SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


**____________________**


FORM
      10-Q




(Mark
      one)


x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      quarterly period ended June 30, 2008




**o**
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      transition period from _________ to
      _________




Commission
      File Number 0-32565


**____________________**




NUTRACEA


**(Exact
      Name of Registrant as Specified in its Charter)**




**California**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **87-0673375**
              (I.R.S.
                Employer Identification No.)**5090
                North 40****th****St., Suite 400**
              **Phoenix,
                AZ**
              (Address
                of Principal Executive Offices)
            **85018**
              (Zip
                Code)**Issuer’s
                telephone number, including area code: (602)
                522-3000**




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      Yes x No
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
      the definitions of “large accelerated filer:, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange.




Large
      accelerated filer oAccelerated
      filer x




Non-accelerated
      filer o (do not check if a smaller
      reporting company)     Smaller reporting company o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      l2b-2 of the Exchange Act). Yes o No
x




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 167,993,724 as of August 6,
      2008.












**FORM
      10-Q**




Index




**PART
                    I.**
                
                
                **FINANCIAL
                    INFORMATION**Item
                    1.
                
                
                Financial
                    Statements(a)Consolidated
                    Condensed Balance Sheets at June 30, 2008 (Unaudited) and December
                    31,
                    2007
                
                
                4(b)Consolidated
                    Condensed Statements of Operations for the three and six months
                    ended June
                    30, 2008 and 2007 (Unaudited)
                
                
                5(c)  
                    Consolidated Condensed Statements of Comprehensive (Loss) Income
                    for the
                    three and six months ended June 30, 2008 and 2007
                    (Unaudited)
                
                
                6(d)Consolidated
                    Condensed Statements of Cash Flows for the six months ended June
                    30, 2008
                    and 2007 (Unaudited)
                
                
                7(e)Notes
                    to Unaudited Consolidated Condensed Financial Statements
                
                
                9Item
                    2.
                
                
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                
                27Item
                    3.
                
                
                Quantitative
                    and Qualitative Disclosures About Market Risk
                
                
                38Item
                    4.
                
                
                Controls
                    and Procedures
                
                
                38**PART
                    II.**
                
                
                **OTHER
                    INFORMATION**
                
                
                39Item
                    1.
                
                
                Legal
                    Proceedings
                
                
                39Item
                    1A.
                
                
                Risk
                    Factors
                
                
                39Item
                    2.
                
                
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                
                
                46Item
                    3.
                
                
                Defaults
                    Upon Senior Securities
                
                
                46Item
                    4.
                
                
                Submission
                    of Matters to a Vote of Security Holders
                
                
                46Item
                    5.
                
                
                Other
                    Information
                
                
                47Item
                    6.
                
                
                Exhibits
                
                
                48Signatures
                
                
                
                
                
                49Certifications




2




**FORWARD-LOOKING
      STATEMENTS**




This
      quarterly report on Form 10-Q contains “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995. All statements
      other than statements of historical fact are “forward-looking statements” for
      purposes of federal and state securities laws, including, but not limited to,
      any projections of earnings, revenue or other financial items; any statements
      of
      the plans, strategies and objectives of management for future operations; any
      statements concerning proposed new services or developments; any statements
      regarding future economic conditions or performance; any statements of belief;
      and any statements of assumptions underlying any of the foregoing.




Forward-looking
      statements may include the words “may,” “could,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar words. The
      forward-looking statements contained herein reflect our current views with
      respect to future events and are subject to certain risks, uncertainties and
      assumptions. Actual results may differ materially from those projected in such
      forward-looking statements due to a number of factors, risks and uncertainties,
      including the factors that may affect future results set forth in this Current
      Report on Form 10-Q and in our annual Report on Form 10-K for the year ended
      December 31, 2007. We disclaim any obligation to update any forward looking
      statements as a result of developments occurring after the date of this
      quarterly report.




3




**PART
      1.**  **FINANCIAL
      INFORMATION**




**Item
      1.**   **Financial
      Statements**




**NUTRACEA
          AND SUBSIDIARIES**
 **CONSOLIDATED
          CONDENSED BALANCE SHEET****S**
 **June
                    30,**
                  **2008**
                  **(Unaudited)**
                
                **December
                    31,**
                  **2007**ASSETSCurrent
                    assets:Cash
                    and cash equivalents
                
                $
                16,067,000
                
                $
                41,298,000Restricted
                    cash
                
                
                906,000
                
                
                758,000Trade
                    accounts receivable, net of allowance for doubtful accounts of
                  $3,177,000
                    and $2,999,000, respectively
                
                
                4,270,000
                
                
                2,346,000Inventories
                
                
                4,947,000
                
                
                1,808,000Notes
                    receivable, net of allowance for doubtful notes receivable of
                  $573,000
                    and $250,000, respectively
                
                
                858,000
                
                
                2,936,000Deposits
                    and other current assets
                
                
                2,828,000
                
                
                2,545,000Total
                    current assets
                
                
                29,876,000
                
                
                51,691,000Restricted
                    cash
                
                
                3,248,000
                
                
                1,791,000Notes
                    receivable, net of current portion
                
                
                -
                
                
                5,039,000Property
                    and equipment, net
                
                
                43,317,000
                
                
                19,328,000Investment
                    in joint ventures
                
                
                11,786,000
                
                
                1,191,000Patents
                    and trademarks, net of accumulated amortization
                
                
                5,349,000
                
                
                5,743,000Other
                    non-current
                
                
                132,000
                
                
                -Goodwill
                
                
                52,668,000
                
                
                39,510,000Total
                    assets
                
                $
                146,376,000
                
                $
                124,293,000LIABILITIES
                    AND SHAREHOLDERS’ EQUITYCurrent
                    liabilities:Accounts
                    payable and accrued liabilities
                
                $
                14,863,000
                
                $
                7,506,000Deferred
                    revenue
                
                
                12,000
                
                
                90,000Note
                    payable
                
                
                23,000
                
                
                23,000Total
                    current liabilities
                
                
                14,898,000
                
                
                7,619,000Long-term
                    liabilities:Long-term
                    liabilities
                
                
                7,350,000
                
                
                -Notes
                    payable, net of current portion
                
                
                64,000
                
                
                77,000Total
                    liabilities
                
                
                22,312,000
                
                
                7,696,000Commitments
                    and contingenciesShareholders’
                    equity:Common
                    stock, no par value, 350,000,000 shares authorized,
                  167,744,000
                    and 144,108,000 shares issued and outstanding
                
                
                198,623,000
                
                
                177,813,000Accumulated
                    deficit
                
                
                (74,061,000
                )
                
                (61,216,000
                )Foreign
                    currency cumulative translation gain
                
                
                (498,000
                )
                
                -Total
                    shareholders’ equity
                
                
                124,064,000
                
                
                116,597,000Total
                    liabilities and shareholder’s equity
                
                $
                146,376,000
                
                $
                124,293,000
   The
          accompanying notes are an integral part of these consolidated condensed
          financial statements.
 4
  **NUTRACEA
        AND SUBSIDIARIES**
 **CONSOLIDA****TED
          CONDENSED STATEMENTS OF****OPERATIONS**
 **(Unaudited)**
 **Three
                  Months Ended**
                **June
                  30, 2008**
              
              **Three
                  Months**
                **Ended**
                **June
                  30, 2007**
              
              **Six
                  Months**
                **Ended**
                **June
                  30, 2008**
              
              **Six
                  Months**
                **Ended**
                **June
                  30, 2007**Revenues:Product
                  sales
              
              $
              10,314,000
              
              $
              7,996,000
              
              $
              15,425,000
              
              $
              9,993,000Licensing
                  fees
              
              
              -
              
              
              5,000,000
              
              
              -
              
              
              5,000,000Total
                  revenue
              
              
              10,314,000
              
              
              12,996,000
              
              
              15,425,000
              
              
              14,993,000Cost
                  of sales
              
              
              7,277,000
              
              
              3,863,000
              
              
              12,071,000
              
              
              4,976,000Gross
                  profit
              
              
              3,037,000
              
              
              9,133,000
              
              
              3,354,000
              
              
              10,017,000Operating
                  expensesResearch
                  and development expenses
              
              
              738,000
              
              
              170,000
              
              
              1,002,000
              
              
              291,000Selling,
                  general and administrative expenses
              
              
              5,871,000
              
              
              5,657,000
              
              
              11,049,000
              
              
              7,970,000Professional
                  fees
              
              
              1,125,000
              
              
              1,536,000
              
              
              3,083,000
              
              
              1,995,000Total
                  operating expenses
              
              
              7,734,000
              
              
              7,363,000
              
              
              15,134,000
              
              
              10,256,000(Loss)
                  income from operations
              
              
              (4,697,000
              )
              
              1,770,000
              
              
              (11,780,000
              )
              
              (239,000
              )Other
                  income (expense)Interest
                  income
              
              
              161,000
              
              
              876,000
              
              
              421,000
              
              
              1,388,000Interest
                  expense
              
              
              (365,000
              )
              
              -
              
              
              (485,000
              )
              
              -Gain
                  on settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              1,250,000Loss
                  on disposal of assets
              
              
              (331,000
              )
              
              (309,000
              )
              
              (331,000
              )
              
              (309,000
              )Other
                  expenses
              
              
              (586,000
              )
              
              -
              
              
              (341,000
              )
              
              -Loss
                  on equity investment
              
              
              (63,000
              )
              
              (250,000
              )
              
              (80,000
              )
              
              (250,000
              )Total
                  (loss) income before income tax
              
              
              (5,881,000
              )
              
              2,087,000
              
              
              (12,596,000
              )
              
              1,840,000Income
                  tax expense
              
              
              (282,000
              )
              
              (85,000
              )
              
              (319,000
              )
              
              (85,000
              )Net
                  (loss) income from continuing
                operations
              
              
              (6,163,000
              )
              
              2,002,000
              
              
              (12,915,000
              )
              
              1,755,000Minority
                  interest
              
              
              70,000
              
              
              -
              
              
              70,000
              
              
              -Net
                  (loss) income
              
              $
              (6,093,000
              )
              
              2,002,000
              
              $
              (12,845,000
              )
              $
              1,755,000Basic
                  and diluted (loss) earnings per share:Basic
                  (loss) income per share
              
              $
              (0.04
              )
              $
              0.01
              
              $
              (0.09
              )
              $
              0.01Fully
                  diluted (loss) income per share
              
              $
              (0.04
              )
              $
              0.01
              
              $
              (0.09
              )
              $
              0.01Weighted
                  average basic number ofshares
                  outstanding
              
              
              151,867,000
              
              
              136,257,000
              
              
              145,545,000
              
              
              118,952,000Weighted
                  average diluted number ofshares
                  outstanding
              
              
              151,867,000
              
              
              167,259,000
              
              
              145,545,000
              
              
              148,954,000
   The
          accompanying notes are an integral part of these consolidated condensed
          financial statements.
  5
  **NUTRACEA
          AND SUBSIDIARIES**
 **CONSOLIDATED
          CONDENSED STATEMENTS OF COMPREHENSIVE LOSS**
 **(Unaudited)**
 **Three
                    Months Ended**
                  **June
                    30, 2008**
                
                **Three
                    Months Ended**
                  **June
                    30, 2007**
                
                **Six
                    Months**
                  **Ended**
                  **June
                    30, 2008**
                
                **Six
                    Months**
                  **Ended**
                  **June
                    30, 2007**Net
                    (loss) income
                
                $
                (6,093,000
                )
                $
                2,002,000
                
                $
                (12,845,000
                )
                $
                1,755,000Other
                    comprehensive income (loss):Foreign
                    currencytranslation
                    (loss)
                
                
                (498,000
                )
                
                **-**
                
                
                (498,000
                )
                
                **-**Unrealized
                    gain onmarketable
                    securities
                
                
                -
                
                
                91,000
                
                
                -
                
                
                91,000Net
                    comprehensive (loss) income
                
                $
                (6,591,000
                )
                $
                2,093,000
                
                $
                (13,343,000
                )
                $
                1,846,000
   The
          accompanying notes are an integral part of these consolidated condensed
          financial statements.
  6
  **NUTRACEA
          AND SUBSIDIARIES**
 **CONSOLIDATED
          CONDENSED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **Six
                    Months Ended****June
                    30, 2008**
                
                **June
                    30, 2007**Cash
                    flows from operating activities:Net
                    (loss) income
                
                $
                (12,845,000
                )
                $
                1,755,000Adjustments
                    to reconcile net (loss) income to net cash used in
                  operating
                    activities:Depreciation
                    and amortization
                
                
                1,738,000
                
                
                894,000Provision
                    for doubtful notes receivable
                
                
                84,000
                
                
                -Provision
                    for doubtful accounts receivable
                
                
                323,000
                
                
                1,055,000Loss
                    on disposal of assets
                
                
                331,000
                
                
                309,000Stock-based
                    compensation
                
                
                1,454,000
                
                
                1,263,000Recognition
                    of deferred income
                
                
                (78,000
                )
                
                (73,000
                )Loss
                    on equity investments
                
                
                80,000
                
                
                250,000Net
                    changes in operating assets and liabilities (net of effectsof
                    Irgovel acquisition and Vital Living, Inc. consolidation):Trade
                    accounts receivable
                
                
                (765,000
                )
                
                (4,752,000
                )Inventories
                
                
                (2,489,000
                )
                
                36,000Deposits
                    and other current assets
                
                
                241,000
                
                
                (380,000
                )Accounts
                    payable and accrued liabilities
                
                
                4,842,000
                
                
                (726,000
                )Other
                    non-current liabilities
                
                
                702,000
                
                
                -Net
                    cash used in operating activities
                
                
                (6,382,000
                )
                
                (369,000
                )Cash
                    flows from investing activities:Restricted
                    cash
                
                
                (1,606,000
                )
                
                -Proceeds
                    from payments of notes receivable
                
                
                6,978,000
                
                
                1,796,000Issuance
                    of notes receivable
                
                
                (182,000
                )
                
                (5,029,000
                )Investment
                    in Irgovel (net of cash acquired with purchase)
                
                
                (14,970,000
                )
                
                -Purchases
                    of property and equipment
                
                
                (17,698,000
                )
                
                (6,026,000
                )Investment
                    in PIN
                
                
                (10,675,000
                )
                
                -Investment
                    in Grainnovation, Inc.
                
                
                -
                
                
                (2,168,000
                )Investment
                    in Vital Living, Inc.
                
                
                -
                
                
                (5,144,000
                )Purchases
                    of other intangible assets
                
                
                (33,000
                )
                
                (109,000
                )Net
                    cash used in investing activities
                
                
                (38,186,000
                )
                
                (16,680,000
                )Cash
                    flows from financing activities:Proceeds
                    from equity financing, net of expenses
                
                
                18,775,000
                
                
                46,805,000Proceeds
                    from exercise of common stock options
                
                
                685,000
                
                
                6,877,000Registration
                    costs
                
                
                (104,000
                )
                
                -Payments
                    on notes payable
                
                
                (13,000
                )
                
                --Net
                    cash provided by financing activities
                
                
                19,343,000
                
                
                53,682,000Effect
                    of foreign currency
                
                
                (6,000
                )
                
                -Net
                    (decrease) increase in cash
                
                
                (25,231,000
                )
                
                36,633,000Cash,
                    beginning of period
                
                
                41,298,000
                
                
                14,867,000Cash,
                    end of period
                
                $
                16,067,000
                
                $
                51,500,000Supplemental
                    disclosures:Cash
                    paid for interest
                
                $
                382,000
                
                $
                -Cash
                    paid for income taxes
                
                $
                184,000
                
                $
                85,000Non-cash
                    disclosures of investing and financing activities:Accounts
                    receivable converted to note receivable
                
                $
                -
                
                $
                3,881,000Accrual
                    for investment in Grain Enhancements joint venture
                
                $
                -
                
                $
                1,500,000Conversion
                    of preferred stock to common stock
                
                $
                -
                
                $
                5,488,000Unrealized
                    gain on marketable securities
                
                $
                -
                
                $
                91,000
   The
          accompanying notes are an integral part of these consolidated condensed
          financial statements.
  7




**NUTRACEA
      AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**






**1.**  **BASIS
      OF PRESENTATION**




The
      accompanying unaudited interim consolidated condensed financial statements
      of
      NutraCea have been prepared in accordance with accounting principles generally
      accepted in the United States of America and the rules of the Securities and
      Exchange Commission (“SEC”), and should be read in conjunction with the audited
      consolidated financial statements and notes thereto contained in NutraCea’s
      Annual Report filed with the SEC on Form 10-K. In the opinion of management,
      all
      adjustments, consisting of normal recurring adjustments, necessary for a fair
      presentation of financial position and the results of operations for the interim
      periods presented have been reflected herein. The results of operations for
      interim periods are not necessarily indicative of the results to be expected
      for
      the full year. Notes to the consolidated financial statements that would
      substantially duplicate the disclosures contained in the audited financial
      statements for 2007 as reported in the 2007 10-K have been omitted.




The
      unaudited condensed consolidated financial statements include the accounts
      of
      NutraCea and our wholly-owned subsidiaries as well as a variable interest
      entity, Vital Living, Inc., for which we are the primary beneficiary as defined
      by Financial Accounting Standards Board (“FASB”), Interpretation No. 46
      (revised 2003), “Consolidation of Variable Interest Entities,” or FIN 46R. We
      have a 90% interest in NutraCea-Cura LLC, which is also consolidated under
      FIN
      46R. In February 2007, we acquired 100% ownership of Irgovel, which operates
      a
      rice-bran oil manufacturing facility in Pelotas, Brazil (see Note 10). In March
      and June, 2008, through our newly-formed wholly owned subsidiary Medan, we
      acquired an aggregate of 51% of the outstanding shares of capital stock of
      PT
      Panganmas Inti Nusantara, an Indonesian
      Company (“PIN”), All inter-company accounts and transactions have been
      eliminated.





We
      operate in two business segments (see Note 14); the NutraCea segment, which
      manufactures and distributes nutritional supplements primarily derived from
      Stabilized Rice Bran (“SRB”), and the Irgovel segment, which consists of our
      rice-bran oil manufacturing subsidiary in Pelotas, Brazil. PIN has no sales
      or
      significant operations at this time, therefore we include its financial
      information in our NutraCea segment.





***Foreign
      currencies***




The
      functional currency for the Company’s wholly-owned subsidiary, Irgovel, is
      the Brazilian Real (R$). The functional currency for PIN is the Indonesian
      Rupiah (Rp$). Accordingly, balance sheet accounts of these subsidiaries are
      translated into United States dollars using the exchange rate in effect at
      the
      balance sheet date, and revenues and expenses are translated using the average
      exchange rates in effect during the period. The gains and losses from foreign
      currency translation of the financial statements of these subsidiaries are
      reported as a separate component of stockholders’ equity under the caption
“Accumulated other comprehensive (loss) income.”




2 .  **STOCK-BASED
      COMPENSATION**




On
      January 1, 2006, NutraCea adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS
      123(R)”). SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25.
      SFAS 123(R) requires all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the financial statements based
      on
      their fair values. NutraCea adopted SFAS 123(R) using the modified prospective
      method which requires the application of the accounting standard as of January
      1, 2006. The consolidated financial statements as of and for the three months
      ended June 30, 2008 and 2007 reflect the impact of adopting SFAS 123(R).





For
      all
      agreements where stock is awarded as partial or full consideration, the expense
      is valued at the fair value of the stock. Expenses for stock options and
      warrants issued to consultants and employees are calculated based upon fair
      value using the Black-Scholes valuation model.





8




Stock-based
      compensation expenses consisted of the following for the three and six months
      ended June 30: ****




**Three
                Months**
              **Ended**
              **June
                30****,****2008**
            
            **Three
                Months Ended**
              **June
                30, 2007**
            
            **Six
                Months**
              **Ended**
              **June
                30, 2008**
            
            **Six
                Months**
              **Ended**
              **June
                30, 2007**Consultants
            
            $
            12,000
            
            $
            266,000
            
            $
            409,000
            
            $
            281,000Directors
            
            
            197,000
            
            
            50,000
            
            
            394,000
            
            
            87,000Employees
            
            
            195,000
            
            
            509,000
            
            
            651,000
            
            
            840,000To
                directors and former director for services
              outside
                of directors duties
            
            
            -
            
            
            -
            
            
            -
            
            
            55,000Total
                stock-based compensation expense
            
            $
            404,000
            
            $
            825,000
            
            $
            1,454,000
            
            $
            1,263,000




The
      Company used the following weighted-average assumptions to estimate the fair
      value of options and warrants granted for the three months ended June 30, 2008
      and 2007:




**2008**
            
            **2007**Risk-free
                interest rate
            
            
            2.27
            %
            
            41.11
            %Expected
                volatility
            
            
            82.0
            %
            
            67.0
            %Expected
                term (years)
            
            
            2.68
            
            
            1.5Resulting
                average fair value
            
            $
            0.42
            
            $
            0.57




The
      Company’s unrecognized compensation expense, before income tax and adjusted for
      estimated forfeitures, related to outstanding unvested stock-based awards as
      of
      June 30, 2008 was approximately as follows:





Weighted
                average Remaining Expense Life (years)
            
            Unrecognized
                ExpenseOptions
                and warrants
            
            
            3.65
            
            $
            2,724,000




**3.**  **MARKETABLE
      SECURITIES**




On
      September 8, 2004, NutraCea purchased 1,272,026 shares of Langley Park
      Investment Trust, PLC (“Langley”), a United Kingdom closed-end mutual fund that
      is actively traded on a London exchange. Per the Stock Purchase Agreement,
      NutraCea paid with 7,000,000 shares of its own common stock. On September 8,
      2006, NutraCea commenced a lawsuit against Langley in the United States District
      Court for the Eastern District of California, Sacramento Division regarding
      this
      transaction. The matter was settled on March 27, 2007. Pursuant to the
      settlement, NutraCea received $1,250,000 from Langley in March, 2007. The
      $1,250,000 settlement is included in the statement of operations as other income
      in the six months ended June 30, 2007. During the third quarter of 2007 Langley
      ceased trading and began the process of liquidating the investments. NutraCea
      has received cash of $127,000 from this liquidation. The realizable value of
      the
      balance of the funds is uncertain and as a result we have recorded the fair
      market value of Langley as $0 at June 30, 2008 and December 31, 2007.




9




**4.**  **INVENTORY**




Inventories
      by segment are composed of the following;




**June
                30,**
            
            
            
            **December
                31,****2008**
            
            
            
            **2007****Consolidated**
            
            **NutraCea**
            
            **Irgovel**
            
            **NutraCea**Finished
                goods
            
            $
            3,122,000
            
            $
            2,089,000
            
            $
            1,033,000
            
            $
            1,396,000Work
                in process
            
            
            524,000
            
            
            -
            
            
            524,000
            
            
            -Raw
                materials
            
            
            1,069,000
            
            
            674,000
            
            
            395,000
            
            
            184,000Packaging
                supplies
            
            
            232,000
            
            
            232,000
            
            
            -
            
            
            228,000Total
                inventories
            
            $
            4,947,000
            
            $
            2,995,000
            
            $
            1,952,000
            
            $
            1,808,000




**5.**   **NOTES
      RECEIVABLE**




At
      June
      30, 2008, we held seven secured promissory notes payable to the Company with
      aggregate outstanding amounts under these notes of $858,000 (net of allowance
      for doubtful notes receivable of $573,000), $858,000 is reported as current
      and
      $0 as long-term. These secured promissory notes bear interest at annual rates
      ranging from 5% to 10% with the principal and all accrued interest due and
      payable to us at dates ranging from July 2008 to December 2008.




During
      the six months ended June 30, 2008 we loaned a total of $182,000 to certain
      strategic customers, which loans were evidenced by promissory notes, and
      received payments totaling $6,977,000 on existing promissory notes. During
      the
      six months ended June 30, 2008 and 2007 we also accrued interest income of
      $150,000 and $398,000, respectively, and received cash payments of $26,000
      and
      $72,000 for accrued interest, respectively.





At
      December 31, 2007, NutraCea had outstanding notes receivable from material
      strategic customers as follows:





A
      $1,968,000 note due from ITV Global, an infomercial marketing company. This
      note
      represents ITV’s payment obligation for a sale made in December, 2007. The note
      carries scheduled payments over a five month period. We obtained a security
      interest in certain assets of the customer to secure payments under the note.
      As
      of June 30, 2008 this note was paid in full.




In
      April
      2007, we converted $365,000 of a customers’ accounts receivable to a note
      receivable, combining it with an existing note from that customer for a total
      note receivable of $500,000, bearing interest at 10% and due in October 2007.
      In
      December, 2008, the note was modified, and the accrued interest added, for
      a new
      total of $543,000. This note was past due as of December 31, 2007. We recorded
      an allowance for doubtful notes of $250,000 against this receivable for the
      year
      ended December 31, 2007. In March, 2008 we re-negotiated the settlement terms
      and extended the due date to April 2008, received payment of the penalty
      interest due of $10,000 on this note and added the remaining accrued interest
      due on the note to the balance due creating a total note receivable of $542,000.
      As of June 30, 2008 this note remains unpaid therefore we have recorded an
      additional allowance for doubtful accounts of $243,000 against this note in
      the
      first quarter of 2008 (see Note 9).




During
      the second quarter of 2007, we granted to Pacific Holdings Advisors Limited
      (“PAHL”) certain rights under a license to use and distribute SRB. PAHL paid a
      one-time fee of $5,000,000 for these rights by issuing to NutraCea an interest
      bearing promissory note due over five year terms. In January 2008, the payment
      terms of the promissory note were amended to allow for the forgiveness of
      accrued interest on the note if the full principal was paid by March 31, 2008.
      We received the $5,000,000 payment on April 1, 2008, however, as the payment
      was
      in transit on that date we agreed to honor the forgiveness of interest due
      through March 31, 2008 of approximately $175,000.




10




**6.**  **PROPERTY
      AND EQUIPMENT**




Property
      and equipment consists of the following:




June
                30,
            
            December
                31,2008
            
            2007Land
            
            $
            237,000
            
            $
            15,000Furniture
                and fixtures
            
            
            2,603,000
            
            
            2,405,000Vehicles
            
            
            66,000
            
            
            -Computers
                and software
            
            
            488,000
            
            
            402,000Leasehold
                improvements
            
            
            1,854,000
            
            
            700,000Property,
                plant and equipment
            
            
            28,830,000
            
            
            14,243,000Construction
                in progress
            
            
            13,281,000
            
            
            4,347,000Total
                property, plant, and equipment
            
            
            47,359,000
            
            
            22,112,000Less
                accumulated depreciation
            
            
            (4,042,000
            )
            
            (2,784,000
            )Total
                property, plant, and equipment, net
            
            $
            43,317,000
            
            $
            19,328,000




Depreciation
      expense (before allocation to cost of goods sold) for the three months ended
      June 30, 2008 and 2007 was $792,000 and $464,000, respectively.




Depreciation
      expense (before allocation to cost of goods sold) for the six months ended
      June
      30, 2008 and 2007 was $1,311,000 and $642,000, respectively.




**7.**  **OTHER
      INTANGIBLE ASSETS**




Other
      intangibles consisted of the following at:




June
                30,
            
            December
                31,2008
            
            2007Patents
            
            $
            2,690,000
            
            $
            2,657,000Copyrights
                and trademarks
            
            
            3,288,000
            
            
            3,288,000Non-compete
                agreements
            
            
            650,000
            
            
            650,000License
                and supply agreement
            
            
            220,000
            
            
            220,000Subtotal
                of other intangible assets
            
            
            6,848,000
            
            
            6,815,000Less
                accumulated amortization
            
            
            (1,499,000
            )
            
            (1,072,000
            )Total
                other intangible assets, net
            
            $
            5,349,000
            
            $
            5,743,000




11




Amortization
      expense for the three months ended June 30, 2008 and 2007 was $136,000 and
      $152,000, respectively. Amortization expense for the six months ended June
      30,
      2008 and 2007 was $427,000 and $252,000, respectively.




**8.**  **(LOSS)
      EARNINGS PER SHARE**




Basic
      (loss) earnings per share is computed by dividing net loss by the weighted
      average number of common shares outstanding during all periods presented. 
Options and warrants are excluded from the basic loss per share calculation
      and
      are considered in calculating the diluted (loss) earnings per
      share.




The
      dilutive effect of outstanding options, warrants is calculated using the
      treasury stock method and the dilutive effect of the convertible series B
      preferred stock, and convertible series C preferred stock is calculated using
      the as-if converted method.





As
      of
      June 30, 2008 and 2007, options and warrants to purchase approximately
      52,008,000 and 47,129,000 shares of our common stock were outstanding,
      respectively. These are excluded from the calculation of diluted loss per share
      at June 30, 2008 because their inclusion would have been anti-dilutive.





Components
      of basic and diluted loss per share were as follows:




**Three
                Months Ended**
              **June
                30, 2008**
            
            **Six
                Months Ended**
              **June
                30, 2008****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                (loss) income
            
            $
            (6,093,000
            )
            $
            2,002,000
            
            $
            (12,845,000
            )
            $
            1,755,000Weighted
                average outstanding
              shares
                of common stock
            
            
            151,867,000
            
            
            136,257,000
            
            
            145,545,000
            
            
            118,952,000Convertible
                preferred stock
            
            
            -
            
            
            2,000
            
            
            -
            
            
            2,000Common
                stock equivalents
            
            
            -
            
            
            31,000,000
            
            
            -
            
            
            30,000,000Total
                diluted shares
            
            
            151,867,000
            
            
            167,259,000
            
            
            145,545,000
            
            
            148,954,000(Loss)
                earnings per share:Basic
            
            $
            (0.04
            )
            $
            0.01
            
            $
            (0.09
            )
            $
            0.01Diluted
            
            $
            (0.04
            )
            $
            0.01
            
            $
            (0.09
            )
            $
            0.01




At
      June
      30, 2008, and 2007, the number of “in-the-money” options and warrants
      outstanding was approximately 19,754,000 and 41,279,000, respectively. The
      weighted average exercise price of “in-the-money” anti-dilutive options and
      warrants for the three months ended June 30, 2008 and 2007 were $0.43 and $1.35,
      respectively.




12




**9.**  **CONCENTRATION
      OF** **CREDIT** **RISK**




Financial
      instruments that potentially subject us to significant concentrations of credit
      risk consist primarily of
      trade
      accounts receivable and notes receivable for sales to major customers. We
      perform credit evaluations on our customers’ financial condition and generally
      do not require collateral on accounts receivable.





*Accounts
      receivable*





We
      maintain an allowance for doubtful accounts on our receivables based upon
      expected collection of all accounts receivable. A summary of the activity in
      the
      allowance for doubtful accounts for the three and six months ended June 30,
      2008
      and 2007 follows:





**Three
                Months Ended**
              **June
                30,**
            
            
            **Six
                Months Ended**
              **June
                30,****2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**Balance,
                beginning of period
            
            $
            3,168,000
            
            $
            20,000
            
            $
            2,999,000
            
            $
            20,000Irgovel
                acquisition
            
            
            **-**
            
            
            **-**
            
            
            94,000
            
            
            -Adjusted
                beginning balance
            
            
            3,168,000
            
            
            20,000
            
            
            3,093,000
            
            
            20,000Provision
                for allowance for doubtfulaccounts
                charged to operations
            
            
            80,000
            
            
            1,055,000
            
            
            173,000
            
            
            1,055,000Losses
                charged against allowance
            
            
            **-**
            
            
            **-**
            
            
            (21,000
            )
            
            -Recoveries
                of accounts previouslyallowed
                for
            
            
            (71,000
            )
            
            **-**
            
            
            (68,000
            )
            
            -Balance,
                end of period
            
            $
            3,177,000
            
            $
            1,075,000
            
            $
            3,177,000
            
            $
            1,075,000




During
      the three months ended June 30, 2008 and 2007 we recorded an allowance for
      doubtful accounts receivable of $9,000 and $1,075,000, respectively.




Our
      provision for allowance for doubtful accounts for the three months ended June
      30, 2008 and 2007 was $80,000, and $1,055,000, respectively.




Our
      provision for allowance for doubtful accounts expense for the six months ended
      June 30, 2008 and 2007 was $173,000, and $1,055,000, respectively.




The
      following table lists the concentrations of sales and accounts receivable by
      customer for each of our segments for the indicated periods:




**Three
                Months Ended**
              **June
                30, 2008**
            
            **Six
                Months Ended**
              **June
                30, 2008****NutraCea**
            
            **Irgovel**
            
            **NutraCea**
            
            **Irgovel**Revenues
                for period
            
            $
            3,935,000
            
            $
            6,379,000
            
            $
            6,809,000
            
            $
            8,616,000Number
                of customers with salesgreater
                than 4% of total revenues
            
            
            5
            
            
            1
            
            
            4
            
            
            3Total
                percentage of sales byCustomers
                with greater than 4%
            
            
            34
            %
            
            9
            %
            
            21
            %
            
            16
            %Accounts
                receivable at end of period
            
            $
            1,721,000
            
            $
            2,549,000
            
            $
            1,721,000
            
            $
            2,549,000Number
                of customers with accountsReceivable
                balances greater than4%
                of total accounts receivable
            
            
            3
            
            
            3
            
            
            3
            
            
            3Total
                percentage of receivables heldby
                customers with greater than4%
                of total receivables
            
            
            67
            %
            
            35
            %
            
            67
            %
            
            35
            %




For
      the
      three months ended June 30, 2007, two customers accounted for a total of 54%
      of
      sales: 30%, and 24% respectively. No other customer accounted for more than
      3%
      of total sales.




13




For
      the
      six months ended June 30, 2007, two customers accounted for a total of 49%
      of
      sales: 26%, and 23% respectively. No other customer accounted for more than
      5%
      of total sales. At June 30, 2007, three customers accounted for 82% of total
      accounts receivable: 33%, 29%, and 20% respectively. No other customer accounted
      for more than 3% of the total outstanding accounts receivable.




*Notes
      receivable*




We
      maintain an allowance for doubtful accounts on our notes receivables based
      upon
      expected collection of all notes receivable. A summary of the activity in the
      allowance for doubtful accounts for the three and six months ended June 30,
      2008
      and 2007 follows:




**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2008**
            
            **June
                30, 2008****2008**
            
            **2007**
            
            **2008**
            
            **2007**Balance,
                beginning of period
            
            $
            543,000
            
            $
            -
            
            $
            250,000
            
            $
            -Provision
                for allowance for doubtfulnotes
                receivable charged to operations
            
            
            30,000
            
            
            -
            
            
            293,000
            
            
            -Losses
                charged against allowance
            
            
            -
            
            
            -
            
            
            -
            
            
            -Recoveries
                of accounts previously allowed for
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
                end of period
            
            $
            573,000
            
            $
            -
            
            $
            543,000
            
            $
            -




**10.**  **ACQUISITIONS
      AND JOINT VENTURES**




*Irgovel*





On
      January 31, 2008, NutraCea entered into a Quotas (share) Purchase and Sale
      Agreement (“Purchase Agreement”) with the Quota Holders (“Sellers”) of Irgovel -
      Industria Riograndens De Oleos Vegetais Ltda., a limited liability company
      organized under the laws of the Federative Republic of Brazil (“Irgovel”).
      Irgovel, located in Brazil, owns and operates a rice bran oil processing
      facility in Pelotas, Brazil, South America.




In
      February 2008, we completed the purchase of Irgovel paying $15,049,000 for
      100%
      of the company. The total consideration of $15,049,000 includes approximately
      $50,000 in legal fees which we incurred and added to the purchase price and
      a
      $649,000 hold-back provision which was due to the sellers in June
      2008 .
      Additionally, we agreed to fund as necessary up to $5,300,000 to pay deferred
      taxes due to the Brazilian government. These deferred taxes are included in
      the
      liabilities on Irgovel’s financial statements and are payable over periods up to
      15 years.




The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition. The Company believes the fair
      values assigned to the assets acquired and liabilities assumed are based on
      reasonable assumptions. The purchase price allocations for the Irgovel
      acquisition are preliminary and the Company is obtaining third-party valuations
      of property, plant, and equipment and certain intangible assets. Accordingly,
      the Company’s fair value estimates for the purchase price allocation may change
      during the allowable allocation period, which is up to one year from the
      acquisition date, if additional information becomes available:




14




Cash
            
            $
            79,000Accounts
                receivable
            
            
            1,242,000Inventory
            
            
            979,000Other
                current assets
            
            
            635,000Property
                and equipment
            
            
            7,605,000Other
                non-current assets
            
            
            23,000Goodwill
            
            
            13,158,000Total
                Assets
            
            
            23,721,000Accounts
                payable and accrued liabilities
            
            
            2,516,000Other
                non-current liabilities
            
            
            6,156,000Net
                assets acquired
            
            $
            15,049,000




See
      Note
      11 for pro forma consolidated results of operations presented as though the
      acquisition had occurred on January 1, 2007.




*Medan,
      LLC* .




On
      January 24, 2008, NutraCea, through a newly formed wholly-owned subsidiary,
      Medan, LLC, a Delaware limited liability company (“Medan”), entered into a Stock
      Purchase Agreement (“Purchase Agreement”) with Fortune Finance Overseas Ltd., a
      British Virgin Islands company (“FFOL”). Pursuant to the Purchase Agreement, on
      March 28, 2008, Medan purchased 9,700 outstanding shares of capital stock of
      PT
      Panganmas Inti Nusantara, an Indonesian Company (“PIN”), from FFOL for
      $8,175,000 after Indonesian approval of PIN’s Foreign Investment Application.




In
      June,
      2008, Medan purchased an additional 3,050 shares directly from PIN for
      $2,500,000 after certain government approvals were obtained, raising Medan’s
      interest in PIN to 51%. The remaining 49% of the common stock of PIN is owned
      by
      FFOL.





We
      made
      this acquisition in order to construct and operate a full scale wheat mill
      incorporating our stabilization technology applied to wheat bran. PIN owns
      land
      and has obtained the permits necessary to construct a wheat facility in Kuala
      Tnajung, Medan, North Sumatra, Indonesia. A director of FFOL is also a director
      of PAHL. Medan and FFOL entered a voting agreement wherein each party will
      vote
      all of it’s shares in a manner so that PIN’s Board of Directors and Board of
      Commissioners shall consist of an even number of persons designated each by
      Medan and FFOL. The Purchase Agreement required us to pay Theorem Capital
      Partners a $500,000 commission upon the completion of the transaction, payable
      in two installments. The first $250,000 of the commission was paid in June,
      2008, the balance was paid in July, 2008. Additionally, upon completion of
      the
      transaction we granted to Theorem an option to purchase 500,000 shares of our
      common stock at an exercise price per share of $1.50, which expires in five
      years. The fair value of this option is approximately $128,000 and was charged
      to professional fees in our statement of operations for the six months ended
      June 30, 2008.





Concurrently
      with the Purchase Agreement, NutraCea entered into a Wheat Bran Stabilization
      Equipment Lease (“Lease”) with PIN. Pursuant to the Lease, NutraCea will lease
      to PIN wheat stabilization equipment developed by NutraCea for use at PIN’s
      facility. The term of the lease will be for 15 years with an automatic extension
      of 5 years if the facility is fully operational and the equipment is still
      being
      used in the operations of the facility. The lease amount payable by PIN will
      be
      the actual cost incurred for manufacturing and installing the equipment at
      the
      facility.




Prior
      to
      our initial acquisition PIN was engaged in a flour trading operation. PIN
      divested itself of its trading operations in the first quarter of 2008 prior
      to
      our initial investment. After the date of our initial investment PIN has no
      sales and its operations are only those related to the preparation of the wheat
      mill project.




As
      we
      have a non-controlling interest in PIN our investment in PIN is accounted for
      under the equity method of accounting. At June 30, 2008 the value of our
      investment was $10,648,000. Our share of the net loss of PIN for the period
      from
      March 28, 2008 through June 30, 2008 was approximately $27,000.




15




Summary
      financial information of PIN at June 30, 2008 is:




AssetsCash
            
            $
            2,735,000Prepaid
                expenses
            
            
            147,000Land
                and equipment (net)
            
            
            4,269,000Total
                Assets
            
            $
            7,151,000Liabilities
                and equityAccounts
                payable and accrued liabilities
            
            $
            2,213,000Shareholders
                equity
            
            
            4,938,000Total
                liabilities and equity
            
            $
            7,151,000




As
      of
      June 30, 2008 the book value of PIN’s assets was $4,938,000 and Medan’s 51%
      interest in these assets was approximately $2,469,000.  The differences
      between the carrying amounts of strategic equity investment accounted for using
      the equity method and the Company’s underlying equity in the net assets of PIN
      was $8,206,000.  Based upon our economic analysis, we believe PIN’s fair
      value far exceeds the book value of its assets.





*Rice
      Science LLC*




In
      December 2007 we formed Rice Science, LLC (“Rice Science”), a Delaware limited
      liability company, with Herbal Science Singapore PTe., Ltd. (“Herbal Science”),
      a Singapore corporation. We formed this LLC with Herbal Science to acquire
      from
      Herbal Science certain isolates license rights and to commercialize and sell
      the
      SRB isolates. NutraCea and Herbal Science have an 80% and 20% interest in the
      operating results, respectively, but Herbal Science has no interest in the
      initial capital contributions.





We
      made
      an initial capital contribution to Rice Science in December 2007 of $1,200,000
      as specified in the limited liability company agreement for Rice Science. We
      may
      make an additional $1,000,000 contribution at our discretion and maintain our
      80% holding. Herbal Science contributed certain licenses as their capital
      contribution with a deemed value of $440,000. There are no further capital
      contributions required of either member. However Herbal Science does not have
      an
      interest in the initial capital contributed by NutraCea and will not have a
      minority interest until there are results of operations.





NutraCea
      holds an 80% interest in Rice Science and therefore will account for the
      investment as a consolidated subsidiary. Summary financial information for
      Rice
      Science as of June 30, 2008 is as follows:





AssetsCash
            
            $
            850,000Receivable
                from Herbal Science
            
            
            70,000920,000Liabilities
                and EquityMembers
                equityMembers
                equity - Herbal Science
            
            
            -Members
                equity - NutraCea, Inc.
            
            
            920,000Total
                members equity
            
            
            920,000Total
                liabilities and equity
            
            $
            920,000







In
      June
      2008, Rice Science made a payment of $350,000 to Herbal Science for on-going
      research programs to commercialize SRB isolates. This amount is included in
      our
      consolidated statement of operations under Research and Development expenses.
      Herbal Science’s $70,000 share of the $350,000 expense is included in our
      consolidated balance sheet as a non-current receivable.




Grainnovation,
      Inc.




In
      April
      2007, we acquired 100% of the outstanding stock of Grainnovation, Inc.
      (“Grainnovation”) a privately held company that had equipment for pelletizing
      horse feed for equine customers of strategic value to NutraCea, and certain
      assets used in Grainnovations’s business for a total of $2,150,000, of which
      $1,605,000 of the purchase price was paid at closing, with the balance held
      in
      third-party escrow. In November, 2007, the second installment of $235,000 due
      was distributed and in April 2008 the last and final installment of $310,000
      was
      distributed to the sellers from the third-party escrow as agreed.




16




The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition. We incurred $20,000 in legal
      fees relating to this purchase, which are added to the purchase price and
      Goodwill. The Company believes the fair values assigned to the assets acquired
      and liabilities assume were based on reasonable assumptions.




Cash
            
            $
            1,000Accounts
                receivable
            
            
            26,000Inventory
            
            
            11,000Property
                and equipment
            
            
            623,000Covenant
                not to compete
            
            
            650,000Goodwill
            
            
            917,000Total
                Assets
            
            
            2,228,000Accrued
                liabilities
            
            
            58,000Net
                assets acquired
            
            $
            2,170,000




*Grain
      Enhancements LLC*




In
      June
      2007, we entered into a joint venture with PAHL to form Grain Enhancements
      LLC
      (“Grain Enhancements”), a Delaware limited liability company. NutraCea and PAHL
      each hold a 47.5% share of Grain Enhancements. The remaining interest is held
      by
      Theorem Group LLC (“Theorem”) (3.333%) and Ho’okipa Capital Partners, Inc.
      (1.667%). The purpose of Grain Enhancements is to develop and market stabilized
      rice bran (“SRB”) and related products in certain Southeast Asian countries.
      Grain Enhancements will purchase SRB exclusively from NutraCea until its own
      facilities are in operation and NutraCea will lease to Grain Enhancements at
      NutraCea’s manufacturing cost the necessary equipment for such facilities.
      Payments under the equipment lease will be payable in full upon installation
      of
      the equipment.




Under
      the
      limited liability agreement for the joint venture, NutraCea and PAHL will
      contribute up to $5,000,000 each to Grain Enhancements to fund the operations,
      of which $1,500,000 each was due on June 30, 2007. Both members made their
      initial contribution in July 2007. Additionally, NutraCea and PAHL were each
      required to contribute to Grain Enhancements $2,000,000 no later than October
      2007, and $1,500,000 no later than August 2008. Only the initial capital
      contribution of $1,500,000 from each member has been made. On January 24, 2008,
      NutraCea and PAHL amended certain terms of the Operating Agreement. Pursuant
      to
      the modified agreement, the timing of mandatory capital contributions of the
      members was changed from the agreed upon schedule to a determination by Grain
      Enhancements finance committee on an as-needed basis. In addition, PAHL will
      no
      longer receive a monthly management fee.




Theorem
      was paid $750,000 and $500,000 by NutraCea and Grain Enhancements, respectively,
      for services relating to the formation of the joint venture. Our portion of
      Grain Enhancements net loss for the three and six months ended June 30, 2008
      was
      $35,000 and $53,000, respectively.




Our
      investment in Grain Enhancements is accounted for under the equity method of
      accounting. At June 30, 2008 the book value of our investment was $1,139,000.




17




Summary
      financial information of Grain Enhancements, LLC at June 30, 2008
      is:




AssetsCash
            
            $
            2,290,000Liabilities
                and equityAccounts
                payable and accrued liabilities
            
            $
            12,000Members
                equity
            
            
            3,000,000Accumulated
                deficit
            
            
            (722,000
            )Total
                equity
            
            
            2,278,000Total
                liabilities and equity
            
            $
            2,290,000




*Vital
      Living, Inc* .




In
      April
      2007, we acquired from their holders outstanding shares of Series D Convertible
      Preferred Stock (“Series D Preferred Stock”) and secured convertible notes
      (“Notes”) of Vital Living, Inc. (“VLI”), a publicly traded company. VLI
      distributes nutritional supplements using similar processes as NutraCea for
      manufacturing and distribution. We paid $1,000,000 for 1,000,000 shares of
      Series D Preferred Stock and $4,226,000 for the outstanding Notes. The Series
      D
      Preferred Stock has a liquidation preference of $1.00 per share senior to the
      liquidation preferences of Vital Living’s Series B Preferred Stock and Senior C
      Preferred Stock. The Notes bear interest at 12% per annum, payable June 15
      and
      December 15, mature in December 2008 and are secured by a security interest
      in
      substantially all of Vital Living’s assets. Originally, the Notes were
      convertible into VLI common stock and VLI had the option of paying the interest
      on the Notes in shares of Vital Living common stock. On September 11, 2007,
      NutraCea and VLI entered into a letter agreement confirming their agreement
      to
      eliminate the conversion rights of the Notes. In addition, the parties agreed
      that until such time, if any, as NutraCea gives 30 days prior written notice
      to
      VLI, VLI may not pay accrued interest under the Notes in shares of Vital Living
      Common Stock, without NutraCea’s consent, and that during such time VLI will not
      be deemed to be in default under the Notes as a result of not paying accrued
      interest in such shares.





On
      September 28, 2007, we entered into an Asset Purchase Agreement (the “Asset
      Purchase Agreement”) with VLI. The Asset Purchase Agreement provides that we
      will purchase substantially all of Vital Living’s intellectual property and
      other assets used by VLI and certain subsidiaries in its business, including
      rights to nutritional supplements and nutraceutical products that are marketed
      for distribution to healthcare practitioners. As part of the transaction, VLI
      will assign to NutraCea its rights under various distribution and other
      agreements relating to the products being acquired. We will not acquire
      inventory, raw materials, cash, or accounts receivable of VLI.





The
      purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
      (ii) cancellation of outstanding indebtednesses of VLI, its subsidiaries and
      certain related entities to NutraCea, including all of the Notes, and (iii)
      cancellation of all shares of Series D Preferred Stock of VLI held by NutraCea.
      Completion of the transaction is subject to a variety of customary closing
      conditions, including, among other things, approval of the transaction by the
      stockholders of VLI at a special meeting of stockholders of Vital Living and
      the
      absence of a material adverse effect on the assets between the date of the
      agreement and the closing date. The Purchase Agreement contains customary
      representations and warranties of the parties, covenants, closing conditions,
      and certain termination rights for both NutraCea and VLI, and further provides
      that, upon termination of the Purchase Agreement under specified circumstances,
      Vital Living may be required to pay NutraCea a termination fee. NutraCea expects
      that the transaction will close in the third quarter of 2008, although the
      actual timing of the closing will depend on many factors including preparation
      of the proxy statement and the SEC’s review of the proxy statement, and the
      closing may occur later than the third quarter of 2008.




We
      purchased the Senior Secured Convertible Notes and Preferred Stock of VLI as
      a
      means of affecting a subsequent acquisition of the productive assets of VLI,
      either through a merger or asset sale. Our purchase of Preferred Stock allowed
      us to control an outstanding class of capital stock, and our purchase of the
      convertible notes allowed us to obtain a senior secured position with respect
      to
      Vital Living’s assets. Vital Living has a set of products that are complementary
      to our products and an established marketing channel that would enable NutraCea
      to market its own products without the expense of building the marketing base.
      In addition, some VLI products are suitable for modification to include
      NutraCea’s stabilized rice bran as a key ingredient, which we believe would
      further enhance and develop the NutraCea brand.




Our
      accounting for the purchase of these securities of VLI qualifies as a Variable
      Interest Entity (“VIE”) in accordance with FIN 46R. As the primary beneficiary,
      we have consolidated VLI.




18




The
      purchase price allocated to the assets and liabilities in April 2007 is as
      follows:




AssetsCash
            
            $
            83,000Accounts
                receivable
            
            
            1,017,000Inventory
            
            
            30,000Property
                and equipment
            
            
            15,000Other
                assets
            
            
            15,000Goodwill
            
            
            6,278,000Total
                Assets
            
            
            7,438,000LiabilitiesAccounts
                payable
            
            
            737,000Accrued
                liabilities
            
            
            725,000Notes
                payable
            
            
            750,000Total
                Liabilities
            
            
            2,212,000Net
                assets acquired
            
            $
            5,226,000




We
      have
      included in our balance sheet at June 30, 2008 the financial position of VLI
      as
      of the period ended June 30, 2008, and VLI’s results of operations for the three
      and six months ended June 30, 2008 in our statement of operations for the three
      and six months ended June 30, 2008, while eliminating inter-company balances.
      The effect on our consolidated, condensed balance sheet at June 30, 2008 was
      a
      decrease in total assets of $1,021,000, an increase in total liabilities of
      $1,675,000 and a decrease in shareholder equity of $2,696,000. The effect on
      our
      consolidated income statement for the six months ended June 30, 2008 was an
      increase in revenues of $1,147,000, an increase in cost of goods sold of
      $720,000, an increase in expenses of $488,000, and a decrease in net income
      of
      $62,000.





*Rice
      RX LLC*




In
      December 2007 we formed Rice Rx LLC (“RRX”), a Delaware LLC, with Herbal Science
      Singapore PTe. Ltd. (“Herbal Science”), a Singapore corporation. We formed RRX
      with Herbal Science to obtain and commercialize certain patentable
      pharmaceutical license rights from Herbal Science. NutraCea and Herbal Science
      each have a 50% interest in RRX.




Commencing
      in July 2008, if and to the extent the members determine that capital
      contributions are necessary, each member agrees to contribute capital of up
      to
      $150,000.




In
      conjunction with the formation of RRX, NutraCea sold to Herbal Science for
      $300,000 an exclusive license to develop, manufacture and sell certain SRB
      isolates and identify and commercialize certain patentable pharmaceuticals.
      Payment for this license was made in the form of $150,000 cash received in
      December, 2007, and the execution of a promissory note payable to NutraCea
      for
      $150,000 at the Bank of America prime rate of interest and due in December
      2008.




Our
      investment in RRX is accounted for under the equity method of accounting. As
      of
      June 30, 2008 no capital contributions had been made, and RRX had no operations,
      expenses or income.




**11.**  **ACQUISITION
      PRO-FORMAS**




In
      February, 2008, we acquired 100% of Irgovel (see Note 10). Presented below
      are
      the unaudited pro forma consolidated results of operations for the three and
      six
      month periods ending June 30, 2008 and 2007 presented as though our acquisition
      of Irgovel had occurred on January 1, 2007. This pro forma data is presented
      for
      informational purposes only and does not purport to be indicative of the results
      of future operations of the Company or of the results that would have actually
      been attained had the acquisition taken place at the beginning of
      2007.




19




**Three
                Months Ended**
              **June
                30, 2008**
            
            **Three
                Months**
              **Ended**
              **June
                30, 2007**
            
            **Six
                Months**
              **Ended**
              **June
                30, 2008**
            
            **Six
                Months**
              **Ended**
              **June
                30, 2007**Revenues:
            
            $
            10,026,000
            
            $
            16,075,000
            
            $
            17,100,000
            
            $
            20,234,000Cost
                of sales
            
            
            7,088,000
            
            
            6,333,000
            
            
            13,327,000
            
            
            9,154,000Gross profit
            
            
            2,938,000
            
            
            9,742,000
            
            
            3,773,000
            
            
            11,080,000Operating
                expenses
            
            
            7,770,000
            
            
            7,947,000
            
            
            15,351,000
            
            
            11,235,000Operating
                (loss) income
            
            
            (4,832,000
            )
            
            1,795,000
            
            
            (11,578,000
            )
            
            (155,000
            )Non-operating
                expenses, other and taxes
            
            
            (1,359,000
            )
            
            103,000
            
            
            (1,447,000
            )
            
            1,746,000Net
                (loss) income available tocommon
                shareholders
            
            $
            (6,191,000
            )
            $
            1,898,000
            
            $
            (13,025,000
            )
            $
            1,591,000Basic
                and diluted (loss) income per shareBasic
                (loss) income per share
            
            $
            (0.04
            )
            $
            0.01
            
            $
            (0.09
            )
            $
            0.01Fully
                diluted (loss) income per share
            
            $
            (0.04
            )
            $
            0.01
            
            $
            (0.09
            )
            $
            0.01Weighted
                average basic numberof
                shares outstanding
            
            
            151,867,000
            
            
            136,257,000
            
            
            145,545,000
            
            
            118,952,000Weighted
                average fully diluted numberof
                shares outstanding
            
            
            151,867,000
            
            
            167,259,000
            
            
            145,545,000
            
            
            148,954,000




**12.**  **NOTES
      PAYABLE**




In
      October 2007, we executed an un-secured promissory note in favor of the lessor
      of our new West Sacramento warehouse for $105,000 at 8% due over four years
      in
      payments of $2,572 per month for the build-out of tenant improvements. At June
      30, 2008 the short-term portion of this note was approximately $23,000 and
      the
      remaining long-term portion was approximately $64,000.




**13.**  **RESTRICTED
      CASH**




Under
      certain agreements we must maintain restricted cash balances in order to satisfy
      future obligations. At June 30, 2008 and December 31, 2007 we had the following
      amounts held in restricted interest-bearing accounts:




June
                30,
            
            December
                31,2008
            
            2007Current
                restricted cashCorporate
                office lease
            
            $
            895,000
            
            $
            448,000Grainnovations
                purchase escrow
            
            
            -
            
            
            310,000Other
            
            
            11,000
            
            
            -Total
                current restricted cash
            
            
            906,000
            
            
            758,000Non-current
                restricted cashCorporate
                office lease
            
            
            1,343,000
            
            
            1,791,000Irgovel
                purchase escrow
            
            
            1,905,000
            
            
            -Total
                long-term restricted cash
            
            
            3,248,000
            
            
            1,791,000Total
                restricted cash
            
            $
            4,154,000
            
            $
            2,549,000




20




**14.**  **RELATED
      PARTY TRANSACTIONS**




Medan,
      LLC




In
      March
      2008, our wholly owned subsidiary Medan, LLC purchased 9,700 shares of PIN
      (see
      Note 10) from FFOL for $8,175,000. A director of FFOL is also a director of
      PAHL. In June 2008, Medan purchased an additional 3,050 shares directly from
      PIN
      for $2,500,000 raising our interest in PIN to 51%.




Vital
      Living, Inc.




In
      conjunction with our purchase of certain securities of VLI (Note 10), we began
      consolidating VLI financial results into our financial results. Additionally,
      during fiscal 2007, we entered into a business relationship with Wellness
      Watchers Global, LLC (“WWG”), the major customer of VLI. The chief executive
      officer of VLI, is also a principal member of WWG. During the year ended
      December 31, 2007, we recorded sales of $2,460,000 to WWG. In the six months
      ended June 30, 2008 we recorded $192,000 of sales to WWG. At June 30, 2008
      we
      had $1,440,000 due from this customer included in our accounts receivable of
      $4,703,000 (net of allowance for doubtful accounts). As of June, 2008 the CEO
      of
      VLI has advanced VLI $462,000 of short-term, non-interest bearing loans which
      are included in the liabilities of VLI. In our consolidated balance sheet we
      have offset the $462,000 due to VLI’s CEO from VLI against accounts receivable
      due VLI from WWG.




**15.**  **COMMITMENTS
      AND CONTINGENCIES**




Contractual
      Obligations




We
      lease
      corporate office space in Phoenix, AZ, warehouse facilities in Sacramento,
      California, property for our production facilities in Lake Charles, Louisiana
      and Freeport Texas, and a small office in Burley, Idaho. Future amounts due
      under these leases at June 30, 2008 are included in the following
      table:




Year
                Ended December 31,2008
            
            $
            751,0002009
            
            
            1,582,0002010
            
            
            1,631,0002011
            
            
            1,654,0002012
            
            
            1598,0002013
            
            
            1,649,000Thereafter
            
            
            5,004,000Total
            
            $
            13,869,000





Total
      rent expense for the three months ended June 30, 2008 and 2007 was $410,000
      and
      $27,000, respectively. Total rent expense for the six months ended June 30,
      2008
      and 2007 was $846,000 and $276,000, respectively.




**16.**  **BUSINESS
      SEGMENTS**




We
      operate in two business segments; NutraCea, which manufactures and distributes
      nutritional supplements primarily derived from SRB (operating results from
      VLI
      are included in our NutraCea segment), and Irgovel, our rice-bran oil
      manufacturing subsidiary in Pelotas, Brazil. Operating results for the three
      and
      six months ended June 30, 2008 (the period for Irgovel is from February 19,
      2008
      through June 30, 2008) and summary financial information as of June 30, 2008
      for
      the segments are presented in the following table:




Summary
                Financial Information
            
            **Three
                Months En****ded
                June 30, 2008**
            
            **Six
              Months Ended June 30, 2008**Operating
                Results
            
            **NutraCea**
            
            **Irgovel**
            
            **NutraCea**
            
            **Irgovel**Net
                revenues
            
            $
            3,935,000
            
            $
            6,379,000
            
            $
            6,809,000
            
            $
            8,616,000Total
                cost of sales
            
            
            3,169,000
            
            
            4,108,000
            
            
            6,364,000
            
            
            5,707,000Gross
                Margin
            
            
            766,000
            
            
            2,271,000
            
            
            445,000
            
            
            2,909,000Operating
                expenses
            
            
            6,906,000
            
            
            828,000
            
            
            13,783,000
            
            
            1,351,000Net
                (loss) income from operations
            
            
            (6,140,000
            )
            
            1,443,000
            
            
            (13,338,000
            )
            
            1,558,000Other
                income (expense), net
            
            
            (758,000
            )
            
            (426,000
            )
            
            (275,000
            )
            
            (541,000
            )Net
                (loss) income before taxes
            
            $
            (6,898,000
            )
            $
            1,017,000
            
            
            (13,613,000
            )
            
            1,017,000Asset
                SummaryTotal
                assets
            
            $
            119,676,000
            
            $
            26,700,000
            
            $
            119,676,000
            
            $
            26,700,000





21




**17** **.**  **STOCKHOLDERS
      EQUITY**




Common
      Stock




During
      the three months ended June 30, 2008 we:




issued
      50,000 shares of our common stock to our Chief Operating Officer, in accordance
      with a restricted grant agreement, valued at $37,500.




retired
      53,096 shares of our common stock. These shares were originally issued to RiceX
      and converted to NutraCea shares at the date of the merger in October, 2005.




*April
      2008 Registered Direct Offering*





In
      April
      2008 we
      issued in a registered offering common stock and warrants for aggregate gross
      proceeds of approximately $20,000,000 ($18,775,000 after offering expenses).
      We
      issued an aggregate of 22,222,223 shares of common stock and warrants to
      purchase an aggregate of 6,666,664 shares of our common stock combined in
“units” at a price of $0.90 per unit. Each unit consists of one share of
      NutraCea common stock and a five year warrant to purchase 0.3 of a share of
      NutraCea common stock at an exercise price of $1.20 per share. An advisor for
      the financing received a customary 6% cash fee based on aggregate proceeds
      received from the investors, reasonable expenses, and a five year warrant to
      purchase 1,333,333 shares of our common stock at an exercise price of $1.20.
      The
      fair value of these warrants to purchase 7,999,997 shares of common stock using
      the Black-Scholes method is approximately $3,102,000. If the warrants issued
      to
      the investors and the financial advisor are exercised in full, we would receive
      approximately $9,600,000.




Options
      and Warrants





During
      the three months ended June 30, 2008 we:





issued
      to
      a new employee an option to purchase a total of 50,000 shares of common stock
      with vesting periods beginning one year from the date of grant to three years.
      The options expire in five years and have an exercise price of $1.00 per
      share.





issued
      to
      fourteen investors warrants to purchase a total of 6,666,664 shares of common
      stock in conjunction with a Registered Direct Offering. The warrants vest
      immediately, expire in five years and have an exercise price of $1.20 per
      share.





issued
      a
      warrant to purchase 1,333,333 shares of our common stock to an advisor for
      our
      April, 2008 registered direct offering. The warrants vest immediately, expire
      in
      five years and have an exercise price of $1.20 per share.





issued
      options to purchase 35,000 shares of our common stock to each of our six
      non-employee directors. The options vest monthly over twelve months, expire
      in
      five years and have an exercise price of $0.86 per share.




22




issued
      warrants to purchase 166,666 shares of our common stock each to three advisors
      under a performance agreement. The warrants vest upon completion of the
      agreements, expired in five years and have an exercise price of $1.50 per
      share.




The
      expense for stock options and warrants issued to consultants and employees
      are
      calculated at fair value using the Black-Scholes valuation method.




**18.**  **SUBSEQUENT
      EVENTS**





In
      July,
      2008 one holder of our common stock exercised warrants and received a total
      of
      250,000 shares of our common stock for an aggregate purchase price of
      $50,000.





**19.**  **FOREIGN
      CURRENCY TRANSLATION ADJUSTMENTS**





In
      February, 2008 we acquired our Irgovel subsidiary in Pelotas, Brazil. We account
      for the operations of Irgovel in the Brazilian Real (R$) and include the results
      of operations and financial position in our consolidated financial statements
      using the U.S. Dollar Unit of Measure method allowed under FAS 52. The
      translation of foreign currencies into U.S. dollars is performed for monetary
      balance sheet accounts using current exchange rates in effect at the balance
      sheet date and for income and expense accounts using monthly average exchange
      rates. Non-monetary accounts are re-measured using historical exchange rates.
      The cumulative effects of translating the functional currencies into the U.S.
      dollar are included in other comprehensive income.





The
      following table lists the components of the accumulated translation (loss)
      or
      gain and the effect in US dollars.




**Accumulated
                Trans****lation
                (Loss)/Gain****Six
                Months En****ded
                June 30, 2008**Balance
                at beginning of period
            
            
            
            
            $
            -Net
                income
            
            R$
            1,195,000
            
            
            31,000Property,
                plant, and equipment
            
            
            13,302,000
            
            
            (704,000
            )Goodwill
            
            
            23,015,000
            
            
            (1,217,000
            )Investment
                from parent
            
            R$
            26,323,000
            
            
            1,392,000Balance
                at end of period
            
            
            
            
            $
            (498,000
            )




**20.**  **IMPLEMENTATION
      OF RECENT ACCOUNTING PRONOUNCEMENTS**





During
      the six months ended June 30, 2008, we implemented the following new accounting
      policies;




*Fair
      Value Measurements*




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure
      assets and liabilities. It also responds to investors’ requests for expanded
      information about the extent to which companies measure assets and liabilities
      at fair value, the information used to measure fair value, and the effect of
      fair valued measurements on earnings. SFAS No. 157 applies whenever standards
      require (or permit) assets or liabilities to be measured at fair value, and
      does
      not expand the use of fair value in any new circumstances. SFAS No. 157 is
      effective for financial assets and liabilities in financial statements issued
      for fiscal years beginning after November 15, 2007.




The
      Company adopted this statement for financial assets and liabilities measured
      at
      fair value effective January 1, 2008. There was no financial statement impact
      as
      a result of adoption. In accordance with the guidance of FASB Staff Position
      No.
      157-2, the Company has postponed adoption of the standard for non-financial
      assets and liabilities that are measured at fair value on a non-recurring basis,
      until the fiscal year beginning after November 15, 2008. The adoption of FAS
      157
      did not have a material impact on the Company’s fair value measurements. The
      provisions of FAS 157 have not been applied to non-financial assets and
      non-financial liabilities.




23




In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159, "The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an amendment of FASB Statement No. 115" ("FAS 159"). FAS 159
      permits companies to measure many financial instruments and certain other items
      at fair value. The Company adopted FAS 159
      in
      the first quarter of 2008; as the Company did not apply the fair value option
      to
      any of its outstanding instruments, FAS 159
      did
      not have an impact on the Company's consolidated financial statements.




Recent
      Accounting Pronouncements





*Business
      Combinations and Non-controlling Interests*





In
      December 2007, the FASB released FAS 141R, *“Business
      Combinations”* and FAS
      160, *“Non-controlling
      Interests in Consolidated Financial Statements.”* Both
      standards will be effective for transactions that occur after January 1,
      2009.





FAS
      141R
      applies to all business combinations and will require the acquiring entity
      to
      recognize the assets and liabilities acquired at their respective fair
      value.  This standard changes the accounting for business combinations
      in several areas.  If we complete an acquisition after the effective
      date of FAS 141R, some of these changes could result in increased volatility
      in
      our results of operations and financial position.  For example,
      transaction costs, which are currently capitalized in a business combination,
      will be expensed as incurred.  Additionally, pre-acquisition
      contingencies (such as in-process lawsuits acquired) and contingent
      consideration (such as additional consideration contingent on specified events
      in the future) will be recorded at fair value at the acquisition date, with
      subsequent changes in fair value reflected in our results of
      operations.  Under current accounting guidance, adjustments to these
      contingencies are reflected in the allocation of purchase price if they occur
      within a certain period of time after the acquisition date.





24




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




NutraCea
      is a health-science company focused on the development and distribution of
      products based upon the use of stabilized rice bran and proprietary rice bran
      formulations. Rice bran is the outer layer of brown rice which until recently
      was an under-utilized by-product of the commercial rice industry. These products
      include food supplements and medical foods which provide health benefits for
      humans and animals (known as "nutraceuticals") based on stabilized rice bran,
      rice bran derivatives and the rice bran oils. In February 2008, we acquired
      100%
      of Irgovel in Pelotas, Brazil (see Note 10 to the consolidated financial
      statements contained herein), which operates a rice-bran oil manufacturing
      plant. Rice bran oil is a natural addition to NutraCea's portfolio of value
      added products derived from rice bran.  A co-product of rice bran oil is
      defatted rice bran that is currently widely used in animal feeding and has
      great
      potential as a food ingredient in human food products after applying
      NutraCea’s proprietary, patent and patent-pending processes.





Beginning
      in the first quarter of 2008 with the acquisition of our Irgovel subsidiary
      we
      began reporting in two business segments; the Irgovel segment for the
      manufacture and sale of rice-bran oil products by Irgovel subsidiary, and the
      NutraCea segment for the manufacture and sale of our SRB and SRB derived
      products. The following is a discussion of the consolidated financial condition
      of our results of operations for the three and six months ended June 30, 2008
      and 2007.





**THREE
      MONTHS ENDED JUNE 30, 2008 AND 2007**




For
      the
      three months ended June 30, 2008, the Company’s net loss was $6,093,000, or
      ($0.04) per share, compared to a profit of $2,002,000 or $0.01 per share, in
      the
      same period of 2007, a decrease in net income of $8,095,000. The increased
      net
      loss for the quarter was primarily due to the decreased gross margin of
      $6,096,000, an increase of $371,000 in operating expenses, and a net increase
      in
      other expenses, other income, and income taxes of $1,628,000.





Our
      NutraCea segment contributed a loss before income taxes of $6,898,000 and our
      Irgovel segment contributed income before taxes of $1,017,000 for the three
      months ended June 30, 2008 (see Note 16 to the consolidated financial statements
      included herein).





*Revenues,
      cost of sales and gross margin*




Our
      consolidated net revenues for the three months ended June 30, 2008 of
      $10,314,000 decreased $2,682,000 from the $12,996,000 consolidated revenues
      recorded in the same period last year. This decrease is comprised of a
      $4,066,000 decrease in product sales and the decrease of $5,000,000 in licensing
      fee revenue by our NutraCea segment, offset by $6,381,000 of sales contributed
      by our Irgovel subsidiary. The $4,066,000 decrease in product sales by our
      NutraCea segment is due to an increase of $615,000 in sales in our core SRB
      product lines offset by sales in the three months ended June 30, 2007 of
      $2,080,000 to a new customer and a $2,601,000 of proprietary products to a
      single customer.





Gross
      margins on product sales in the three months ended June 30, 2008 were
      $3,037,000, or 29% compared to $9,133,000, or 70%, a decrease of $6,096,000
      compared to the same period last year. Gross margins on our various product
      lines vary widely and the gross margins are impacted from period to period
      by
      sales mix and utilization of production capacity. Our investment in production
      capacity during 2007 and the first six months of 2008 has increased our fixed
      operating costs in our NutraCea segment by approximately $750,000 per quarter.
      Additionally, during the second quarter of 2008 our NutraCea segment operated
      at
      30% capacity overall due to difficulties in obtaining adequate quantities of
      useable rice bran. Our Mermentau plant was idle from May through July because
      the rice mill that supplies the plant was not milling rice because of business
      conditions at their mill un-related to our operations. Our Lake Charles plant
      began operations in May, 2008 however full production levels have not been
      reached because the rice mill was phasing in our contract for rice bran. The
      combination of increased fixed costs and under-utilization of production
      capacity, along with the $4,995,000 decline in license fees, contributed to
      the
      increase in cost of goods sold in our NutraCea segment from 30% to 81% for
      the
      quarter ending June 30, 2008. We anticipate that beginning in August, 2008
      both
      rice mills will be operational and our plants will be receiving 100% of the
      output from each mill. If, however, adequate supplies of raw rice bran remain
      too low to run our plants at our desired capacity levels we may continue to
      have
      lower than desired gross profit margins on our NutraCea product sales.





The
      following table illustrates the gross margin contribution by each of our
      segments during the three months ended:




**June
                30, 2008**
            
            
            **June
                30, 2007**
            
            
            **Increase/**
              **(Decrease)****Consolidated**
            
            
            **%**
            
            
            **NutraCea**
            
            
            **%**
            
            
            **Irgovel**
            
            
            **%**
            
            
            **NutraCea**
            
            
            **%**Net
                product sales
            
            $
            10,309,000
            
            
            
            
            $
            3,930,000
            
            
            
            
            $
            6,379,000
            
            
            
            
            $
            7,996,000
            
            
            
            
            $
            2,313,000Royalty
                and licensing
            
            
            5,000
            
            
            
            
            
            5,000
            
            
            
            
            
            -
            
            
            
            
            
            5,000,000
            
            
            
            
            
            (4,995,000
            )Total
                revenues
            
            
            10,314,000
            
            
            100
            
            
            3,935,000
            
            
            100
            
            
            6,379,000
            
            
            100
            
            
            12,996,000
            
            
            100
            
            
            (2,682,000
            )Cost
                of sales
            
            
            7,277,000
            
            
            71
            
            
            3,169,000
            
            
            81
            
            
            4,108,000
            
            
            64
            
            
            3,863,000
            
            
            30
            
            
            3,414,000Gross
                Margin
            
            $
            3,037,000
            
            
            29
            
            $
            766,000
            
            
            19
            
            $
            2,271,000
            
            
            36
            
            $
            9.133,000
            
            
            70
            
            $
            (6,096,000
            )





*Operating
      expenses*




Research
      and Development (“R&D”) expenses were $738,000 and $170,000 for the quarter
      ended June 30, 2008 and 2007, respectively, an increase of $568,000. The
      increase was attributed to higher product development costs and employee related
      expenses due to increased R&D activities and expanded scientific staff
      compared to the same period last year. We paid $350,000 to Herbal Science
      Singapore PTE. LTD, the 20% minority member of our research subsidiary Rice
      Science, LLC., for on-going research programs to commercialize SRB isolates.
      The
      Company expects to continue research and development expenditures to establish
      the scientific basis for health claims of existing products and to develop
      new
      products and applications.





Sales,
      General and Administrative (“SG&A”) expenses were $5,871,000 and $5,657,000
      in the three months ended June 30, 2008 and 2007, respectively, an increase
      of
      $214,000, or 4%. This increase is due to $1,351,000 of SG&A costs for our
      Irgovel subsidiary, offset by a $1,137,000 reduction of total SG&A costs in
      our NutraCea segment. SG&A expenses for our Irgovel subsidiary consist of
      marketing, selling, and administrative expenses.





Specific
      changes in SG&A expense is detailed in the following schedule for the three
      months ended:




**June
                30, 2008**
            
            **June
                30, 2007**
            
            **Increase
                /(Decrease)**Selling,
                General, and Administrative ExpensesPayroll
            
            $
            1,582,000
            
            $
            1,472,000
            
            $
            110,000Employee
                benefits, payroll taxes, and hiringexpenses
            
            
            280,000
            
            
            142,000
            
            
            138,000Sales
                and marketing
            
            
            223,000
            
            
            612,000
            
            
            (389,000
            )Allowance
                for bad debt expense, net
            
            
            105,000
            
            
            1,055,000
            
            
            (950,000
            )Operations
            
            
            258,000
            
            
            310,000
            
            
            (52,000
            )Travel
                and entertainment
            
            
            238,000
            
            
            349,000
            
            
            (111,000
            )Rent
                and facility costs
            
            
            436,000
            
            
            249,000
            
            
            187,000Stock
                based compensation (net of amounts applied toR&D
                and professional fees)
            
            
            770,000
            
            
            909,000
            
            
            (139,000
            )Amortization
            
            
            218,000
            
            
            222,000
            
            
            (4,000
            )Depreciation
                , net ofallocation
                to cost of goods sold
            
            
            248,000
            
            
            118,000
            
            
            130,000Administration,
                insurance, and other
            
            
            162,000
            
            
            219,000
            
            
            (57,000
            )Total
                NutraCea segment
            
            
            4,520,000
            
            
            5,657,000
            
            
            (1,137,000
            )Total
                Irgovel segment
            
            
            1,351,000
            
            
            -
            
            
            1,351,000Total
                selling, general and administrative expenses
            
            $
            5,871,000
            
            $
            5,657,000
            
            $
            214,000





In
      the
      three months ended June 30, 2008 our provision for the allowance for bad debt
      expense was $105,000 compared to $1,055,000 in the three months ended June
      30,
      2007, a decrease of $950,000. This change is the result of a $105,000 additional
      provision for a doubtful accounts receivable.




25




Professional
      fees were $1,125,000 and $1,536,000 for the three months ended June 30, 2008
      and
      2007, respectively, a decrease of $411,000. This decrease is primarily due
      to
      the $707,000 decrease in broker and commission fees. The following table lists
      the changes in each of the professional fees accounts for the three month
      periods ended:




Professional
                Fees
            
            **June
                30, 2008**
            
            **June
                30, 2007**
            
            **Increase/Decrease**Legal
            
            $
            374,000
            
            $
            172,000
            
            $
            202,000Accounting
            
            
            366,000
            
            
            249,000
            
            
            117,000Other
                consulting fees
            
            
            169,000
            
            
            173,000
            
            
            (4,000
            )Broker
                and commission fees
            
            
            43,000
            
            
            750,000
            
            
            (707,000
            )Shareholder
                relations
            
            
            173,000
            
            
            192,000
            
            
            (19,000
            )Total
                NutraCea segment
            
            
            1,125,000
            
            
            1,536,000
            
            
            (411,000
            )Total
                Irgovel segment
            
            
            -
            
            
            -
            
            
            -Total
                professional fees
            
            $
            1,125,000
            
            $
            1,536,000
            
            $
            (411,000
            )





*Other
      income and expense*




Other
      expenses (net of income) were $1,184,000 in the three months ended June 30,
      2008
      compared to a net other income of $317,000 for the three month ended June 30,
      2007. This $1,501,000 increase is detailed in the following table.








Other
                income (expense)
            
            **June
                30, 2008**
            
            **June
                30, 2007**
            
            **(Increase)/Decrease**Interest
                income
            
            $
            161,000
            
            $
            876,000
            
            $
            (715,000
            )Interest
                expense
            
            
            (365,000
            )
            
            -
            
            
            (365,000
            )Loss
                on disposal of assets
            
            
            (331,000
            )
            
            (309,000
            )
            
            (22,000
            )Other
                expenses
            
            
            (586,000
            )
            
            -
            
            
            (586,000
            )Loss
                on equity investments
            
            
            (63,000
            )
            
            (250,000
            )
            
            187,000Total
                other (expense) income
            
            $
            (1,184,000
            )
            $
            317,000
            
            $
            (1,501,000
            )





Interest
      income decreased $715,000 due to lower cash balances being available for
      investment.




Interest
      expense increased $365,000 for the three months ended June 30, 2008 due to
      $262,000 of interest expense on our Irgovel subsidiary for interest on accounts
      receivable credit lines and $103,000 of interest incurred in our NutraCea
      segment for our note payable for the leasehold improvements for our
      warehouse/office in West Sacramento, California, and the interest




Loss
      on
      disposal of assets increased $22,000 due to a write-down of $331,000 of
      inventory related to an infomercial product line compared to the $309,000 charge
      in the three months ending June 30, 2007 for the abandonment of leasehold
      improvements in our Sacramento office when we moved the corporate office to
      Phoenix, AZ.




Other
      expenses increased $586,000 due to a $221,000 reversal of a an accrued late
      fee,
      $205,000 lawsuit settlement on our VIE consolidated subsidiary Vital Living,
      and
      $160,000 of other non-operating charges on our Irgovel segment.




The
      loss
      on equity investments decreased $187,000. Our loss on the equity investments
      in
      GE and PIN from operations was $63,000 compared to the $250,000 loss in the
      prior period which was due to the payment of the broker’s commission relating to
      the formation of GE.






**SIX
      MONTHS ENDED JUNE 30, 2008 AND 2007**




For
      the
      six months ended June 30, 2008, the Company’s net loss was $12,845,000, or
      ($0.09) per share, compared to net income of $1,755,000, or $0.01 per share,
      in
      the same period of 2007, showing a decrease of $14,600,000. The decrease for
      the
      six month period was primarily due to the $5,410,000 increase in product sales,
      offset by the $4,978,000 decline in license fee revenue, and a $7,095,000
      increase in cost of goods sold which combined to result in a $6,663,000 decrease
      in gross margin. Additionally, operating expenses increased $4,878,000 and
      other
      expenses (net of other income) increased $3,167,000.





Our
      NutraCea segment contributed a loss before income taxes of $12,170,000 and
      our
      Irgovel segment contributed income before taxes of $1,017,000 for the six months
      ended June 30, 2008 (see Note 16 to the consolidated financial statements
      included herein).





26





*Revenues,
      cost of sales and gross margin*




Our
      consolidated revenues through June 30, 2008 of $15,425,000 increased $432,000,
      or 3%, from the same period last year. The revenue increase is attributable
      to
      $8,618,000 in sales contributed by our Irgovel segment, offset by a $3,206,000
      decline in product sales and the decline of $4,978,000 of license fee revenues
      by our NutraCea segment. The $3,206,000 decline in product sales from our
      NutraCea segment is due to an increase of $1,475,000 in sales in our SRB product
      lines offset by sales in the six months ended June 30, 2007 of $2,080,000 to
      a
      new customer and a $2,601,000 of proprietary products to a single
      customer.





Gross
      margins on sales in the six months ended June 30, 2008 were $3,354,000, or
      22%,
      compared to $10,017,000, or 67%, during the same period last year, a decline
      of
      $6,663,000. Gross margins on our various product lines vary widely and the
      gross
      margins are impacted from period to period by sales mix and utilization of
      production capacity. Our investment in production capacity during 2007 and
      the
      first six months of 2008 has increased our fixed operating costs in our NutraCea
      segment by approximately $750,000 per quarter. Additionally, during the six
      months ended June 30, 2008 our NutraCea segment operated at 42% capacity overall
      due to difficulties in obtaining adequate quantities of useable rice bran.
      Our
      Mermentau plant was idle from May, 2008 through July, 2008 because the mill
      that
      supplies the plant was not milling rice because of business conditions at their
      mill un-related to our operations. Our Lake Charles plant began operations
      in
      May, 2008, however full production levels have not been reached because the
      rice
      mill was phasing in our contract for rice bran. The combination of increased
      fixed costs and under-utilization of production capacity, along with the decline
      of $4,978,000 in license and royalty fees, contributed to the increase in cost
      of goods sold in our NutraCea segment from 33% to 86% for the six months ending
      June 30, 2008. We anticipate that beginning in August, 2008 both rice mills
      will
      be operational and our plants will be receiving 100% of the output from each
      mill. If, however, adequate supplies of rice bran remain too low to run our
      plants at our desired capacity levels we may continue to have lower than desired
      gross profit margins on our NutraCea product sales.





Also,
      during the six months ended June 30, 2008 we recorded a charge to cost of goods
      of $515,000 on our NutraCea segment relating to a credit to a customer to
      reimburse the customer for products purchased by it, totaling $903,000 during
      2007 ultimately determined by the customer to not meet its specifications.
      This
      credit relates to a specialty product made for this customer only and is the
      only significant warranty cost that we have incurred. The customer has agreed
      to
      apply the credit against future purchases. We know of no other product warranty
      contingencies.





The
      following table illustrates the gross margin contribution by each of our
      segments during the six months ended:




**June
                30, 2008**
            
            **June
                30, 2007**
            
            **Increase/**
              **(Decrease)****Consolidated**
            
            **%**
            
            **NutraCea**
            
            **%**
            
            **Irgovel**
            
            **%**
            
            **NutraCea**
            
            **%**Net
                product sales
            
            $
            15,393,000
            
            
            
            
            $
            6,777,000
            
            
            
            
            $
            8,616,000
            
            
            
            
            $
            9,983,000
            
            
            
            
            $
            5,410,000Royalty
                and licensing
            
            
            32,000
            
            
            
            
            
            32,000
            
            
            
            
            
            -
            
            
            
            
            
            5,010,000
            
            
            
            
            
            (4,978,000
            )Total
                revenues
            
            
            15,425,000
            
            
            100
            
            
            6,809,000
            
            
            100
            
            
            8,616,000
            
            
            100
            
            
            14,993,000
            
            
            100
            
            
            432,000Cost
                of salesCost
                of goods sold
            
            
            11,556,000
            
            
            75
            
            
            5,849,000
            
            
            86
            
            
            5,707,000
            
            
            66
            
            
            4,976,000
            
            
            33
            
            
            6,580,000Product
                warranty cost
            
            
            515,000
            
            
            3
            
            
            515,000
            
            
            8
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            515,000Total
                cost of sales
            
            
            12,071,000
            
            
            78
            
            
            6,364,000
            
            
            94
            
            
            5,707,000
            
            
            66
            
            
            4,976,000
            
            
            33
            
            
            7,095,000Gross
                Margin
            
            $
            3,354,000
            
            
            22
            
            $
            445,000
            
            
            6
            
            $
            2,909,000
            
            
            34
            
            $
            10,017,000
            
            
            67
            
            $
            (6,663,000
            )




27




*Operating
      expenses*




R&D
      expenses were $1,002,000 and $291,000 for the six months ended June 30, 2008,
      and 2007, respectively, an increase of $711,000. The increase was attributed
      to
      higher product development costs and employee related expenses due to increased
      R&D activities and expanded scientific staff compared to the same period
      last year. We paid $350,000 to Herbal Science Singapore PTE. LTD, the 20%
      minority member of our research subsidiary Rice Science, LLC for on-going
      research programs to commercialize SRB Isolates. The Company expects to continue
      research and development expenditures to establish the scientific basis for
      health claims of existing products and to develop new products and applications.





SG&A
      expenses were $11,049,000 and $7,970,000 in the six months ended June 30, 2008
      and 2007 respectively, an increase of $3,079,000, or 39%. This increase is
      due
      to a $1,728,000, or 22%, increase in our Nutracea segment due to expanded
      investment in personnel, infrastructure, and sales and marketing activities
      to
      meet anticipated future demands (with the exception of bad debt expense - see
      below), and $1,351,000 of SG&A from our Irgovel subsidiary. SG&A
      expenses for our Irgovel subsidiary consist of marketing, selling, and
      administrative expenses.





Specific
      changes in SG&A expense is detailed in the following schedule for the six
      months ended:




Selling,
                General, and Administrative Expenses
            
            June
                30, 2008
            
            June
                30, 2007
            
            Increase
                / (Decrease)Payroll
            
            $
            3,064,000
            
            $
            2,256,000
            
            $
            808,000Employee
                benefits, payroll taxes,and
                hiring expenses
            
            
            505,000
            
            
            424,000
            
            
            81,000Sales
                and marketing
            
            
            696,000
            
            
            869,000
            
            
            (173,000
            )Allowance
                for bad debt expense, net
            
            
            495,000
            
            
            1,055,000
            
            
            (560,000
            )Operations
            
            
            625,000
            
            
            455,000
            
            
            170,000Travel
                and entertainment
            
            
            587,000
            
            
            469,000
            
            
            118,000Rent
                and facility cost
            
            
            846,000
            
            
            276,000
            
            
            570,000Stock
                based compensation, net of amountsallocated
                to R&D and professional fees
            
            
            1,390,000
            
            
            1,263,000
            
            
            127,000Amortization
            
            
            427,000
            
            
            252,000
            
            
            175,000Depreciation,
                net ofallocation
                to cost of goods sold
            
            
            525,000
            
            
            218,000
            
            
            307,000Administration,
                insurance, and other
            
            
            538,000
            
            
            433,000
            
            
            105,000Total
                NutraCea segment
            
            
            9,698,000
            
            
            7,970,000
            
            
            1,728,000Total
                Irgovel segment
            
            
            1,351,000
            
            
            -
            
            
            1,351,000Total
                selling, general and administrative expenses
            
            $
            11,049,000
            
            $
            7,970,000
            
            $
            3,079,000





In
      the
      six months ended June 30, 2008 our provision for the allowance for bad debt
      expense was $495,000 compared to $1,055,000 for the six months ended June 30,
      2007, a decrease of $560,000. This change is the result of an additional
      $152,000 provision for doubtful accounts receivable and an additional $323,000
      provision for doubtful notes receivable.





Professional
      fees were $3,083,000 and $1,995,000 for the six months ended June 30, 2008
      and
      2007, respectively, an increase of $1,088,000. The higher professional fees
      in
      2008 are due to $393,000 of legal fees for our acquisition of Irgovel and our
      joint venture agreement with Bright. Broker and commission fees of $793,000
      and
      $750,000, respectively include a $500,000 commission associated with our
      acquisition of PIN in 2008 and the $750,000 commission paid in 2007 for our
      Grain Enhancements joint venture. . Professional fees include costs related
      to
      accounting, legal and consulting services. The following table lists the
      increases in each of the professional fees accounts for the three month periods
      ended:





Professional
                Fees
            
            **June
                30, 2008**
            
            **June
                30, 2007**
            
            **Increase/(Decrease)**Legal
            
            $
            853,000
            
            $
            255,000
            
            $
            598,000Accounting
            
            
            811,000
            
            
            505,000
            
            
            306,000Other
                consulting fees
            
            
            311,000
            
            
            218,000
            
            
            93,000Broker
                and commission fees
            
            
            793,000
            
            
            750,000
            
            
            43,000Shareholder
                relations
            
            
            315,000
            
            
            267,000
            
            
            48,000Total
                NutraCea segment
            
            
            3,083,000
            
            
            1,995,000
            
            
            1,088,000Total
                Irgovel segment
            
            
            -
            
            
            -
            
            
            -Total
                Professional Fees
            
            $
            3,083,000
            
            $
            1,995,000
            
            $
            1,088,000




28




*Other
      income and expense*




Other
      expenses (net of other income) were $816,000 for the six months ended June
      30,
      2008 compared to other income (net of other expenses) of $2,079,000 in the
      six
      months ended June 30, 2007, an increase in net expense of 2,895,000.





Other
                (expenses) income
            
            **June
                30, 2008**
            
            **June
                30, 2007**
            
            **(Increase)/Decrease**Interest
                income
            
            $
            421,000
            
            $
            1,388,000
            
            $
            (967,000
            )Interest
                expense
            
            
            (485,000
            )
            
            -
            
            
            (485,000
            )Gain
                on lawsuit settlement
            
            
            -
            
            
            1,250,000
            
            
            (1,250,000
            )Loss
                on disposal of assets
            
            
            (331,000
            )
            
            (309,000
            )
            
            (22,000
            )Other
                expenses
            
            
            (341,000
            )
            
            -
            
            
            (341,000
            )Loss
                on equity investments
            
            
            (80,000
            )
            
            (250,000
            )
            
            170,000Total
                other (expenses) income
            
            $
            (816,000
            )
            $
            2,079,000
            
            $
            (2,895,000
            )





Interest
      income decreased $967,000 due to lower cash balances being available for
      investment.




Interest
      expense increased $485,000 for the three months ended June 30, 2008 due to
      $382,000 of interest expense on our Irgovel subsidiary for interest on accounts
      receivable credit lines and $103,000 of interest incurred in our NutraCea
      segment for our note payable for the leasehold improvements for our
      warehouse/office in West Sacramento, California, and the interest incurred
      during the second quarter for the three month note payable issued for the
      purchase of our new building in Phoenix, Arizona.




In
      the
      six months ended June 30, 2007 we received a $1,250,000 payment for the
      settlement of a lawsuit (see Note 3 to the consolidated financial statements
      included herein).




Loss
      on
      disposal of assets increased $22,000 due to a write-down of $331,000 of
      inventory related to an infomercial product line compared to the $309,000 charge
      in the three months ending June 30, 2007 for the abandonment of leasehold
      improvements in our Sacramento office when we moved the corporate office to
      Phoenix, AZ.




Other
      expenses increased $341,000 due to $205,000 lawsuit settlement on our VIE
      consolidated subsidiary Vital Living, and $136,000 of other non-operating
      charges on our Irgovel segment.




The
      loss
      on equity investments decreased $170,000. Our loss on the equity investments
      in
      GE and PIN from operations was $80,000. The $250,000 loss in the prior period
      was due to the payment of the broker’s commission relating to the formation of
      GE.




**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      June 30, 2008, our source of liquidity was cash in the amount of $16,067,000.
      Our cash decreased by $25,231,000 in the six months ended June 30, 2008 from
      our
      cash position of $41,298,000 at December 31, 2007. The decrease in cash was
      primarily due to our $14,970,000 (net of cash acquired with the purchase)
      investment in Irgovel, the purchase of property, plant, and equipment of
      17,698,000 (including $8,400,000 for an industrial building in Phoenix) and
      our
      purchase of 51% of PIN (see Note 10 to our consolidated financial statements
      contained herein) for $10,675,000, offset by the receipt of approximately
      $18,775,000 (net of expenses) from our registered direct offering of equity
      in
      April, 2008.





On
      April
      1, 2008 we received $5,000,000 from PAHL in payment of the note receivable
      entered into in June 2007 for the sale to PAHL of licensing rights. Originally
      due over five year terms, the note was modified in January 2008 to allow for
      the
      forgiveness of accrued interest on the note if the full principal was paid
      by
      March 31, 2008. As the payment was in transit on that date the company agreed
      to
      honor the forgiveness of interest due thru March 31, 2008 of approximately
      $175,000.




29




For
      the
      six months ended June 30, 2008, net cash used in operations was $6,382,000,
      compared to cash used in operations in the same period of 2007 of $369,000,
      an
      increase of $6,013,000. This increase in cash used in operations resulted from
      the increase in our net loss of $14,600,000, offset by the net increase in
      non-cash charges against income of $234,000 and the net increase in the change
      in operating assets and liabilities of $8,353,000.





Inventories
      increased in the six months ended June 30, 2008 by $3,139,000, from the
      $1,808,000 balance at December 31, 2007. $1,952,000 of this increase is due
      to
      our acquisition of Irgovel. The balance of the increase, or $1,187,000 on our
      NutraCea segment was caused by our intentional growth of inventory levels in
      anticipation of future orders. With the completion of our Mermentau and Lake
      Charles, Louisiana, plants, our production capacity now is able to meet current
      contracted demand. We have increased sales of our core SRB product lines by
      $1,475,000 in the six months ended June 30, 2008 compared to the same period
      last year, and believe that such sales growth will continue.





Cash
      used
      in investing activities in the six months ended June 30, 2008 was $38,186,000,
      compared to $16,680,000 for the same period of 2007. This increase of
      $21,506,000 was primarily caused by our $14,970,000 (net of $79,000 cash
      acquired with the purchase) investment in Irgovel (see Note 10 in our
      consolidated financial statements contained herein), an increase of $17,698,000
      in expenditures for plant expansions and other fixed assets, and our $10,675,000
      investment in PIN (see Note 10), offset by the receipt of $6,978,000 in payments
      due on notes receivable.





Cash
      provided by financing activities for the six months ended June 30, 2008 and
      2007, was approximately $19,343,000, and $53,682,000, respectively, a decrease
      of $34,339,000. This decrease is primarily composed of a $28,030,000 decrease
      in
      the proceeds of our direct offerings, and a decrease of $6,192,000 decrease
      in
      proceeds from the exercise of common stock options and warrants.





In
      April
      2008 we
      issued in a registered offering, common stock and warrants for aggregate gross
      proceeds of approximately $20,000,000 ($18,775,000 after offering expenses).
      We
      issued an aggregate of 22,222,223 shares of common stock and warrants to
      purchase an aggregate of 6,666,664 shares of our common stock combined in
“units” at a price of $0.90 per unit. Each unit consists of one share of
      Nutracea common stock and a five year warrant to purchase 0.3 of a share of
      NutraCea common stock at an exercise price of $1.20 per share. An advisor for
      the financing received a customary 6% cash fee, base on aggregate gross proceeds
      received from the investors, reasonable expenses and a warrant to purchase
      1,333,333 shares of our common stock at an exercise price of $1.20. Using the
      Black-Scholes method, the fair value of these warrants to purchase 7,999,997
      shares of common stock is approximately $3,102,000. If exercised, we would
      receive approximately $9,600,000.




On
      February 15, 2007, we sold an aggregate of 20,000,000 shares of our common
      stock
      at a price of $2.50 per share in connection with a private placement for
      aggregate gross proceeds of $50,000,000 ($46,805,000 after offering expenses).
      Additionally, the investors were issued warrants to purchase an aggregate of
      10,000,000 shares of our common stock at an exercise price of $3.25 per share.
      An advisor for the financing received a customary 6% cash-fee, based on
      aggregate gross proceeds received from the investors, reasonable expenses and
      a
      warrant to purchase 1,200,000 shares of common stock at an exercise price per
      share of $3.25. The warrants have a term of five years and are exercisable
      after
      August 16, 2007.





We
      believe we have sufficient cash reserves to meet all anticipated short-term
      operating requirements. We anticipate raising capital to complete our capital
      improvement projects in the United States and Brazil.





*Purchase
      of customer list*





During
      the third quarter of 2008 we expect to complete the purchase of a customer
      list
      and existing book of business from one of our rice mill suppliers for
      $3,100,000.





*Long-term
      financing needs*





In
      January 2008 we entered into an agreement to construct a wheat mill in Indonesia
      and acquired 51% of an Indonesian company, PIN (see Note 10 to the financial
      statements included herein), which owns lands and has the approvals necessary
      for the construction of such a mill. We anticipate that this project will
      require additional funding of approximately $25,000,000, of which approximately
      $12,500,000 will be invested each by the minority partner and
      NutraCea.




30




In
      April
      2008 we announced an agreement to form a joint venture with Bright Holdings
      (Hong Kong) Company, Ltd. (“Bright”), to develop, construct, and operate
      facilities in China to produce, market, distribute and sell rice oil, defatted
      rice bran and other products derived from rice bran. NutraCea will have an
      approximate 72% interest in the joint venture, but will designate 80% of the
      board members and contribute 80% of the capital investment. NutraCea and
      Bright’s capital contributions to the joint venture are to total approximately
      $64,000,000, of which NutraCea will be required to contribute approximately
      $51,000,000 over the next twenty-four months.





We
      expect
      to meet these funding requirements by raising additional capital through sales
      of equity or debt or a combination thereof.





**OFF
      BALANCE SHEET ARANGEMENTS**





We
      have
      not entered into any transactions with unconsolidated entities whereby we have
      financial guarantees, subordinated retained interests, derivative instruments
      or
      other contingent arrangements that expose us to material continuing risk,
      contingent liabilities, or any other obligation under a variable interest in
      an
      unconsolidated entity that provides financing and liquidity support or market
      risk or credit risk support to the Company.





**CRITICAL
      ACCOUNTING POLICIES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon unaudited consolidated condensed financial statements, which have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America. The preparation of financial statements in accordance
      with generally accepted accounting principles requires management to make
      judgments, estimates and assumptions regarding uncertainties that affect the
      reported amounts presented and disclosed in the financial statements. Management
      reviews these estimates and assumptions based on historical experience, changes
      in business conditions and other relevant factors that they believe to be
      reasonable under the circumstances. In any given reporting period, actual
      results could differ from the estimates and assumptions used in preparing our
      financial statements.




Critical
      accounting policies are those that may have a material impact on our financial
      statements and also require management to exercise significant judgment due
      to a
      high degree of uncertainty at the time the estimate is made. Management has
      discussed the development and selection of our accounting policies, related
      accounting estimates and the disclosures set forth below with the Audit
      Committee of our Board of Directors. We believe our critical accounting policies
      include those addressing revenue recognition, allowance for doubtful accounts,
      and valuation of goodwill and intangible assets.




***Revenue
      Recognition***




We
      derive
      our revenue primarily from product sales. Product is shipped when an approved
      purchase order is received. Products shipped by us are generally sold FOB
      Origin, with the customer taking title to the product once it leaves our plant
      via common carrier as that is when risk of loss is transferred. At this point,
      the price to the customer is fixed and determinable, and collectability is
      reasonably assured. Deposits are deferred until either the product has shipped
      or conditions relating to the sale have been substantially
      performed.





On
      occasion, we receive purchase orders for multiple product deliveries. In these
      situations, each delivery is individually evaluated to determine appropriate
      revenue recognition. Each delivery is generally considered to be a separate
      unit
      of accounting for the purposes of revenue recognition and, in all instances,
      persuasive evidence of an arrangement, delivery, pricing and collectability
      must
      be determined or accomplished, as applicable, before revenue is recognized.
      In
      addition, if the purchase order includes customer acceptance provisions, no
      revenue is recognized until customer acceptance occurs. Revenue is accounted
      for
      at the point of shipment FOB Origin, unless accompanied by a memorandum of
      understanding detailing the requirement of customer acceptance in order to
      transfer title, in which case revenue is recognized at the time of such
      acceptance.





Sometimes
      a customer order is completed and such order is stored at the warehouse at
      the
      customer’s request. In these cases, we refer to *Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
      104)* ,
      which
      requires four basic criteria be met before we recognize revenue on bill and
      hold
      transactions:




31




(1)
      our
      purchase orders demonstrates that persuasive evidence of an arrangement exists;


(2) risk
      of ownership has passed to those customers requesting that the transaction
      be on
      a bill and hold basis because of their fulfillment business practices for
      ensuring goods are available to meet their customers demands; all our
      obligations and no further performance obligations by us are required; our
      customers have made arrangements for future shipping instructions with our
      third
      party manufacture where they store their inventory occupy warehouse space;
      and
      the customer has acknowledged taking title and risk of loss for the product
      purchased.


(3) the
      selling price has been fixed and determinable; and


(4)
      collectability is reasonably assured.





In
      order
      to assess whether the price is fixed and determinable, we ensure there are
      no
      refund rights. If payment terms are based on future performance or a right
      of
      return exists, we defer revenue recognition until the price becomes fixed and
      determinable. We assess collectability based on a number of factors, including
      past transaction history with the customer and the creditworthiness of the
      customer. If we determine that collection of a payment is not reasonably
      assured, revenue recognition is deferred until the time collection becomes
      reasonably assured, which is generally upon receipt of payment. Changes in
      judgments and estimates regarding application of SAB No. 104 might result in
      a
      change in the timing or amount of revenue recognized.





Occasionally,
      we will grant exclusive use of our labels by customers in specific territories
      in exchange for a nonrefundable fee. Under *EITF
      00-21, Revenue Recognition with Multiple Deliverables,* each
      label licensing provision is considered to be a separate unit of accounting.
      Each agreement is individually evaluated to determine appropriate revenue
      recognition in accordance with *SAB
      104.* If all
      of the following four SAB 104 basic criteria are met, revenue will be
      recognized: (1) persuasive evidence of an arrangement exists;
      (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectability is reasonably assured. Determination of
      criteria (3) and (4) are based on management’s judgments regarding the fixed
      nature of the selling prices of the products delivered and the collectability
      of
      those amounts.





Additionally, the
      license agreement is expressly not contingent on any future performance
      requirements by NutraCea or customers, nor tied to special discount to market
      pricing. The license agreement is not a vehicle for favored, discounted pricing.





***Allowance
      for Doubtful Accounts***




The
      allowance for doubtful accounts is based on our assessment of the collectability
      of specific customer accounts and the aging of accounts receivable and notes
      receivable.  We analyze historical bad debts, the aging of customer
      accounts, customer concentrations, customer credit-worthiness, current economic
      trends and changes in our customer payment patterns when evaluating the adequacy
      of the allowance for doubtful accounts.  From period to period, differences
      in judgments or estimates utilized may result in material differences in the
      amount and timing of our bad debt expenses.





We
      continuously monitor collections from our customers and maintain an allowance
      for doubtful accounts based upon our historical experience and any specific
      customer collection issues that we have identified. Credit losses have
      historically exceeded our expectations and the provisions established.
      Accordingly, there is a risk that credit losses in the future also may exceed
      our provisions in which case our operating results would be adversely affected.
      In 2007, NutraCea experienced significant credit losses of $3,233,000 compared
      to $9,000 in the prior year. These sales were made to customers that had good
      payment history, fit our strategic business plan and, depending on the
      transaction size, provided a substantial down payment. However, these customers
      encountered business difficulties and were unable to make payments. In addition,
      another customer had difficulties funding their marketing plan. We continue
      to
      evaluated our credit policy to ensure that the customers are worthy of terms
      and
      will support our business plans.





***Valuation
      of Goodwill and Long-Lived Assets***




Long-lived
      assets, consisting primarily of property and equipment, patents and trademarks,
      and goodwill, comprise a significant portion of our total assets. Long-lived
      assets are reviewed for impairment whenever events or changes in circumstances
      indicate that their carrying values may not be recoverable. We assess the
      impairment of goodwill and long-lived assets whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable.
      Impairment is reviewed at least annually, generally in the fourth quarter of
      each year.




32




Factors
      we consider important that could trigger an impairment, include the
      following:





§
            significant
                underperformance relative to expected historical or projected future
                operating results;




§
            Significant
                changes in the manner of our use of the acquired assets or the strategy
                for our overall business;




§
            Significant
                negative industry or economic
                trends;




§
            Significant
                declines in our stock price for a sustained period;
                and




§
            Decreased
                market capitalization relative to net book
                value.





When
      there is an indication that the carrying value of goodwill or a long-lived
      asset
      may not be recoverable based upon the existence of one or more of the above
      indicators, an impairment loss is recognized if the carrying amount exceeds
      its
      fair value.





Our
      impairment analyses require management to make assumptions and to apply judgment
      to estimate future cash flows and asset fair values, including estimating the
      profitability of future business strategies. We have not made any material
      changes in our impairment assessment methodology during the past two fiscal
      years. We do not believe there is a reasonable likelihood that there will be
      a
      material change in the estimates or assumptions we use to calculate long-lived
      asset impairment losses. However, if actual results are not consistent with
      our
      estimates and assumptions used in estimating future cash flows and asset fair
      values, we may be exposed to losses that could be material.





Recoverability
      of assets is measured by a comparison of the carrying value of an asset to
      the
      future net cash flows expected to be generated by those assets. The cash flow
      projections are based on historical experience, management’s view of growth
      rates within the industry, and the anticipated future economic
      environment.





When
      we
      determine that the carrying value of patents and trademarks, long-lived assets
      and related goodwill and enterprise-level goodwill may not be recoverable based
      upon the existence of one or more of the above indicators of impairment, it
      measures any impairment based on a projected discounted cash flow method using
      a
      discount rate determined by its management to be commensurate with the risk
      inherent in its current business model. During 2007, in connection with the
      annual impairment testing, NutraCea recorded an impairment loss of $1.3 million
      in association with the Vital Living transaction. This is the first impairment
      loss incurred by us.





*Goodwill
      impairment*





In
      accordance with Statement of Financial Accounting Standards (SFAS) 142, the
      Company is required to test goodwill for impairment at least annually. The
      goodwill impairment test compares the fair value of individual reporting units
      to the carrying value of these reporting units. If fair value is less than
      carrying value then a goodwill impairment may be present. The market value
      of
      the Company’s common stock is an indicator of fair value and a consideration in
      determining the fair value of the company’s reporting units. SFAS
      142
      also requires goodwill to be tested for impairment between the annual test
      if an
      event occurs or circumstances change that “more likely than not” reduce the fair
      value of a reporting unit below its carrying value.





While
      there have been no significant changes in four of five triggering factors listed
      above, our share price has declined by 48% from $1.40 per share at December
      31,
      2007, to $0.73 per share at June 30, 2008, indicating a significant decline
      in
      market capitalization.





At
      June
      30, 2008 the market value of our stock was $0.73. This fair market price
      multiplied by the company’s outstanding common stock (including the addition of
      a 20% control premium) yields a fair value of approximately $147,000,000 which
      exceeds the companies carrying value of approximately $124,000,000. Based on
      this analysis we
      can
      conclude that it is “more likely than not” that fair value exceeds carrying
      value at June 30, 2008. Therefore, we have concluded that no triggering events
      have occurred as of June 30, 2008 that would require an interim impairment
      test.





As
      of
      August 7, 2008 the market price of our stock was $0.68 which multiplied by
      the
      company’s outstanding common stock (including the addition of a 20% control
      premium) at June 30, 2008 yields a fair value of approximately $137,000,000
      which exceeds the companies carrying value of approximately $124,000,000 which
      indicates that no triggering event has occurred that would require an interim
      impairment test.





If,
      however, the market value of the Company’s common stock continues to decline
      then the carrying value of the company could exceed fair value which would
      require us to perform an interim impairment test. For example, if our share
      price declined to a sustained level of around $0.45 per share, this could result
      in an impairment of the carrying value of goodwill of our NutraCea segment
      of up
      to approximately $32,000,000.





33





***Stock-Based
      Compensation***




We
      have a
      stock incentive plan that provides for the issuance of stock options, restricted
      stock and other awards to employees and service providers.  We
      calculate compensation expense according to the
      provisions of revised Statement of Financial Accounting Standards
      No. 123(R), or SFAS No. 123(R), “Share-Based Payment.” Under
      SFAS No. 123(R), stock-based compensation cost is measured at the
      grant date, based on the estimated fair value of the award, and is recognized
      as
      expense over the employee’s requisite service period. We have awards with
      performance conditions. We adopted the provisions of SFAS No. 123(R)
      on January 1, 2006, using a modified prospective application. Accordingly,
      prior periods have not been revised for comparative purposes. Stock-based
      compensation expense recognized is based on the value of share-based payment
      awards that are ultimately expected to vest, which coincides with the award
      holder’s requisite service period.





We
      estimate the value of our share-based payment awards using the
      Black-Scholes-Merton option-pricing model, and amortize all new grants as
      expense on a straight-line basis over the vesting period.





Our
      stock
      options have characteristics significantly different from those of traded
      options, and changes in the assumptions can materially affect the fair value
      estimates. Because valuation model assumptions are subjective, in our opinion,
      existing valuation models, including the Black-Scholes-Merton model, may not
      provide reliable measures of the fair values of our share-based compensation
      awards. There is not currently a generally accepted market-based mechanism
      or
      other practical application to verify the reliability and accuracy of the
      estimates stemming from these valuation models. Although we estimate the fair
      value of employee share-based awards in accordance with SFAS 123(R) and the
      Securities and Exchange Commission’s Staff Accounting
      Bulletin No. 107, or SAB No. 107, the option-pricing model
      we use may not produce a value that is indicative of the fair value achieved
      in
      a willing buyer/willing seller market transaction.





The
      determination of fair value of share-based payment awards on the date of grant
      using the Black-Scholes-Merton model is affected by our stock price and the
      historical volatility on our traded options, as well as the input of other
      subjective assumptions. These assumptions include, but are not limited to,
      the
      expected term of stock options and our expected stock price volatility over
      the
      term of the awards.




SFAS No. 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. We assess the forfeiture rate on a quarterly basis and revise the
      rate when deemed necessary.




***Adoption
      of recent accounting pronouncements***




*Fair
      Value Measurements*




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure
      assets and liabilities. It also responds to investors’ request for expanded
      information about the extent to which companies measure assets and liabilities
      at fair value, the information used to measure fair value, and the effect of
      fair valued measurements on earnings. SFAS No. 157 applies whenever standards
      require (or permit) assets or liabilities to be measured at fair value, and
      does
      not expand the use of fair value in any new circumstances. SFAS No. 157 is
      effective for financial assets and liabilities in financial statements issued
      for fiscal years beginning after November 15, 2007.




The
      Company adopted this statement for financial assets and liabilities measured
      at
      fair value effective January 1, 2008. There was no financial statement impact
      as
      a result of adoption. In accordance with the guidance of FASB Staff Position
      No.
      157-2, the Company has postponed adoption of the standard for non-financial
      assets and liabilities that are measured at fair value on a non-recurring basis,
      until the fiscal year beginning after November 15, 2008. The adoption of FAS
      157
      did not have a material impact on the Company’s fair value measurements. The
      provisions of FAS 157 have not been applied to non-financial assets and
      non-financial liabilities.





34




In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159, "The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an amendment of FASB Statement No. 115"
      ("FAS 159"). FAS 159 permits companies to measure many financial
      instruments and certain other items at fair value. The Company adopted
      FAS 159 in the first quarter of 2008; as the Company did not apply the fair
      value option to any of its outstanding instruments, FAS 159 did not have an
      impact on the Company's consolidated financial statements.




*Recent
      accounting pronouncements*





*Business
      Combinations and Non-controlling Interests*





In
      December 2007, the FASB released FAS 141R, *“Business
      Combinations”* and FAS
      160, *“Non-controlling
      Interests in Consolidated Financial Statements.”* Both
      standards will be effective for transactions that occur after January 1,
      2009.





FAS
      141R
      applies to all business combinations and will require the acquiring entity
      to
      recognize the assets and liabilities acquired at their respective fair
      value.  This standard changes the accounting for business combinations
      in several areas.  If we complete an acquisition after the effective
      date of FAS 141R, some of these changes could result in increased volatility
      in
      our results of operations and financial position.  For example,
      transaction costs, which are currently capitalized in a business combination,
      will be expensed as incurred.  Additionally, pre-acquisition
      contingencies (such as in-process lawsuits acquired) and contingent
      consideration (such as additional consideration contingent on specified events
      in the future) will be recorded at fair value at the acquisition date, with
      subsequent changes in fair value reflected in our results of
      operations.  Under current accounting guidance, adjustments to these
      contingencies are reflected in the allocation of purchase price if they occur
      within a certain period of time after the acquisition date.





**Item
      3.**   **Quantitative
      and Qualitative Disclosures About Market Risk**




Our
      cash
      and cash equivalents have been maintained only with maturities of 30 days or
      less. Our short-term investments have interest reset periods of 30 days or
      less.
      These financial instruments may be subject to interest rate risk through lost
      income should interest rates increase during their limited term to maturity
      or
      resetting of interest rates. As of June 30, 2008, we had approximately $87,000
      of long-term debt bearing interest at 8%. Future borrowings, if any, would
      bear
      interest at negotiated rates and would be subject to interest rate risk. We
      do
      not believe that a hypothetical adverse change of 10% in interest rates would
      have a material effect on our financial position.




**Item
      4.**   **Controls
      and Procedures**




Disclosure
      Controls and Procedures





We
      carried out an evaluation, under the supervision and with the participation
      of
      management, including our chief executive officer and chief financial officer,
      of the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures as of the end of the period covered by this quarterly
      report. Based upon that evaluation, our chief executive officer and our chief
      financial officer concluded that, as of June 30, 2008, our disclosure controls
      and procedures were effective to ensure that information we are required to
      disclose by NutraCea in reports that we file or submit under the Securities
      and
      Exchange Act of 1934, as amended, is accumulated and communicated to our
      management, including our principal executive and principal financial officers,
      as appropriate to allow timely decisions regarding required disclosure, and
      that
      such information is recorded, processed, summarized and reported within the
      time
      periods specified in the Securities and Exchange Commission rules and forms.




Changes
      in Internal Control Over Financial Reporting





During
      the quarter covered by this report, there was no change in NutraCea’s internal
      control over financial reporting that has materially affected, or is reasonably
      likely to materially effect, the Company’s internal control over financial
      reporting.




35




**PART
      2.**  **OTHER INFORMATION**




**Item
      1.**   **Legal
      Proceedings**




From
      time
      to time we are involved in litigation incidental to the conduct of our business.
      While the outcome of lawsuits and other proceedings against us cannot be
      predicted with certainty, in the opinion of management, individually or in
      the
      aggregate, no such lawsuits are expected to have a material effect on our
      financial position or results of operations.




**Item
      1A.**  **Risk
      Factors**




Investors
      or potential investors in our stock should carefully consider the risks
      described below. Our stock price will reflect the performance of our business
      relative to, among other things, our competition, expectations of securities
      analysts or investors, and general economic market conditions and industry
      conditions. One should carefully consider the following factors in connection
      with any investment in our stock. Our business, financial condition and results
      of operations could be materially adversely affected if any of the following
      risks occur. Should any or all of the following risks materialize, the trading
      price of our stock could decline, and investors could lose all or part of their
      investment.




**Risks
      Related to Our Business**




***We
      have a limited operating history and have generated*** **losses in each quarter of 2008 and for each year other than
      2006.**




We
      began
      operations in February 2000 and incurred losses in each reporting period other
      than the second, third, and fourth quarters of 2006 and the second quarter
      of
      2007. Our prospects for financial success are difficult to forecast because
      we
      have a relatively limited operating history. Our prospects for financial success
      must be considered in light of the risks, expenses and difficulties frequently
      encountered by companies in new, unproven and rapidly evolving markets. Our
      business could be subject to any or all of the problems, expenses, delays and
      risks inherent in the establishment of a new business enterprise, including
      limited capital resources, possible delays in product development, possible
      cost
      overruns due to price and cost increases in raw product and manufacturing
      processes, uncertain market acceptance, and inability to respond effectively
      to
      competitive developments and attract, retain and motivate qualified employees.
      Therefore, there can be no assurance that our business or products will be
      successful, that we will be able to achieve or maintain profitable operations
      or
      that we will not encounter unforeseen difficulties that may deplete our capital
      resources more rapidly than anticipated.




***There
      are significant market risks associated with our
      business.***




We
      have
      formulated our business plan and strategies based on certain assumptions
      regarding the size of the rice bran market, our anticipated share of this
      market, and the estimated price and acceptance of our products. These
      assumptions are based on the best estimates of our management; however, there
      can be no assurance that our assessments regarding market size, potential market
      share attainable by us, the price at which we will be able to sell our products,
      market acceptance of our products, or a variety of other factors will prove
      to
      be correct. Any future success may depend upon factors including changes in
      the
      dietary supplement industry, governmental regulation, increased levels of
      competition, including the entry of additional competitors, increased success
      by
      existing competitors, changes in general economic conditions, increases in
      operating costs including costs of production, supplies, personnel, equipment,
      and reduced margins caused by competitive pressures.




***We
      may*** **face
      difficulties integrating businesses we acquire,**




As
      part
      of our strategy, we expect to review opportunities to buy other businesses
      or
      technologies that would complement our current products, expand the breadth
      of
      our markets or enhance technical capabilities, or that may otherwise offer
      growth opportunities. In the event of any future acquisitions, we
      could:




·
            issue
                stock that would dilute current shareholders’ percentage
                ownership;




·
            incur
                debt; or




·
            assume
                liabilities.




These
      purchases also involve numerous risks, including:




36




·
            problems
                combining the purchased operations, technologies or
                products;




·
            unanticipated
                costs;




·
            diversion
                of management’s attention from our core
                business;




·
            adverse
                effects on existing business relationships with suppliers and
                customers;




·
            risks
                associated with entering markets in which we have no or limited prior
                experience; and




·
            potential
                loss of key employees of purchased
                organizations.




We
      cannot
      assure you that we will be able to successfully integrate any businesses,
      products, technologies or personnel that we might purchase in the
      future.




***We
      intend to pursue significant foreign operations and there are inherent risks
      in
      operating abroad.***





An
      important component of our business strategy is to build rice bran stabilization
      facilities in foreign countries and to market and sell our products
      internationally. For example, we recently entered into a joint ventures to
      produce and market our SRB products in Southeast Asia and China and purchased
      a
      company in Brazil that manufactures rice bran oil. There are risks in operating
      stabilization facilities in developing countries because, among other reasons,
      we may be unable to attract sufficient qualified personnel, intellectual
      property rights may not be enforced as we expect, power may not be available
      as
      contemplated. Should any of these risks occur, we may be unable to maximize
      the
      output from these facilities and our financial results may decrease from our
      anticipated levels. The inherent risks of international operations could
      materially adversely affect our business, financial condition and results of
      operations. The types of risks faced in connection with international operations
      and sales include, among others:




·
            cultural
                differences in the conduct of
                business;





·
            fluctuations
                in foreign exchange rates;




·
            greater
                difficulty in accounts receivable collection and longer collection
                periods;




·
            impact
                of recessions in economies outside of the United
                States;




·
            reduced
                protection for intellectual property rights in some
                countries;





·
            unexpected
                changes in regulatory requirements;




·
            tariffs
                and other trade barriers;





·
            political
                conditions in each country;




·
            management
                and operation of an enterprise spread over various
                countries;





·
            the
                burden and administrative costs of complying with a wide variety
                of
                foreign laws; and




·
            currency
                restrictions.




***We
      depend on limited number of customers.***




During
      2007, our NutraCea segment received approximately 51% of product sales revenue
      from six customers and approximately 15% of our revenue from one customer.
      During the six months ended June 30, 2008, two customers accounted for 12%
      of
      our sales in our NutraCea segment. A loss of any of these customers could have
      a
      material adverse effect on our revenues and results of operations.




37




***The
      inability of our significant customers to meet their obligations to us may
      adversely affect our financial results.***




We
        are
        subject to credit risk due to concentration of our trade accounts receivables
        and notes receivables. For our NutraCea segment, as of June 30, 2008, two
        customers accounted for 61% of our $4,898,000 gross trade accounts receivables.
        Both of these customers balances are past due and we have recorded a 100%
        allowance for doubtful accounts of $3,084,000. In addition, we acquired secured
        promissory notes of Vital Living, Inc. with aggregate principal amounts of
        $4,226,000 in connection with our entering into an asset purchase agreement
        with
        Vital Living to acquire Vital Living’s assets. While we obtain personal
        guarantees and security interests backing these obligations when possible,
        many
        of these obligations are not guaranteed or secured. The inability of our
        significant customers and obligors to meet their obligations to us, or, in
        the
        case of Vital Living, the deterioration of Vital Living’s financial condition or
        assets before we are able to consummate our asset purchase, may adversely
        affect
        our financial condition and results of operations.


***We
      rely upon a limited number of product offerings.***




The
      majority of our products are based on stabilized rice bran. Although we will
      market stabilized rice bran as a dietary supplement, as an active food
      ingredient for inclusion in our products and in other companies’ products, and
      in other ways, a decline in the market demand for our products, as well as
      the
      products of other companies utilizing our products, could have a significant
      adverse impact on us.




***We
      are dependent upon our marketing efforts.***




We
      are
      dependent on our ability to market products to animal food producers, food
      manufacturers, mass merchandise and health food retailers, and to other
      companies for use in their products. We must increase the level of awareness
      of
      dietary supplements in general and our products in particular. We will be
      required to devote substantial management and financial resources to these
      marketing and advertising efforts and there can be no assurance that it will
      be
      successful.




***We
      rely upon an adequate supply of raw rice bran.***




The
      majority of our current products depend on our proprietary technology using
      unstabilized or raw rice bran, which is a by-product from milling paddy rice
      to
      white rice. Our ability to manufacture stabilized rice bran raw is currently
      limited to the production capability of our production equipment at Farmers’
Rice Co-operative and Archer Daniels Midland, our own plants located next to
      the
      Louisiana Rice Mill in Mermentau, Louisiana, Farmer’s Rice Inc. in Lake Charles,
      Louisiana, and American Rice, Inc. in Freeport, Texas, and our single
      value-added products plant in Dillon, Montana. We currently are capable of
      producing enough finished products at our facilities to meet current demand.
      With the exception of our newly acquired rice bran oil facility in Pelotas,
      Brazil, our existing plants do not allow for dramatic expansion , therefore
      additional domestic production capacity will be needed if demand increases.




We
      are
      pursuing other supply sources in the United States and in foreign countries
      and
      anticipate being able to secure alternatives and back-up sources of rice bran.
      However, there can be no assurance that we will continue to secure adequate
      sources of raw rice bran to meet our requirements to produce stabilized rice
      bran products. For example, our Mermentau plant was idle from May through July,
      2008, because the rice mill that supplies the plant was not milling rice due
      to
      business reasons un-related to our operations. In addition, since rice bran
      has
      a limited shelf life, the supply of rice bran is affected by the amount of
      rice
      planted and harvested each year. If economic or weather conditions adversely
      affect the amount of rice planted or harvested, the cost of rice bran products
      that we use may increase. We are not generally able to pass cost increases
      to
      our customers and any increase in the cost of stabilized rice bran products
      would have an adverse effect on our results of operations.





***We
      face risks in our wheat bran stabilization efforts.***





In
      January 2008, through a newly formed wholly owned subsidiary, we entered an
      agreement to develop and lease Wheat Bran Stabilization equipment to an
      Indonesian company. Our efforts to prove our Wheat Bran Stabilization technology
      on an industrial scale may not be successful and the demand for stabilized
      wheat
      bran products may not grow as we anticipate.





38




***We
      identified material weaknesses in our internal control over financial reporting,
      which could impact negatively our ability to report our results of operations
      and financial condition accurately and in a timely
      manner.***





As
      required by Section 404 of the Sarbanes-Oxley Act of 2002, management conducted
      an evaluation of the effectiveness of our internal control over financial
      reporting at December 31, 2007. We identified two material weaknesses in our
      internal control over financial reporting and concluded that, as of December
      31,
      2007, we did not maintain effective control over financial reporting based
      on
      criteria established in *Internal
      Control-Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway
      Commission.  Each
      of
      our material weaknesses results in a reasonable possibility that a material
      misstatement of the annual or interim financial statements that we prepare
      will
      not be prevented or detected on a timely basis. As a result, we must perform
      additional work to obtain reasonable assurance regarding the reliability of
      our
      financial statements.





If
      we are
      unsuccessful in implementing or following our remediation plan, or fail to
      update our internal control over financial reporting as our business evolves
      or
      to integrate acquired businesses into our controls system, we may not be able
      to
      timely or accurately report our financial condition, results of operations
      or
      cash flows or to maintain effective disclosure controls and procedures. If
      we
      are unable to report financial information in a timely and accurate manner
      or to
      maintain effective disclosure controls and procedures, we could be subject
      to,
      among other things, regulatory or enforcement actions by the SEC, securities
      litigation and a general loss of investor confidence, any one of which could
      adversely affect our business prospects and the market value of our common
      stock.




***We
      face competition.***




Competition
      in our targeted industries, including nutraceuticals, functional food
      ingredients, rice bran oils, animal feed supplements and companion pet food
      ingredients is vigorous, with a large number of businesses engaged in the
      various industries. Many of our competitors have established reputations for
      successfully developing and marketing their products, including products that
      incorporate bran from other cereal grains and other alternative ingredients
      that
      are widely recognized as providing similar benefits as rice bran. In addition,
      many of our competitors have greater financial, managerial, and technical
      resources than us. If we are not successful in competing in these markets,
      we
      may not be able to attain our business objectives.




***We*** **have
      not yet achieved positive cash flow**




We
      have
      not generated a positive cash flow from operations continuous period to period
      since commencing operations, and have relied primarily on cash raised from
      the
      sale of our securities to fund capital investments and acquisitions. We raised
      in a public offering of our common stock and warrants to purchase our common
      stock approximately $20,000,000 in April 2008. Additionally, we raised in
      private placements of equity approximately $50,000,000 in February 2007,
      $17,560,000 in May 2006, and $8,000,000 in October 2005. While we believe that
      we have adequate cash reserves and working capital to fund current operations,
      our ability to meet long term business objectives may be dependent upon our
      ability to raise additional financing through public or private equity
      financings, establish increasing cash flow from operations, enter into
      collaborative or other arrangements with corporate sources, or secure other
      sources of financing to fund long-term operations. There is no assurance that
      external funds will be available on terms acceptable to us in sufficient amount
      to finance operations until we do reach sufficient positive cash flow to fund
      our capital expenditures. In addition, any issuance of securities to obtain
      such
      funds would dilute percentage ownership of our shareholders. Such dilution
      could
      also have an adverse impact on our earnings per share and reduce the price
      of
      our common stock. Incurring additional debt may involve restrictive covenants
      and increased interest costs and demand on future cash flow. Our inability
      to
      obtain sufficient financing may require us to delay, scale back or eliminate
      some or all of our product development and marketing programs.




***Our
      products could fail to meet applicable regulations which could have a material
      adverse affect on our financial performance.***




The
      dietary supplement and cosmetic industries are subject to considerable
      government regulation, both as to efficacy as well as labeling and advertising.
      There is no assurance that all of our products and marketing strategies will
      satisfy all of the applicable regulations of the Dietary Supplement, Health
      and
      Education Act, the Food, Drug and Cosmetic Act, the U.S. Food and Drug
      Administration and/or the U.S. Federal Trade Commission. Failure to meet any
      applicable regulations would require us to limit the production or marketing
      of
      any non-compliant products or advertising, which could subject us to financial
      or other penalties.




39




***Our
      success depends in part on our ability to obtain patents, licenses and other
      intellectual property rights for our products and
      technology.***




We
      have
      one patent entitled Methods for Treating Joint Inflammation, Pain and Loss
      of
      Mobility, which covers both humans and mammals. In addition, our subsidiary
      RiceX has five United States patents and may decide to file corresponding
      international applications. RiceX holds patents to the production of Beta Glucan
      and to a micro nutrient enriched rice bran oil process. RiceX also holds patents
      to a method to treat high cholesterol, to a method to treat diabetes and to
      a
      process for producing Higher Value Fractions from stabilized rice bran. The
      process of seeking patent protection may be long and expensive, and there can
      be
      no assurance that patents will be issued, that we will be able to protect our
      technology adequately, or that competition will not be able to develop similar
      technology.




There
      currently are no claims or lawsuits pending or threatened against us or RiceX
      regarding possible infringement claims, but there can be no assurance that
      infringement claims by third parties, or claims for indemnification resulting
      from infringement claims, will not be asserted in the future or that such
      assertions, if proven to be accurate, will not have a material adverse affect
      on
      our business, financial condition and results of operations. In the future,
      litigation may be necessary to enforce our patents, to protect our trade secrets
      or know-how or to defend against claimed infringement of the rights of others
      and to determine the scope and validity of the proprietary rights of others.
      Any
      litigation could result in substantial cost and diversion of our efforts, which
      could have a material adverse affect on our financial condition and results
      of
      operations. Adverse determinations in any litigation could result in the loss
      of
      our proprietary rights, subjecting us to significant liabilities to third
      parties, require us to seek licenses from third parties or prevent us from
      manufacturing or selling our systems, any of which could have a material adverse
      affect on our financial condition and results of operations. There can be no
      assurance that a license under a third party’s intellectual property rights will
      be available to us on reasonable terms, if at all.




***We
      are dependent on key employees and consultants.***




Our
      success depends upon the efforts of our top management team, including the
      efforts of Bradley D. Edson, our President and Chief Executive Officer, Todd
      C.
      Crow, our Chief Financial Officer, Leo Gingras, our Chief Operating Officer,
      and
      Kody K. Newland, our Senior Vice President of Sales and Marketing. Although
      we
      have written employment agreements with each of the foregoing individuals,
      other
      than Ms. Adelman, there is no assurance that such individuals will not die,
      become disabled, or resign. In addition, our success is dependent upon our
      ability to attract and retain key management persons for positions relating
      to
      the marketing and distribution of our products. There is no assurance that
      we
      will be able to recruit and employ such executives at times and on terms
      acceptable to us.




***Our
      products may require clinical trials to establish efficacy and
      safety.***




Certain
      of our products may require clinical trials to establish our benefit claims
      or
      their safety and efficacy. Such trials can require a significant amount of
      resources and there is no assurance that such trials will be favorable to the
      claims we make for our products, or that the cumulative authority established
      by
      such trials will be sufficient to support our claims. Moreover, both the
      findings and methodology of such trials are subject to challenge by the FDA
      and
      scientific bodies. If the findings of our trials are challenged or found to
      be
      insufficient to support our claims, additional trials may be required before
      such products can be marketed.




**Risks
      Related to Our Stock**




***Our
      Stock Price is Volatile.***




The
      market price of a share of our common stock has fluctuated significantly in
      the
      past and may continue to fluctuate significantly in the future. The high and
      low
      closing prices of a share of common stock for the following periods
      were:




40




**High**
            
            **Low**Three
                months ended June 30, 2008
            
            $
            1.13
            
            $
            0.69Six
                months ended June 30, 2008
            
            $
            1.56
            
            $
            0.69Twelve
                months ended December 31, 2007
            
            $
            5.00
            
            $
            0.75Twelve
                months ended December 31, 2006
            
            $
            2.74
            
            $
            0.60




The
      market price of a share of our common stock may continue to fluctuate in
      response to a number of factors, including:




·
            announcements
                of new products or product enhancements by us or our
                competitors;




·
            fluctuations
                in our quarterly or annual operating
                results;




·
            developments
                in our relationships with customers and
                suppliers;




·
            the
                loss of services of one or more of our executive officers or other
                key
                employees;




·
            announcements
                of technological innovations or new systems or enhancements used
                by us or
                our competitors;




·
            developments
                in our or our competitors intellectual property
                rights;




·
            adverse
                effects to our operating results due to impairment of
                goodwill;




·
            failure
                to meet the expectation of securities analysts’ or the public;
                and




·
            general
                economic and market conditions.




***We
      have significant “equity overhang” which could adversely affect the market price
      of our common stock and impair our ability to raise additional capital through
      the sale of equity securities.***




As
      of
      Augusts 4, 2008, 167,993,724 shares of our common stock were outstanding.
      Additionally, as of August 4, 2008, options and warrants to purchase
      approximately 51,121,000 shares of our common stock were outstanding. The
      possibility that substantial amounts of our outstanding common stock may be
      sold
      by investors or the perception that such sales could occur, often called “equity
      overhang,” could adversely affect the market price of our common stock and could
      impair our ability to raise additional capital through the sale of equity
      securities in the future.




***Sales
      of Our Stock Pursuant to Registration Statements May Hurt Our Stock
      Price***




We
      granted registration rights to the investors in our October 2005, May 2006
      and
      February 2007 capital stock and warrant financings. As of August 4, 2008,
      approximately 33,721,000 shares of our common stock remained eligible for resale
      pursuant to outstanding registration statements filed for these investors.
      In
      addition, we have filed a registration statement to cover our issuance and
      sale
      of up to $125,000,000 of common stock, preferred stock, and warrants to purchase
      common or preferred stock. We sold an aggregate of 22,222,223 shares of common
      stock and warrants to purchase an aggregate 6,666,664 shares of our common
      stock
      for gross proceeds of $20,000,000 pursuant to that registration statement in
      April, 2008. Additional sales or potential sales of a significant number of
      shares into the public markets may negatively affect our stock
      price.




***The
      Exercise of Outstanding Options and Warrants May Dilute Current
      Shareholders***




As
      of
      August 4, 2008, there were outstanding options and warrants to purchase
      approximately 51,121,000 shares of our common stock. Holders of these options
      and warrants may exercise them at a time when we would otherwise be able to
      obtain additional equity capital on terms more favorable to us. Moreover, while
      these options and warrants are outstanding, our ability to obtain financing
      on
      favorable terms may be adversely affected.




41




***We
      may need to raise funds through debt or equity financings in the future, which
      would dilute the ownership of our existing shareholders and possibly subordinate
      certain of their rights to the rights of new
      investors.***




We
      may
      choose to raise additional funds in debt or equity financings if they are
      available to us on terms we believe reasonable to increase our working
      capital, strengthen our financial position or to make acquisitions. Any
      sales of additional equity or convertible debt securities would result in
      dilution of the equity interests of our existing shareholders, which could
      be
      substantial. Additionally, if we issue shares of preferred stock or convertible
      debt to raise funds, the holders of those securities might be entitled to
      various preferential rights over the holders of our common stock, including
      repayment of their investment, and possibly additional amounts, before any
      payments could be made to holders of our common stock in connection with an
      acquisition of the company. Such preferred shares, if authorized, might be
      granted rights and preferences that would be senior to, or otherwise adversely
      affect, the rights and the value of our common stock. Also, new investors may
      require that we and certain of our shareholders enter into voting arrangements
      that give them additional voting control or representation on our board of
      directors.




***The
      authorization of our preferred stock may have an adverse effect on the rights
      of
      holders of our common stock.***




We
      may,
      without further action or vote by holders of our common stock, designate and
      issue shares of our preferred stock. The terms of any series of preferred stock
      could adversely affect the rights of holders of our common stock and thereby
      reduce the value of our common stock. The designation and issuance of preferred
      stock favorable to current management or shareholders could make it more
      difficult to gain control of our Board of Directors or remove our current
      management and may be used to defeat hostile bids for control which might
      provide shareholders with premiums for their shares.




***Compliance
      with corporate governance and public disclosure regulations may result in
      additional expenses.***




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002, and new regulations issued
      by the Securities and Exchange Commission, are creating uncertainty for
      companies. In order to comply with these laws, we may need to invest substantial
      resources to comply with evolving standards, and this investment would result
      in
      increased general and administrative expenses and a diversion of management
      time
      and attention from revenue-generating activities to compliance
      activities.




***Our
      officers and directors have limited liability and have indemnification
      rights***




Our
      Articles of Incorporation and by-laws provide that we may indemnify our officers
      and directors against losses sustained or liabilities incurred which arise
      from
      any transaction in that officer’s or director’s respective managerial capacity
      unless that officer or director violates a duty of loyalty, did not act in
      good
      faith, engaged in intentional misconduct or knowingly violated the law, approved
      an improper dividend, or derived an improper benefit from the
      transaction.




**Item
      2.**   **Unregistered
      Sales of Equity Securities and Use of Proceeds**




None







**Item
      3.**   **Defaults
      Upon Senior Securities**




None




42




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




a.
            We
                held our Annual Meeting of Shareholders on June 4, 2008 (“Annual
                Meeting”). Out of 145,076,146 shares of common stock entitle to vote at
                such meeting, there were present in person or by proxy 119,233,240
                shares
                of common stock.




b.
            At
                the Annual Meeting, the following seven individuals were elected
                to the
                Company’s Board of Directors.


Nominee
              Votes
                  Cast For
              Withheld
                  or AgainstBradley
                  D. Edson
              105,344,724
              13,878,516David
                  S. Bensol
              106,137,184
              13,086,056Wesley
                  K. Clark
              105,467,183
              13,756,057James
                  Lintzenich
              107,498,679
              11,724,561Edward
                  L McMillan
              107,970,032
              11,253,208Steven
                  W. Saunders
              108,320,838
              10,902,402Kenneth
                  L. Shropshire
              108,161,577
              11,061,663




c.
            The
                following additional proposals were considered at the Annual Meeting
                and
                were not approved by the vote of the stockholders, in accordance
                with the
                tabulation shown below:




(1)
      Proposal to approve an amendment to the Company’s 2005 Equity Incentive Plan to
      limit the number of shares that may be granted to any person annually in order
      to allow NutraCea to receive certain corporate income tax deductions that may
      otherwise be limited by Internal Revenue Code Section 162(m):




Votes
                  For
              Votes
                  Against
              Abstain
              Broker
                  non-vote33,118,946
              9,835,876
              441,864
              75,827,554




(2)
      Proposal to approve an amendment to the 2005 Equity Incentive Plan to increase
      the size of the automatic annual option grants to our non-employee directors:


Votes
                  For
              Votes
                  Against
              Abstain
              Broker
                  non-vote24,666,519
              18,079,939
              649,227
              75,827,555




**Item
      5.**




**Other
      Information**




In
      August
      2008 we amended Bradley Edson’s employment agreement with us to clarify
      that our board of directors or the Compensation Committee of NutraCea’s
      board of directors, at their discretion, could grant cash bonuses to Mr.
      Edson. Our board of directors approved the amendment on the same
      date.




*Vital
      Living, Inc.*




As
      discussed elsewhere in this quarterly report on Form 10-Q, NutraCea holds
      secured promissory notes of Vital Living, Inc. that have aggregate principal
      amounts of $4,226,000. Vital Living’s obligations under the notes are secured by
      a security interest in substantially all of the assets of Vital Living, and
      the
      principal and accrued and unpaid interest on the notes become due and payable
      on
      December 15, 2008.




43




On
      August
      7, 2008 we delivered a notice of default to Vital Living declaring that an
      event
      of default has occurred under the notes and that all amounts payable under
      the
      notes be immediately due and payable. We declared an event of default based
      upon
      Vital Living’s written admission to NutraCea that it is unlikely to be able to
      meet its obligations under the notes and, among other things, Vital Living’s low
      levels of cash and cash equivalents.





We
      are
      evaluating our options under the notes and the related security agreement,
      including foreclosing on the collateral that secures the notes. As of the date
      we filed this report of Form 10-Q, Vital Living has not responded to our notice
      of default. Vital Living may disagree with our belief that an event of default
      has occurred. If we decide to foreclose on the collateral, we may not be able
      to
      do so in a timely or complete manner.




**Item
      6.**   **Exhibits**




The
      following exhibits are attached hereto and filed herewith:




**Exhibit**
              **Number**
            **Description
                of Exhibit**1.1(1)
            Placement
                Agency Agreement, dated April 24, 2008, by and between NutraCea and
                Rodman
                & Renshaw, LLC2.1
            Schedules
                to Quotas Purchase and Sale Agreement, dated January 31, 2008, between
                NutraCea and Quota Holders of Irgovel Industria Riograndens De Oleos
                Vegitais Ltda.4.1(1)
            Form
                of Common Stock Purchase Warrant.10.1
            Second
                Amendment of Employment Agreement between NutraCea and Todd C.
                Crow.10.2
            Form
                of Restricted Stock Grant Agreement for 2005 Equity Incentive
                Plan.10.3(1)
            Form
                of Securities Purchase Agreement, dated as of April 24, 2008, by
                and
                between NutraCea and each investor signatory thereto.10.4+
            Shareholders’s
                Agreement
                dated June 25, 2008.10.5
            Second Amendment
                of Employment Agreement between NutraCea and Brad
                Edson.31.1
            Certification
                of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Office Pursuant to
                18
                U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of
                2002.




**+** Confidential
      treatment requested as to certain portions




(1)
      incorporated herein by reference to exhibits previously filed on Registrant’s
      Current Report on Form 8-K, filed on April 28, 2008.






44




SIGNATURES




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




NUTRACEADated:
              August 11, 2008
            
            */s/*Bradley
              EdsonBradley
              EdsonChief
              Executive Officer


Dated:
                August 11, 2008
              
              */s*/
                Todd C CrowTodd
                C. Crow,Chief
                  Financial Officer
                (Principal Accounting
                  Officer)




45