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 September 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 o Accelerated
        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: 168,124,554 as of October 31,
        2008.
  
  **FORM
        10-Q**
  Index
 **PART
                    I.**
                **FINANCIAL
                    INFORMATION**Item
                    1.
                Financial
                    Statements(a)
                Consolidated
                      Condensed Balance Sheets at September 30, 2008 (Unaudited)
                      and December
                      31, 2007
                
                4(b)
                Consolidated
                    Condensed Statements of Operations (Unaudited) for the three
                    and nine
                    months ended September 30, 2008 and 2007
                
                5(c)
                Consolidated
                    Condensed Statements of Comprehensive loss (Unaudited) for the
                    three and
                    nine months ended September 30, 2008 and 2007
                
                6(d)
                Consolidated
                    Condensed Statements of Cash Flows (Unaudited) for the nine months
                    ended
                    September 30, 2008 and 2007
                
                7(e)
                Notes
                      to Unaudited Consolidated Condensed Financial
                      Statements
                
                8Item
                      2.
                Management’s
                      Discussion and Analysis of Financial Condition and Results
                      of
                      Operations
                
                26Item
                    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
                
                48Item
                    3.
                Defaults
                      Upon Senior Securities
                
                48Item
                    4.
                Submission
                      of Matters to a Vote of Security Holders
                
                48Item
                    5.
                Other
                      Information
                
                48Item
                    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
        I.**  **FINANCIAL
        INFORMATION**
  **Item
        1.**   **Financial
        Statements**
  **NUTRACEA
        AND SUBSIDIARIES**
 **CONSOLIDATED
        CONDENSED BALANCE SHEET****S**
 
 **September 30,**
                **2008**
              
              **December 31,2007**(Unaudited)ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              8,702,000
              
              $
              41,298,000Restricted
                  cash
              
              
              2,363,000
              
              
              758,000Trade
                  accounts receivable, net of allowance for doubtful accounts of
                  $3,404,000
                  and $2,999,000, respectively
              
              
              2,992,000
              
              
              2,346,000Inventories
              
              
              4,945,000
              
              
              1,808,000Notes
                  receivable, net of allowance for doubtful notes receivable of $573,000
                  and
                  $250,000, respectively
              
              
              921,000
              
              
              2,936,000Deposits
                  and other current assets
              
              
              3,248,000
              
              
              2,545,000Total
                  current assets
              
              
              23,171,000
              
              
              51,691,000Restricted
                  cash
              
              
              1,344,000
              
              
              1,791,000Notes
                  receivable, net of current portion
              
              
              -
              
              
              5,039,000Property
                  and equipment, net
              
              
              46,652,000
              
              
              19,328,000Investment
                  in joint ventures
              
              
              11,751,000
              
              
              1,191,000Patents
                  and trademarks, net of accumulated amortization
              
              
              5,139,000
              
              
              5,743,000Other
                  non-current
              
              
              124,000
              
              
              -Goodwill,
                  net of $1,300,000 impairment
              
              
              52,668,000
              
              
              39,510,000Total
                  assets
              
              $
              140,849,000
              
              $
              124,293,000LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCurrent
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              15,126,000
              
              $
              7,596,000Notes
                  payable, current portion
              
              
              710,000
              
              
              23,000Total
                  current liabilities
              
              
              15,836,000
              
              
              7,619,000Long-term
                  liabilities:Notes
                  payable, net of current portion
              
              
              4,379,000
              
              
              77,000Total
                  liabilities
              
              
              20,215,000
              
              
              7,696,000Commitments
                  and contingencies
              
              
              -
              
              
              -Shareholders’
                  equity:Common
                  stock, no par value, 350,000,000 shares authorized,167,994,000
                  and 144,108,000 shares issued and outstanding
              
              
              199,185,000
              
              
              177,813,000Accumulated
                  deficit
              
              
              (78,594,000
              )
              
              (61,216,000
              )Foreign
                  currency cumulative translation adjustment
              
              
              43,000
              
              
              -Total
                  shareholders’ equity
              
              
              120,634,000
              
              
              116,597,000Total
                  liabilities and shareholder’s equity
              
              $
              140,849,000
              
              $
              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 MonthsEndedSeptember 30,2008**
                
                **Three MonthsEndedSeptember 30,2007**
                
                **Nine MonthsEndedSeptember 30,2008**
                
                **Nine MonthsEndedSeptember 30,2007**RevenuesProduct
                    sales, net of discounts
                
                $
                11,193,000
                
                $
                3,048,000
                
                $
                26,563,000
                
                $
                13,031,000Less
                    sales returns
                
                
                -
                
                
                (1,551,000
                )
                
                (119,000
                )
                
                (1,551,000
                )Licensing
                    and royalty revenue
                
                
                8,000
                
                
                23,000
                
                
                39,000
                
                
                5,033,000Total
                    revenues
                
                
                11,201,000
                
                
                1,520,000
                
                
                26,483,000
                
                
                16,513,000Cost
                    of sales
                
                
                8,704,000
                
                
                1,635,000
                
                
                20,775,000
                
                
                6,611,000Gross
                    profit (loss)
                
                
                2,497,000
                
                
                (115,000
                )
                
                5,708,000
                
                
                9,902,000Operating
                    expensesResearch
                    and development expenses
                
                
                266,000
                
                
                155,000
                
                
                1,268,000
                
                
                446,000Selling,
                    general and administrative expenses
                
                
                6,484,000
                
                
                4,576,000
                
                
                17,534,000
                
                
                12,546,000Professional
                    fees
                
                
                303,000
                
                
                747,000
                
                
                3,385,000
                
                
                2,742,000Total
                    operating expenses
                
                
                7,053,000
                
                
                5,478,000
                
                
                22,187,000
                
                
                15,734,000Loss
                    from operations
                
                
                (4,556,000
                )
                
                (5,593,000
                )
                
                (16,479,000
                )
                
                (5,832,000
                )Other
                    income (expense)Interest
                    income
                
                
                176,000
                
                
                778,000
                
                
                597,000
                
                
                2,167,000Interest
                    expense
                
                
                (107,000
                )
                
                -
                
                
                (448,000
                )
                
                -Gain
                    on settlement
                
                
                -
                
                
                -
                
                
                -
                
                
                1,250,000Gain
                    (loss) on disposal of assets
                
                
                211,000
                
                
                -
                
                
                (462,000
                )
                
                (309,000
                )Loss
                    on equity investments
                
                
                (35,000
                )
                
                (36,000
                )
                
                (115,000
                )
                
                (286,000
                )Total
                    loss before income tax
                
                
                (4,311,000
                )
                
                (4,851,000
                )
                
                (16,907,000
                )
                
                (3,010,000
                )Income
                    tax expense
                
                
                (222,000
                )
                
                67,000
                
                
                (541,000
                )
                
                (18,000
                )Net
                    loss from continuingoperations
                
                
                (4,533,000
                )
                
                (4,784,000
                )
                
                (17,448,000
                )
                
                (3,028,000
                )Minority
                    interest
                
                
                -
                
                
                -
                
                
                70,000
                
                
                -Net
                    loss
                
                $
                (4,533,000
                )
                $
                (4,784,000
                )
                $
                (17,378,000
                )
                $
                (3,028,000
                )Basic
                    and diluted loss per share:Basic
                    loss per share
                
                $
                (0.03
                )
                $
                (0.03
                )
                $
                (0.12
                )
                $
                (0.02
                )Fully
                    diluted loss per share
                
                $
                (0.03
                )
                $
                (0.03
                )
                $
                (0.12
                )
                $
                (0.02
                )Weighted
                    average basic number ofshares
                    outstanding
                
                
                167,866,000
                
                
                141,084,000
                
                
                147,947,000
                
                
                131,054,000Weighted
                    average diluted number ofshares
                    outstanding
                
                
                167,866,000
                
                
                141,084,000
                
                
                147,947,000
                
                
                131,054,000
 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 MonthsEndedSeptember 30,2008**
              
              **Three MonthsEndedSeptember 30,2007**
              
              **Nine MonthsEndedSeptember 30,2008**
              
              **Nine MonthsEndedSeptember 30,2007**Net
                  loss
              
              $
              (4,533,000
              )
              $
              (4,784,000
              )
              $
              (17,378,000
              )
              $
              (3,028,000
              )Other
                  comprehensive income:Foreign
                  currencyTranslation
                  adjustment
              
              
              541,000
              
              
              -
              
              
              43,000
              
              
              -Unrealized
                  gain onmarketable
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              91,000Net
                  comprehensive (loss)
              
              $
              (3,992,000
              )
              $
              (4,784,000
              )
              $
              (17,335,000
              )
              $
              (2,937,000
              )




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




6




**NUTRACEA
      AND SUBSIDIARIES**


**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Nine
                  Months Ended****September
                  30,2008**
              
              **September
                  30,2007**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (17,378,000
              )
              $
              (3,028,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              2,870,000
              
              
              1,453,000Provision
                  for doubtful notes receivable
              
              
              323,000
              
              
              -Provision
                  for doubtful accounts receivable
              
              
              310,000
              
              
              800,000Loss
                  on disposal of assets
              
              
              331,000
              
              
              309,000Stock-based
                  compensation
              
              
              1,956,000
              
              
              1,667,000Recognition
                  of deferred income
              
              
              (89,000
              )
              
              -Loss
                  on equity investments
              
              
              115,000
              
              
              286,000Net
                  changes in operating assets and liabilities (net of effects of
                  Irgovel
                  acquisition and Vital Living, Inc. consolidation):Trade
                  accounts receivable
              
              
              121,000
              
              
              (1,545,000
              )Inventories
              
              
              (2,695,000
              )
              
              (623,000
              )Deposits
                  and other current assets
              
              
              (282,000
              )
              
              (400,000
              )Accounts
                  payable and accrued liabilities
              
              
              5,730,000
              
              
              (485,000
              )Effect
                  of exchange rate change
              
              
              (52,000
              )
              
              -Net
                  cash used in operating activities
              
              
              (
                  8,740,000
              )
              
              (1,566,000
              )Cash
                  flows from investing activities:Restricted
                  cash
              
              
              (1,158,000
              )
              
              -Proceeds
                  from payments of notes receivable
              
              
              7,025,000
              
              
              3,965,000Issuance
                  of notes receivable
              
              
              (294,000
              )
              
              (5,670,000
              )Investments
                  in subsidiaries (net of cash acquired with purchase)
              
              
              (25,646,000
              )
              
              (7,312,000
              )Purchases
                  of property and equipment
              
              
              (21,989,000
              )
              
              (8,208,000
              )Investment
                  in joint venture
              
              
              -
              
              
              (1,500,000
              )Purchases
                  of other intangible assets
              
              
              (40,000
              )
              
              (802,000
              )Effect
                  of exchange rate change
              
              
              75,000
              
              
              -Net
                  cash used in investing activities
              
              
              (42,027,000
              )
              
              (19,527,000
              )Cash
                  flows from financing activities:Proceeds
                  from equity financing, net of expenses
              
              
              18,775,000
              
              
              46,805,000Proceeds
                  from exercise of common stock options
              
              
              745,000
              
              
              8,967,000Registration
                  costs
              
              
              (104,000
              )
              
              -Payment
                  on notes payable
              
              
              (1,076,000
              )
              
              -Effect
                  of exchange rate change
              
              
              (163,000
              )
              
              -Net
                  cash provided by financing activities
              
              
              18,177,000
              
              
              55,772,000Effect
                  of foreign currency
              
              
              (6,000
              )
              
              -Net
                  (decrease) increase in cash
              
              
              (32,596,000
              )
              
              34,679,000Cash,
                  beginning of period
              
              
              41,298,000
              
              
              14,867,000Cash,
                  end of period
              
              $
              8,702,000
              
              $
              49,546,000Supplemental
                  disclosures:Cash
                  paid for interest
              
              $
              448,000
              
              $
              2,000Cash
                  paid for income taxes
              
              $
              541,000
              
              $
              17,000Non-cash
                  disclosures of investing and financing activities:Accounts
                  receivable converted to note receivable
              
              $
              -
              
              $
              3,881,000Accounts
                  receivable exchanged for an intangible asset
              
              $
              -
              
              $
              300,000Conversion
                  of preferred stock to common stock
              
              $
              -
              
              $
              5,490,000Settlement
                  of accounts receivable net, to acquire an intangible asset
              
              $
              -
              
              $
              284,000Unrealized
                  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 (“NutraCea”, “the Company”, “we”, “our”) 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. In
      February 2008, 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”) (see Note 10). All inter-company
      accounts and transactions have been eliminated.





We
      operate in two business segments (see Note 16); the NutraCea segment, which
      manufactures and distributes bulk ingredients primarily derived from Stabilized
      Rice Bran (“SRB”), utilizing our unique and proprietary technology and the
      Irgovel segment, which consists of our rice-bran oil and fatted and de-fatted
      SRB manufacturing subsidiary in Pelotas, Brazil. Our interest in PIN is a
      non-controlling interest (see Note 10), therefore we include its results of
      operations as a gain or loss on an equity investment in our NutraCea segment.





***Foreign
      currencies***





The
      functional currency for the Company’s wholly-owned subsidiary, Irgovel, is
      the Brazilian Real (R$). Accordingly, the balance sheet of Irgovel is translated
      into United States dollars using the exchange rate in effect at the balance
      sheet date, except for goodwill, property and equipment, and investment from
      parent amounts which are reported at the exchange rate effective at the date
      those amounts were invested (see Note 19). 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 “Foreign currency translation adjustment.”




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 and
      nine
      months ended September 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 nine months
      ended September 30: ****


**Three Months**
                **Ended**
                **September 30****,****2008**
              
              **Three MonthsEnded**
                **September 30,2007**
              
              **Nine MonthsEnded**
                **September 30,2008**
              
              **Nine MonthsEnded**
                **September 30,2007**Consultants
              
              $
              116,000
              
              $
              64,000
              
              $
              525,000
              
              $
              345,000Directors
              
              
              126,000
              
              
              117,000
              
              
              520,000
              
              
              204,000Officers
                  and employees
              
              
              260,000
              
              
              223,000
              
              
              911,000
              
              
              1,063,000To
                  directors and former director for servicesoutside
                  of directors duties
              
              
              -
              
              
              -
              
              
              -
              
              
              55,000Total
                  stock-based compensation expense
              
              $
              502,000
              
              $
              404,000
              
              $
              1,956,000
              
              $
              1,667,000




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




**2008**
            
            **2007**Risk-free
                interest rate
            
            
            2.60
            %
            
            4.83
            %Expected
                volatility
            
            
            92.95
            %
            
            70.76
            %Expected
                term (years)
            
            
            2.52
            
            
            6.21Resulting
                average fair value
            
            $
            0.29
            
            $
            1.70




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





Weighted average
                Remaining Expense Life (years)
            
            UnrecognizedExpenseOptions
                and warrants
            
            
            1.04
            
            $
            1,862,000




**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 then
      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 nine months ended September 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 September 30, 2008 and December 31,
      2007.




9




**4.**  **INVENTORY**




Inventories
      by segment are composed of the following:


**September 30,**
              
              
              
              **December 31,****2008**
              
              
              
              **2007****Consolidated**
              
              **NutraCea**
              
              **Irgovel**
              
              **NutraCea**Finished
                  goods
              
              $
              2,974,000
              
              $
              2,237,000
              
              $
              737,000
              
              $
              1,396,000Work
                  in process
              
              
              440,000
              
              
              -
              
              
              440,000
              
              
              -Raw
                  materials
              
              
              1,128,000
              
              
              460,000
              
              
              668,000
              
              
              184,000Packaging
                  supplies
              
              
              403,000
              
              
              403,000
              
              
              -
              
              
              228,000Total
                  inventories
              
              $
              4,945,000
              
              $
              3,100,000
              
              $
              1,845,000
              
              $
              1,808,000


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




At
      September 30, 2008, we held six secured promissory notes payable to the Company
      with aggregate outstanding amounts under these notes of $1,494,000 (net of
      allowance for doubtful notes receivable of $573,000), all of which is reported
      as current. 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 October 2008 to September 2009.




During
      the nine months ended September 30, 2008 we loaned a total of $294,000 to
      certain strategic partners, which loans were evidenced by promissory notes,
      and
      received payments totaling $7,025,000 on existing promissory notes. During
      the
      nine months ended September 30, 2008 and 2007 we also accrued interest income
      of
      $182,000 and $139,000, respectively, and received cash payments of $49,000
      and
      $115,000 for accrued interest, respectively.





At
      December 31, 2007 we had a $1,968,000 note due from ITV Global, an infomercial
      marketing company, 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. This note was paid
      in
      full during the second quarter of 2008.




In
      April
      2007 we converted $365,000 of a customer’s accounts receivable to a note
      receivable and combined 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, 2007, 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 $543,000.
      Though we have received $20,000 in interest as of September 30, 2008 the
      principal on this note remains unpaid therefore we recorded an additional
      allowance for doubtful accounts of $323,000 against this note in the first
      quarter of 2008 (see schedule below).




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




*Allowance
      for doubtful 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 nine months ended September
      30, 2008 and 2007 follows:


**Three Months Ended**
              
              **Nine Months Ended****September 30, 2008**
              
              **September 30, 2008****2008**
              
              **2007**
              
              **2008**
              
              **2007**Balance,
                  beginning of period
              
              $
              573,000
              
              $
              -
              
              $
              250,000
              
              $
              -Provision
                  for allowance for doubtful notes receivable charged to
                  operations
              
              
              -
              
              
              -
              
              
              323,000
              
              
              -Losses
                  charged against allowance
              
              
              -
              
              
              -
              
              
              -
              
              
              -Recoveries
                  of accounts previously allowed for
              
              
              -
              
              
              -
              
              
              -
              
              
              -Balance,
                  end of period
              
              $
              573,000
              
              $
              -
              
              $
              573,000
              
              $
              -




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




Property
      and equipment consists of the following:


**September
                  30,**
              ****
              **December
                  31,**
              ********
              ****
              **2008**
              ****
              **2007**Land
              
              $
              2,472,000
              
              $
              15,000Furniture
                  and fixtures
              
              
              2,756,000
              
              
              2,405,000Vehicles
              
              
              66,000
              
              
              -Computers
                  and software
              
              
              532,000
              
              
              402,000Leasehold
                  improvements
              
              
              2,524,000
              
              
              700,000Property,
                  plant and equipment
              
              
              21,233,000
              
              
              14,243,000Irgovel
                  manufacturing facility
              
              
              8,143,000
              
              
              -Construction
                  in progress
              
              
              13,849,000
              
              
              4,347,000Total
                  property, plant, and equipment
              
              
              51,575,000
              
              
              22,112,000Less
                  accumulated depreciation
              
              
              (4,923,000
              )
              
              (2,784,000
              )Total
                  property, plant, and equipment, net
              
              $
              46,652,000
              
              $
              19,328,000




In
      the
      first quarter of 2008 we purchased raw land next to our manufacturing facility
      in Dillon, Montana, for $233,000. Also, in the first quarter of 2008 we
      purchased an industrial building in Phoenix for approximately $8,411,000. We
      allocated $2,235,000 of this cost to the value of the land included in the
      purchase. The balance of the building cost remains in construction in progress
      pending completion of the equipment projects necessary for the plant to become
      operational.




Depreciation
      expense (before allocation) for the three months ended September 30, 2008 and
      2007 was $881,000 and $353,000, respectively.




Depreciation
      expense (before allocation) for the nine months ended September 30, 2008 and
      2007 was $2,225,000 and $1,009,000, respectively.




11




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




Other
      intangibles consist of the following at:


**September 30,**
              ****
              **December 31,**
              ********
              ****
              **2008**
              ****
              **2007**Patents
              
              $
              2,698,000
              
              $
              2,657,000Copyrights,
                  trademarks and intangibles
              
              
              3,508,000
              
              
              3,508,000Non-compete
                  agreements
              
              
              650,000
              
              
              650,000Subtotal
                  of other intangible assets
              
              
              6,856,000
              
              
              6,815,000Less
                  accumulated amortization
              
              
              (1,717,000
              )
              
              (1,072,000
              )Total
                  other intangible assets, net
              
              $
              5,139,000
              
              $
              5,743,000




Amortization
      expense for the three months ended September 30, 2008 and 2007 was $217,000
      and
      $192,000, respectively.




Amortization
      expense for the nine months ended September 30, 2008 and 2007 was $645,000
      and
      $444,000, respectively.




**8.**  **LOSS
      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..





As
      of
      September 30, 2008 and 2007, options and warrants to purchase approximately
      51,177,000 and 44,770,000 shares of our common stock were outstanding,
      respectively. These are excluded from the calculation of diluted loss per share
      at September 30, 2008 because their inclusion would have been anti-dilutive.





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


**Three Months Ended**
              
              **Nine Months Ended****September 30, 2008**
              
              **September 30, 2008****2008**
              
              **2007**
              
              **2008**
              
              **2007**Net
                  loss
              
              $
              (4,533,000
              )
              $
              (4,784,000
              )
              $
              (17,378,000
              )
              $
              (3,028,000
              )Weighted
                  average outstanding shares of common stock
              
              
              167,866,000
              
              
              141,084,000
              
              
              147,947,000
              
              
              131,054,000Convertible
                  preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -Common
                  stock equivalents
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  diluted shares
              
              
              167,866,000
              
              
              141,084,000
              
              
              147,947,000
              
              
              131,054,000Loss
                  per share:Basic
              
              $
              (0.03
              )
              $
              (0.03
              )
              $
              (0.12
              )
              $
              (0.02
              )Diluted
              
              $
              (0.03
              )
              $
              (0.03
              )
              $
              (0.12
              )
              $
              (0.02
              )


At
      September 30, 2008, and 2007, the number of “in-the-money” options and warrants
      outstanding was approximately 12,589,000 and 29,438,000, respectively. The
      weighted average exercise price of “in-the-money” anti-dilutive options and
      warrants for the three months ended September 30, 2008 and 2007 were $0.32
      and
      $0.55, 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 nine months ended September
      30, 2008 and 2007 follows:


**Three Months Ended**
              
              **Nine Months Ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Balance,
                  beginning of period
              
              $
              3,177,000
              
              $
              1,075,000
              
              $
              2,999,000
              
              $
              20,000Irgovel
                  acquisition
              
              
              -
              
              
              -
              
              
              94,000
              
              
              -Adjusted
                  beginning balance
              
              
              3,177,000
              
              
              1,075,000
              
              
              3,093,000
              
              
              20,000Provision
                  for allowance for doubtful accounts charged to operations
              
              
              310,000
              
              
              800,000
              
              
              483,000
              
              
              1,855,000Losses
                  charged against allowance
              
              
              (3,000
              )
              
              -
              
              
              (24,000
              )
              
              -Recoveries
                  of accounts previously allowed for
              
              
              (80,000
              )
              
              (1,055,000
              )
              
              (148,000
              )
              
              (1,055,000
              )Balance,
                  end of period
              
              $
              3,404,000
              
              $
              820,000
              
              $
              3,404,000
              
              $
              820,000




During
      the three months ended September 30, 2008 and 2007 we recorded a provision
      for
      allowance for doubtful accounts receivable of $310,000 and $800,000,
      respectively.




During
      the nine months ended September 30, 2008 and 2007 our provision for allowance
      for doubtful accounts was $483,000, and $1,855,000, respectively.




*NutraCea
      Segment*




For
      the
      three months ended September 30, 2008, three customers accounted for a total
      of
      21% of sales: 7%, 7%, and 7%, respectively.




For
      the
      three months ended September 30, 2007, four customers accounted for a total
      of
      30% of sales: 12%, 6%, 6%, and 6% respectively. No other customer accounted
      for
      more than 4% of total sales.




For
      the
      nine months ended September 30, 2008 three customers accounted for a total
      of
      17% of sales: 7%, 5%, and 5%, respectively.




For
      the
      nine months ended September 30, 2007, four customers accounted for a total
      of
      37% of sales: 15%, 8%, 7%, and 7%, respectively. No other customer
      accounted for more than 5% of total sales.




At
      September 30, 2008, two customers accounted for 64% of total accounts
      receivable: 34% and 30%, respectively. No other customer accounted for more
      than
      6% of total outstanding accounts receivable.




At
      September 30, 2007, two customers accounted for 67% of total accounts
      receivable: 35%, and 32% respectively. No other customer accounted for more
      than
      2% of the total outstanding accounts receivable.




13




*Irgovel
      segment*




For
      the
      three months ended September 30, 2008, three customers accounted for a total
      of
      41% of sales: 28%, 7%, and 6%, respectively.




For
      the
      nine months ended September 30, 2008 three customers accounted for a total
      of
      27% of sales: 19%, 4%, and 4%, respectively.




At
      September 30, 2008, one customer accounted for 30% of total accounts receivable.
      No other customer accounted form more than 4% of total outstanding accounts
      receivable.




**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 were capitalized as part of the purchase price and
      a
      $649,000 hold-back provision which was due to the sellers in June
      2008 ,
      subject
      to the final accounting of liabilities to be assumed by NutraCea. At September
      30, 2008 the hold-back had not been paid to the sellers pending that final
      accounting. 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 notes payable in the liabilities on Irgovel’s financial statements
      and are payable on a straight-line basis over periods through July 2018.




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:




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.




14




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. Our investment agreement provides for 50% control each by NutraCea and
      FFOL. Accordingly, our interest is non-controlling under EITF 96-16, and
      therefore our investment is accounted for under the equity method in accordance
      with Accounting Principles Board Opinion No. 18.





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 nine months ended
      September 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 September 30, 2008 the value of our
      investment was $10,642,000. Our 51% share of the net loss of PIN for the period
      from March 28, 2008 through September 30, 2008 was approximately $33,000.




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




AssetsCash
            
            $
            2,559,000Prepaid
                expenses
            
            
            147,000Land
                and equipment (net)
            
            
            4,109,000Total
                Assets
            
            $
            6,815,000Liabilities
                and equityAccounts
                payable and accrued liabilities
            
            $
            2,094,000Shareholders
                equity
            
            
            4,721,000Total
                liabilities and equity
            
            $
            6,815,000




As
      of
      September 30, 2008 the book value of PIN’s assets was $4,721,000 and Medan’s 51%
      interest in these assets was approximately $2,408,000. 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
      $8,234,000.  Based upon our economic analysis, we believe PIN’s fair value
      substantially 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 Rice Science 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.




15




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 its’ 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 September 30, 2008 is as follows:





AssetsCash
            
            $
            850,000Receivable
                from Herbal Science
            
            
            70,000Total
                Assets
            
            $
            920,000Liabilities
                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 owned equipment for pelletizing
      horse feed for equine customers of strategic value to NutraCea, and certain
      assets used in Grainnovation’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.




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 were capitalized as part of 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




16




*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, 5% is
      held by minority partners. The purpose of Grain Enhancements is to develop
      and
      market 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
      original limited liability company 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 limited liability company
      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 Enhancement’s 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 nine months ended September 30,
      2008 was $29,000 and $82,000, respectively.




Our
      investment in Grain Enhancements is accounted for under the equity method of
      accounting. At September 30, 2008 the book value of our investment was
      $1,108,000.




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




AssetsCash
            
            $
            2,224,000Other
                assets
            
            
            9,000Total
                assets
            
            $
            2,233,000Liabilities
                and equityAccounts
                payable and accrued liabilities
            
            $
            16,000Members
                equity
            
            
            3,000,000Accumulated
                deficit
            
            
            (785,000
            )Unrealized
                exchange gain
            
            
            2,000Total
                equity
            
            
            2,217,000Total
                liabilities and equity
            
            $
            2,233,000




*Vital
      Living, Inc* .




In
      April
      2007, we acquired from their holders outstanding shares of Series D Convertible
      Preferred Stock (“Series D Preferred Stock”) and senior 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 on June
      15
      and December 15 each year, 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.




17




We
      purchased the Notes and Series D 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 the Series D Preferred Stock allowed
      us to
      control an outstanding class of capital stock, and our purchase of the Notes
      allowed us to obtain a senior secured position with respect to VLI’s assets. VLI
      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.





On
      September 28, 2007, NutraCea entered into an Asset Purchase Agreement (the
      “Purchase Agreement”) with VLI. On October 21, 2008, NutraCea terminated the
      Purchase Agreement. NutraCea’s obligation to complete the transactions
      contemplated by the Purchase Agreement was subject to VLI’s shareholders
      approving such transactions. VLI has not held a shareholder meeting to obtain
      this approval. Pursuant to the terms of the Purchase Agreement, NutraCea had
      the
      right to terminate the Purchase Agreement.





On
      September 3, 2008, NutraCea filed a complaint against VLI in Superior Court
      of
      Arizona, Maricopa County alleging that VLI has breached its obligations to
      NutraCea under the VLI promissory notes held by NutraCea (the “Notes”) and the
      security agreement relating to the Notes. NutraCea seeks, among other things,
      immediate payment of all outstanding amounts under the Notes and a judgment
      foreclosing NutraCea’s security interest in VLI’s assets that secure the
      Notes.




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.




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 September 30, 2008 the financial position
      of
      VLI as of the period ended September 30, 2008, and VLI’s results of operations
      for the three and nine months ended September 30, 2008 in our statement of
      operations for the three and nine months ended September 30, 2008, while
      eliminating inter-company balances. The effect on our consolidated, condensed
      balance sheet at September 30, 2008 was a decrease in total assets of
      $1,145,000, an increase in total liabilities of $1,654,000 and a decrease in
      shareholder equity of $2,799,000. The effect on our consolidated income
      statement for the three and nine months ended September 30, 2008 was an increase
      in revenues of $571,000 and $1,718,000, respectively, an increase in cost of
      goods sold of $421,000 and $1,141,000, respectively, an increase in operating
      expenses of $343,000 and $831,000, respectively, and a decrease in net income
      of
      $103,000 and $165,000, respectively.




18




*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 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 of the members agree to contribute capital
      of
      up to $150,000. During the third quarter of 2008 the members agreed that no
      capital contributions were necessary.




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 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
      September 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
      nine month periods ending September 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.


**Three Months**
                **Ended**
                **September 30,**
                **2008**
              
              **Three Months**
                **Ended**
                **September 30,**
                **2007**
              
              **Nine Months**
                **Ended**
                **September 30,**
                **2008**
              
              **Nine Months**
                **Ended**
                **September 30,**
                **2007**Revenues:
              
              $
              11,201,000
              
              $
              9,442,000
              
              $
              29,079,000
              
              $
              29,676,000Cost
                  of sales
              
              
              8,704,000
              
              
              7,929,000
              
              
              22,664,000
              
              
              17,083,000Gross
                  profit
              
              
              2,497,000
              
              
              1,513,000
              
              
              6,415,000
              
              
              12,593,000Operating
                  expenses
              
              
              7,053,000
              
              
              7,118,000
              
              
              22,329,000
              
              
              18,353,000Operating
                  (loss) income
              
              
              (4,556,000
              )
              
              (5,605,000
              )
              
              (15,914,000
              )
              
              (5,760,000
              )Non-operating
                  expenses, other and taxes
              
              
              23,000
              
              
              315,000
              
              
              (1,000,000
              )
              
              2,123,000Net
                  (loss) income available to common shareholders
              
              $
              (4,533,000
              )
              $
              (5,290,000
              )
              $
              (16,914,000
              )
              $
              (3,637,000
              )Basic
                  and diluted loss per shareBasic
                  (loss) income per share
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.11
              )
              $
              (0.03
              )Fully
                  diluted (loss) income per share
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.11
              )
              $
              (0.03
              )Weighted
                  average basic number of shares outstanding
              
              
              167,866,000
              
              
              141,084,000
              
              
              147,947,000
              
              
              131,054,000Weighted
                  average fully diluted number of shares outstanding
              
              
              167,866,000
              
              
              141,084,000
              
              
              147,947,000
              
              
              131,054,000




19


**12.**  **NOTES
        PAYABLE**
  In
        October 2007, we executed an un-secured promissory note in favor of the lessor
        of our new West Sacramento warehouse relating to the build-out of tenant
        improvements. The note has an original principal amount of $105,000, accrues
        interest at 8% per annum and is payable over four years in payments of $2,572
        per month for the build-out of tenant improvements. At September 30, 2008
        the
        short-term portion of this note was approximately $23,000 and the remaining
        long-term portion was approximately $58,000.
  Our
        Irgovel subsidiary has notes payable for Brazilian federal and social security
        taxes under a Brazilian government program, equipment purchases, and working
        capital. These notes are payable over periods through July, 2018 and bear
        interest from 6.0% to 21.4%.
  The
        following table lists the current and long-term portions of our notes payable
        at:
 
 **September 30,**
              ****
              **December 31,**
              ********
              ****
              **2008**
              ****
              **2007**NutraCea
                  - current portion
              
              $
              23,000
              
              $
              23,000Irgovel
                  – current portion
              
              
              687,000
              
              
              -Total
                  current portion
              
              
              710,000
              
              
              23,000NutraCea
                  – notes payable, net of current portion
              
              
              58,000
              
              
              77,000Irgovel
                  – notes payable, net of current portion
              
              
              4,321,000
              
              
              -Total
                  notes payable, net of current portion
              
              
              4,379,000
              
              
              77,000Total
                  notes payable
              
              $
              5,089,000
              
              $
              100,000
  **13.**  **RESTRICTED
        CASH**
  Under
        certain agreements we must maintain restricted cash balances in order to
        satisfy
        future obligations. At September 30, 2008 and December 31, 2007 we had the
        following amounts held in restricted interest-bearing accounts:
 
 **September 30,**
              ****
              **December 31,**
              ********
              ****
              **2008**
              ****
              **2007**Current
                  restricted cashCorporate
                  office lease
              
              $
              448,000
              
              $
              448,000Grainnovations
                  purchase escrow
              
              
              -
              
              
              310,000Irgovel
                  purchase escrow
              
              
              1,905,000
              
              
              -Other
              
              
              10,000Total
                  current restricted cash
              
              
              2,363,000
              
              
              758,000Non-current
                  restricted cashCorporate
                  office lease
              
              
              1,344,000
              
              
              1,791,000Total
                  long-term restricted cash
              
              
              1,344,000
              
              
              1,791,000Total
                  restricted cash
              
              $
              3,707,000
              
              $
              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 nine months
        ended September 30, 2008 we recorded $192,000 of sales to WWG. At September
        30,
        2008 we had $1,440,000 due from this customer included in our accounts
        receivable of $2,992,000 (net of allowance for doubtful accounts). As of
        September, 2008 the CEO of VLI has advanced VLI $494,000 of short-term,
        non-interest bearing loans which are included in the liabilities of VLI.
        In our
        consolidated balance sheet we have offset the $494,000 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, Arizona, 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 September 30, 2008 are included in the following
        table:
  **Year
                  Ended December 31,**2008
              
              $
              403,0002009
              
              
              1,582,0002010
              
              
              1,631,0002011
              
              
              1,654,0002012
              
              
              1,598,0002013
              
              
              1,649,000Thereafter
              
              
              5,004,000Total
              
              $
              13,521,000
 ****
 Total
        rent expense for the three months ended September 30, 2008 and 2007 was $412,000
        and $396,000, respectively. Total rent expense for the nine months ended
        September 30, 2008 and 2007 was $1,258,000 and $672,000,
        respectively.
  **16.**  **BUSINESS
        SEGMENTS**
  We
        operate in two business segments; NutraCea, which manufactures and distributes
        bulk ingredients primarily derived from SRB (operating results from VLI are
        included in our NutraCea segment) utilizing our unique and proprietary
        technology, and Irgovel, our rice-bran oil manufacturing subsidiary in Pelotas,
        Brazil. Operating results for the three and nine months ended September 30,
        2008
        (the period for Irgovel is from February 19, 2008 through September 30, 2008)
        and summary financial information as of September 30, 2008 for the segments
        are
        presented in the following table:
  21
  **Summary
                  Financial Information**
              
              **Three Months Ended****September 30, 2008**
              
              **Nine Months Ended September 30, 2008****Operating
                  Results**
              
              **NutraCea**
              
              **Irgovel**
              
              **NutraCea**
              
              **Irgovel**Net
                  revenues
              
              $
              3,429,000
              
              $
              7,772,000
              
              $
              10,239,000
              
              $
              16,244,000Total
                  cost of sales
              
              
              2,920,000
              
              
              5,784,000
              
              
              9,285,000
              
              
              11,490,000Gross
                  Margin
              
              
              509,000
              
              
              1,988,000
              
              
              954,000
              
              
              4,754,000Operating
                  expenses
              
              
              5,746,000
              
              
              1,307,000
              
              
              19,529,000
              
              
              2,658,000Net
                  (loss) income from operations
              
              
              (5,237,000
              )
              
              681,000
              
              
              (18,575,000
              )
              
              2,096,000Other
                  income (expense), net
              
              
              208,000
              
              
              37,000
              
              
              3,000
              
              
              (431,000
              )Net
                  (loss) income before taxes
              
              $
              (5,029,000
              )
              $
              718,000
              
              
              (18,572,000
              )
              
              1,665,000Asset
                  SummaryTotal
                  assets
              
              $
              113,935,000
              
              $
              26,914,000
              
              $
              113,935,000
              
              $
              26,914,000
  **17.**  **STOCKHOLDERS
        EQUITY**
  Common
        Stock
  During
        the three months ended September 30, 2008 we issued 250,000 shares of our
        common
        stock in exchange for warrants and cash of $50,000.
  Options
        and Warrants
 
 During
        the three months ended September 30, 2008 we:
 
 Issued
        to
        an employee an option to purchase a total of 25,000 shares with vesting
        beginning 90 days from the date of grant to four years. The option expires
        in
        five years and has an exercise price of $0.66 per share.
 
 Issued
        to
        a new employee an option to purchase a total of 100,000 shares with vesting
        beginning after one year from the date of grant to three years. The option
        expires in five years and has an exercise price of $0.78 per share.
 
 Issued
        to
        an outside director an option to purchase a total of 38,399 shares vesting
        immediately. The option expires in one year and has an exercise price of
        $1.656
        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**
 
 *Issuance
        of preferred stock*
  On
        October 20, 2008 we issued to two institutional investors, for the purchase
        price of $5 million, shares of our Series D Convertible Preferred Stock
        ("Preferred Stock") and five-year warrants to purchase up to 4,545,455 shares
        of
        NutraCea Common Stock. The securities were offered in "units" at a price
        of
        $1,000 per unit. The units immediately separated upon issuance. Each unit
        consisted of one share of Preferred Stock convertible into 1,818.18 shares
        of
        Common Stock at a conversion price per share of Common Stock of $0.55, and
        a
        warrant to purchase 909.09 shares of NutraCea Common Stock at an exercise
        price
        of $0.55 per share. The investors also received additional warrants that
        grant
        the investors the right, for a period of 60 days after the initial issuance,
        to
        purchase an additional $5 million of Preferred Stock and associated warrants
        on
        the same terms as the initial issuance. For the sale of 5,000 units we received
        an aggregate of $5,000,000 less $300,000 placement fees and $200,000 estimated
        expenses.
  22
  The
        Preferred Stock accrues dividends at 8% per annum preferred dividend. These
        dividends are payable quarterly in arrears, commencing on January 1, 2009.
        Subject to the satisfaction of certain conditions, the dividends are payable
        in
        shares of NutraCea Common Stock, but may be paid in cash at NutraCea's election.
        NutraCea will redeem all of the Preferred Stock (unless converted) over nine
        months and in nine equal monthly installments commencing on February 1,
        2009. The redemption amount is payable in shares of NutraCea Common Stock,
        but
        may be paid in cash at NutraCea's election. The conversion price and the
        exercise price for the Warrants are each subject to anti-dilution adjustments
        upon certain stock issuances at a price per share less than the conversion
        price. Subject to certain limitations, we may redeem the Preferred Stock
        at any
        time upon 10 days notice at a price equal to 110% of the aggregate state
        value
        of the Preferred Stock being redeemed plus accrued and unpaid dividends thereon.
        The proceeds will be used by NutraCea for the completion and further expansion
        of projects in Brazil as well as for general working capital.
  *Termination
        of Purchase Agreement with Vital Living, Inc.*
 
 On
        September 28, 2007, NutraCea entered into an Asset Purchase Agreement (the
        “Purchase Agreement”) with Vital Living, Inc. (“Vital Living”). On October 21,
        2008, NutraCea terminated the Purchase Agreement. NutraCea’s obligation to
        complete the transactions contemplated by the Purchase Agreement was subject
        to
        Vital Living’s shareholders approving such transactions. Vital Living has not
        held a shareholder meeting to obtain this approval. Pursuant to the terms
        of the
        Purchase Agreement, NutraCea had the right to terminate the Purchase Agreement.
 
 On
        September 3, 2008, NutraCea filed a complaint against Vital Living in Superior
        Court of Arizona, Maricopa County (CV2008-021291) alleging that Vital Living
        has
        breached its obligations to NutraCea under the Vital Living promissory notes
        held by NutraCea (the “Notes”) and the security agreement relating to the Notes.
        NutraCea seeks, among other things, immediate payment of all outstanding
        amounts
        under the Notes and a judgment foreclosing NutraCea’s security interest in Vital
        Living’s assets that secure the Notes.
  **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 SFAS 52, “*Foreign
        Currency Translation*”. 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 adjustment
        and the effect in US dollars.
  **Accumulated Trans**lation Gain******Nine Months Ended****September 30, 2008**Balance
                  at beginning of period
              
              
              
              
              $
              -Net
                  income of Irgovel subsidiary
              
              R$
              1,912,000
              
              $
              (150,000
              )Property,
                  plant, and equipment
              
              
              13,302,000
              
              
              589,000Goodwill
              
              
              23,015,000
              
              
              1,020,000Investment
                  from parent
              
              R$
              30,282,000
              
              
              (1,416,000
              )Balance
                  at end of period
              
              
              
              
              $
              43,000
 
 23
  **20.**  **IMPLEMENTATION
        OF RECENT ACCOUNTING PRONOUNCEMENTS**
 
 During
        the nine months ended September 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, “*Effective Date of FASB Statement No. 157*”, 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 SFAS No. 157 did not have
        a
        material impact on the Company’s fair value measurements. The provisions of SFAS
        No. 157 have not been applied to non-financial assets and non-financial
        liabilities.
  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" ("SFAS No. 159"). SFAS No. 159
        permits companies to measure many financial instruments and certain other
        items
        at fair value. The Company adopted SFAS No. 159
        in
        the first quarter of 2008; as the Company did not apply the fair value option
        to
        any of its outstanding instruments, SFAS No. 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 SFAS No.141R, *“Business
        Combinations”* and
        SFAS No.160, *“Non-controlling
        Interests in Consolidated Financial Statements.”* Both
        standards will be effective for transactions that occur after January 1,
        2009.
 
 SFAS No.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 SFAS No.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.
 
 In
        March 2008, the FASB issued Statement of Financial Accounting Standards
        No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities — an amendment of FASB
        Statement No. 133* (“SFAS No.161”). This Standard requires enhanced disclosures regarding derivatives
        and hedging activities, including: (a) the manner in which an entity uses
        derivative instruments; (b) the manner in which derivative instruments and
        related hedged items are accounted for under Statement of Financial Accounting
        Standards No. 133, *Accounting
        for Derivative Instruments and Hedging Activities* ;
        and
        (c) the effect of derivative instruments and related hedged items on an
        entity’s financial position, financial performance, and cash flows. The Standard
        is effective for financial statements issued for fiscal years and interim
        periods beginning after November 15, 2008. As SFAS No.161 relates specifically to disclosures, the Standard is not expected
        to
        have an impact on our financial condition, results of operations or cash
        flows.
  24
 *Other
        Pronouncements*
  In
        May 2008, the FASB issued Statement of Financial Accounting Standards
        No. 162, “ *The
        Hierarchy of Generally Accepted Accounting Principles*” (“SFAS No.162”). This Standard identifies the sources of accounting principles and
        the framework for selecting the principles to be used in the preparation
        of
        financial statements of nongovernmental entities that are presented in
        conformity with generally accepted accounting principles. SFAS No. 162 directs
        the hierarchy to the entity, rather than the independent auditors, as the
        entity
        is responsible for selecting accounting principles for financial statements
        that
        are presented in conformity with generally accepted accounting principles.
        The
        Standard is effective 60 days following SEC approval of the Public Company
        Accounting Oversight Board amendments to remove the hierarchy of generally
        accepted accounting principles from the auditing standards. SFAS No.162 is not expected to have an impact on our financial condition,
        results
        of operations or cash flows.
 
 In
        May
        2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
        Position ("FSP") APB No. 14-1, "*Accounting for Convertible Debt Instruments
        That May Be Settled in Cash upon Conversion (Including Partial Cash
        Settlement)*". FSP No. APB 14-1 clarifies that convertible debt instruments
        that may be settled in cash upon either mandatory or optional conversion
        (including partial cash settlement) are not addressed by paragraph 12 of
        APB
        Opinion No. 14, "*Accounting for Convertible Debt and Debt issued with Stock
        Purchase Warrants*". Additionally, FSP No. APB 14-1 specifies that issuers
        of such instruments should separately account for the liability and equity
        components in a manner that will reflect the entity's nonconvertible debt
        borrowing rate when interest cost is recognized in subsequent periods. FSP
        No.
        APB 14-1 is effective for financial statements issued for fiscal years beginning
        after December 15, 2008, and interim periods within those fiscal years. We
        will
        adopt FSP No. APB 14-1 beginning in the first quarter of fiscal 2009, and
        this
        standard must be applied on a retrospective basis. We are evaluating the
        impact
        the adoption of FSP No. APB 14-1, if any, will have on our consolidated
        financial position and results of operations.
 
 In
        April
        2008, the FASB issued FSP No. 142-3, "*Determination of the Useful Life of
        Intangible Assets*" ("FSP No. 142-3"). FSP No. 142-3 amends the factors an
        entity should consider in developing renewal or extension assumptions used
        in
        determining the useful life of recognized intangible assets under FASB Statement
        No. 142, "Goodwill and Other Intangible Assets". This new guidance applies
        prospectively to intangible assets that are acquired individually or with
        a
        group of other assets in business combinations and asset acquisitions. FSP
        No.
        142-3 is effective for financial statements issued for fiscal years and interim
        periods beginning after December 15, 2008. Early adoption is prohibited.
        We are
        currently evaluating the impact, if any, that FSP No. 142-3 will have on
        our
        consolidated financial statements.
 
 25
  **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 nine months ended September
        30,
        2008 and 2007.
 
 **THREE
        MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**
  For
        the
        three months ended September 30, 2008, the Company’s net loss was $4,533,000, or
        ($0.03) per share, compared to a net loss of $4,784,000 or ($0.03) per share,
        in
        the same period of 2007, a decrease in net loss of $251,000. The decreased
        net
        loss for the quarter was primarily due to the increased gross margin of
        $2,612,000, offset by a net increase of $2,361,000 in operating expenses,
        other
        expenses and income, and income taxes.
 
 Our
        NutraCea segment contributed a loss of $5,029,000 and our Irgovel segment
        contributed income of $496,000 for the three months ended September 30, 2008.
 
 *Revenues,
        cost of sales and gross margin*
  Our
        consolidated net revenues for the three months ended September 30, 2008 of
        $11,201,000 increased $9,681,000 from the $1,520,000 consolidated revenues
        recorded in the same period last year. This increase is comprised of a
        $1,909,000 increase in product sales by our NutraCea segment and $7,772,000
        of
        sales contributed by our Irgovel subsidiary. The $1,909,000 increase in product
        sales by our NutraCea segment is due to an increase of $373,000 in sales
        in our
        core SRB product lines in the three months ended September 30, 2008 offset
        by
        the sales return of $1,551,000 of product in the three months ended September
        30, 2007, and the decline of $15,000 licensing and royalty revenue.
 
 Gross
        profit (loss) on product sales in the three months ended September 30, 2008
        were
        $2,497,000, or 22% compared to ($115,000), or (8.0)%, an increase of $2,612,000
        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
        nine
        months of 2008 has increased our fixed operating costs in our NutraCea segment
        by approximately $750,000 per quarter. Additionally, during the third quarter
        of
        2008 our NutraCea segment operated at approximately 48% of available capacity.
        Available capacity equates to normal production capacity and takes into account
        rice mill production of raw rice bran from contracted rice mill suppliers.
        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 not 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. Additionally, hurricane weather
        disrupted normal operations at all three of our gulf coast facilities. The
        combination of increased fixed costs and lower utilization of production
        capacity, offset by the sales return of $1,551,000 in the three months ended
        September 30, 2007, contributed to the change in cost of goods sold in our
        NutraCea segment from 108% during the three months ended September 30, 2008
        to
        87% for the quarter ending September 30, 2008. We anticipate that in the
        fourth
        quarter both the rice mills that supply us will be operating near their capacity
        and our plants will be receiving most of the output available to us from
        each rice mill. If, however, supplies of raw rice bran remain too low to
        run our
        plants at our desired capacity levels we may continue to have lower than
        expected gross profit margins on our NutraCea product sales.
  26
  The
        following table illustrates the gross margin contribution by each of our
        segments during the three months ended:


**September
                    30,**
                  **2008**
                
                **September
                    30,**
                  **2007****Consolidated**
                ****
                **%**
                ****
                **NutraCea**
                ****
                **%**
                ****
                **Irgovel**
                ****
                **%**
                ****
                **NutraCea**
                ****
                **%**
                ****
                **Increase/**
                  **(Decrease)**Total
                    product sales
                
                $
                11,193,000
                
                
                
                
                $
                3,421,000
                
                
                
                
                $
                7,772,000
                
                
                
                
                $
                3,048,000
                
                
                
                
                $
                8,145,000Licensing
                    and royalty revenue
                
                
                8,000
                
                
                
                
                
                8,000
                
                
                
                
                
                -
                
                
                
                
                
                23,000
                
                
                
                
                
                (15,000
                )Total
                    revenues
                
                
                11,201,000
                
                
                
                
                
                3,429,000
                
                
                
                
                
                7,772,000
                
                
                
                
                
                3,071,000
                
                
                
                
                
                8,130,000Less
                      infomercialsales return
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                (1,551,000
                )
                
                
                
                
                1,551,000Net
                    revenues
                
                
                11,201,000
                
                
                100
                
                
                3,429,000
                
                
                100
                
                
                7,772,000
                
                
                100
                
                
                1,520,000
                
                
                100
                
                
                9,681,000Cost
                    of sales
                
                
                8,783,000
                
                
                79
                
                
                2,999,000
                
                
                87
                
                
                5,784,000
                
                
                74
                
                
                1,635,000
                
                
                108
                
                
                7,148,000Product
                    warranty costs
                
                
                (79,000
                )
                
                (1
                )
                
                (79,000
                )
                
                (2
                )
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                (
                    79,000
                )Total
                    cost of sales
                
                
                8,704,000
                
                
                78
                
                
                2,920,000
                
                
                85
                
                
                5,784,000
                
                
                74
                
                
                1,635,000
                
                
                108
                
                
                7,069,000Gross
                    Margin
                
                $
                2,497,000
                
                
                22
                
                $
                509,000
                
                
                15
                
                $
                1,988,000
                
                
                26
                
                $
                (115,000
                )
                
                (8
                )
                $
                2,612,000
 Operating
        expenses:
  *Research
        and development*
  Research
        and Development (“R&D”) expenses were $266,000 and $155,000 in the quarter
        ended September 30, 2008 and 2007, respectively, an increase of $111,000.
        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. 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*
 
 Sales,
        General and Administrative (“SG&A”) expenses were $6,484,000 and $4,576,000
        in the three months ended September 30, 2008 and 2007, respectively, an increase
        of $1,908,000, or 42%. This increase is due to $1,182,000 of SG&A costs for
        our Irgovel subsidiary, and a net $726,000 increase in 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:
  **September 
                  30,**
                **2008**
              
              **September 30,**
                **2007**
              
              **Increase /(Decrease)**Selling,
                  General, and Administrative ExpensesPayroll,
                  benefits, taxes, and hiring costs
              
              $
              2,472,000
              
              $
              1,507,000
              
              $
              965,000Sales
                  and marketing
              
              
              362,000
              
              
              1,041,000
              
              
              (679,000
              )Allowance
                  for bad debt expense, net
              
              
              231,000
              
              
              (255,000
              )
              
              486,000Operations
              
              
              350,000
              
              
              263,000
              
              
              87,000Travel
                  and entertainment
              
              
              183,000
              
              
              180,000
              
              
              3,000Rent,
                  administration, insurance and other costs
              
              
              812,000
              
              
              1,128,000
              
              
              (316,000
              )Stock
                      based compensation (net of amounts applied to R&D and professional
                      fees)
              
              
              466,000
              
              
              404,000
              
              
              62,000Amortization
              
              
              218,000
              
              
              135,000
              
              
              83,000Depreciation
                      , net of allocation to cost of goods sold
              
              
              208,000
              
              
              173,000
              
              
              35,000Total
                  NutraCea segment
              
              
              5,302,000
              
              
              4,576,000
              
              
              726,000Total
                  Irgovel segment
              
              
              1,182,000
              
              
              -
              
              
              1,182,000Total
                  selling, general and administrative expenses
              
              $
              6,484,000
              
              $
              4,576,000
              
              $
              1,908,000
 
 27





Payroll,
      benefits, taxes and hiring expenses increased a total of $965,000 in the three
      months ended September 30, 2008 over the same period in 2007 due to the staffing
      of our manufacturing facilities in Lake Charles, Louisiana and Phoenix, Arizona,
      along with the addition of key management positions in our corporate offices
      in
      Phoenix, Arizona.





Sales
      and
      marketing expenses decreased $679,000 in the three months ended September 30,
      2008 compared to the same period in 2007 due to a $434,000 decrease in
      advertising costs, and a $252,000 decrease in commission expense.





*Professional
      fees*




Professional
      fees were $303,000 and $747,000 in the three months ended September 30, 2008
      and
      2007, respectively, a decrease of $444,000. Professional fees include costs
      related to accounting, legal and consulting services.





*Other
      income and expense*




Other
      expenses (net of income) were $245,000 and $742,000 for the three months ended
      September 30, 2008 and 2007, respectively. This $497,000 net decrease in other
      income (expense) is detailed in the following table.





**Other income (expense)**
            
            **September 30,**
              **2008**
            
            **September 30,**
              **2007**
            
            **(Increase)/Decrease**Interest
                income
            
            $
            176,000
            
            $
            778,000
            
            $
            (602,000
            )Interest
                expense
            
            
            (107,000
            )
            
            -
            
            
            (107,000
            )Gain
                or (loss) on disposal of assets
            
            
            211,000
            
            
            -
            
            
            211,000Loss
                on equity investments
            
            
            (35,000
            )
            
            (36,000
            )
            
            1,000Total
                other income
            
            $
            245,000
            
            $
            742,000
            
            $
            (497,000
            )





Interest
      income decreased $602,000 due to lower cash balances available for
      investment.




Interest
      expense increased $107,000 for the three months ended September 30, 2008 due
      to
      $103,000 of interest expense on our Irgovel subsidiary for interest on notes
      payable and $4,000 of interest incurred in our NutraCea segment for our note
      payable for the leasehold improvements for our warehouse/office in West
      Sacramento, California (see Note 12 to the consolidated condensed financial
      statements included herein).




Gain
      or
      loss on disposal of assets increased $211,000 due the sale of assets of our
      NutraCea/Cura LLC operation.




Income
      Taxes




Income
      taxes were $222,000 for the nine months ended September 30, 2008 compared to
      a
      credit of $67,000 for the nine months ended September 30, 2007. The increase
      of
      $289,000 is primarily due to Brazilian income taxes due for our Irgovel
      subsidiary.




**NINE
      MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**




For
      the
      nine months ended September 30, 2008, the Company’s net loss was $17,378,000, or
      ($0.12) per share, compared to a net loss of $3,028,000, or $0.02 per share,
      in
      the same period of 2007, a decrease of $14,350,000. The decrease for the nine
      month period was primarily due to the $4,194,000 decrease in gross profits,
      a
      $6,453,000 increase in operating expenses, and a $3,703,000 net increase in
      other expenses and income taxes.





Our
      NutraCea segment contributed a loss of $18,537,000 and our Irgovel segment
      contributed income of $1,159,000 for the nine months ended September 30, 2008
      (see Note 16 to the consolidated financial statements included herein).




28




*Revenues,
      cost of sales and gross margin*




Consolidated
      net revenues were $26,483,000 and $16,513,000 in the nine months ended September
      30, 2008 and 2007, respectively. This increase of $9,970,000 or 60%, is
      attributable to $16,244,000 in sales contributed by our Irgovel segment, offset
      by a $1,280,000 decline in product sales and the net decline of $4,994,000
      of
      license and royalty fee revenues by our NutraCea segment. The $1,280,000 decline
      in product sales from our NutraCea segment is composed of a net increase of
      $3,401,000 in sales in our core SRB product lines during the nine months ended
      September 30, 2008 offset by sales in the nine months ended September 30, 2007
      of $2,080,000 to a new customer and a $2,601,000 of proprietary products to
      a
      single customer.





Gross
      profits on sales in the nine months ended September 30, 2008 were $5,708,000,
      or
      22%, compared to $9,902,000, or 60%, during the nine months ended September
      30,
      2007. The decline of $4,194,000 is primarily due to the net decrease of
      $4,994,000 in licensing and royalty fees during the nine months ended September
      30, 2007.





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 nine
      months of 2008 has increased our fixed operating costs in our NutraCea segment
      by approximately $750,000 per quarter. 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. Additionally, hurricane weather disrupted normal operations
      at
      all three of our gulf coast facilities. The combination of increased fixed
      costs
      and lower utilization of production capacity, along with the decline of
      $4,994,000 in license and royalty fees which have no cost component associated
      with them, contributed to the increase in cost of goods sold in our NutraCea
      segment from 40% for the nine months ended September 30, 2007 to 86% for the
      nine months ending September 30, 2008. We anticipate that in the fourth quarter
      of 2008 the rice mills will be operating near their capacity and our plants
      will
      be receiving most of the output from each rice mill. If, however, supplies
      of raw rice bran remain too low to run our plants at our desired capacity levels
      we may continue to have lower than expected gross profit margins on our NutraCea
      product sales.





Also,
      during the nine months ended September 30, 2008 we recorded a charge of $436,000
      on our NutraCea segment relating to a credit to a customer to reimburse the
      customer for products purchased by it that the customer ultimately determined
      did not meet its specifications. The customer purchased of total of $903,000
      of
      the product during 2007. 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 nine months ended:




**September 30,**
                **2008**
              
              **September 30,**
                **2007****Consolidated**
              
              **%**
              
              **NutraCea**
              
              **%**
              
              **Irgovel**
              
              **%**
              
              **NutraCea**
              
              **%**
              
              **Increase/**
                **(Decrease)**Total
                  product sales
              
              $
              26,563,000
              
              
              
              
              $
              10,319,000
              
              
              
              
              $
              16,244,000
              
              
              
              
              $
              13,031,000
              
              
              
              
              $
              13,532,000Licensing
                  fees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              5,000,000
              
              
              
              
              
              (5,000,000
              )Royalty
                  revenue
              
              
              39,000
              
              
              
              
              
              39,000
              
              
              
              
              
              -
              
              
              
              
              
              33,000
              
              
              
              
              
              6,000Total
                  revenues
              
              
              26,602,000
              
              
              
              
              
              10,358,000
              
              
              
              
              
              16,244,000
              
              
              
              
              
              18,064,000
              
              
              
              
              
              8,538,000Less
                  infomercial sales return
              
              
              (119,000
              )
              
              
              
              
              (119,000
              )
              
              
              
              
              -
              
              
              
              
              
              (1,551,000
              )
              
              
              
              
              1,432,000Net
                  revenues
              
              
              26,483,000
              
              
              100
              
              
              10,239,000
              
              
              100
              
              
              16,244,000
              
              
              100
              
              
              16,513,000
              
              
              100
              
              
              9,970,000Cost
                  of salesCost
                  of goods sold
              
              
              20,339,000
              
              
              76
              
              
              8,849,000
              
              
              86
              
              
              11,490,000
              
              
              71
              
              
              6,611,000
              
              
              40
              
              
              13,728,000Product
                  warranty cost
              
              
              436,000
              
              
              2
              
              
              436,000
              
              
              4
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              436,000Total
                  cost of sales
              
              
              20,775,000
              
              
              78
              
              
              9,285,000
              
              
              90
              
              
              11,490,000
              
              
              71
              
              
              6,611,000
              
              
              40
              
              
              14,164,000Gross
                  Margin
              
              $
              5,708,000
              
              
              22
              
              $
              954,000
              
              
              10
              
              $
              4,754,000
              
              
              29
              
              $
              9,902,000
              
              
              60
              
              $
              (4,194,000
              )




29




Operating
      expenses:




*Research
      and development*




R&D
      expenses were $1,268,000 and $446,000 in the nine months ended September 30,
      2008, and 2007, respectively, an increase of $822,000. 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.





*Selling,
      general and administrative*





SG&A
      expenses were $17,534,000 and $12,546,000 in the nine months ended June 30,
      2008
      and 2007 respectively, an increase of $4,988,000, or 40%. This increase is
      due
      to a $2,455,000, or 20%, increase in our Nutracea segment to expand investment
      in personnel, infrastructure, and sales and marketing activities to meet
      anticipated future demands and $2,533,000 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 nine
      months ended:




**Selling, General, and Administrative Expenses**
            ****
            **September 30,**
              **2008**
            ****
            **September 30,**
              **2007**
            ****
            **Increase /(Decrease)**Payroll,
                benefits, taxes and hiring expenses
            
            $
            6,041,000
            
            $
            3,938,000
            
            $
            2,103,000Sales
                and marketing
            
            
            1,058,000
            
            
            2,114,000
            
            
            (1,056,000
            )Allowance
                for bad debt expense, net
            
            
            726,000
            
            
            800,000
            
            
            (74,000
            )Operations
            
            
            975,000
            
            
            745,000
            
            
            230,000Travel
                and entertainment
            
            
            770,000
            
            
            673,000
            
            
            97,000Rent,
                administration, insurance and other costs
            
            
            2,197,000
            
            
            2,100,000
            
            
            97,000Stock
                based compensation, net of amounts allocated to R&D and professional
                fees
            
            
            1,856,000
            
            
            1,667,000
            
            
            189,000Amortization
            
            
            645,000
            
            
            246,000
            
            
            399,000Depreciation,
                net of allocation to cost of goods sold
            
            
            733,000
            
            
            263,000
            
            
            470,000Total
                NutraCea segment
            
            
            15,001,000
            
            
            12,546,000
            
            
            2,455,000Total
                Irgovel segment
            
            
            2,533,000
            
            
            -
            
            
            2,533,000Total
                selling, general and administrative expenses
            
            $
            17,534,000
            
            $
            12,546,000
            
            $
            4,988,000





Payroll
      and related benefits and hiring expenses increased a total of $2,103,000 in
      the
      nine months ended September 30, 2008 over the same period in 2007 due to the
      staffing of our facilities in Lake Charles, Louisiana and Phoenix, Arizona,
      along with the addition of key management positions in our corporate offices
      in
      Phoenix, Arizona.





Sales
      and
      marketing expenses decreased $1,056,000 in the nine months ended September
      30,
      2008 compared to the same period in 2007 due to a $889,000 decrease in
      advertising costs, and a $171,000 decrease in commission expense, net of other
      increases.





*Professional
      fees*





Professional
      fees were $3,385,000 and $2,742,000 in the nine months ended September 30,
      2008
      and 2007, respectively, an increase of $643,000. The higher professional fees
      in
      the nine months ended September 30, 2008 is primarily due to legal fees for
      our
      acquisitions of Irgovel and our joint venture agreement with Bright.
      Professional fees include costs related to accounting, legal and consulting
      services.





30




*Other
      income and expense*




The
      net
      decrease of other income and expense of $3,250,000 is shown in the following
      table for the nine months ended:





**Other (expenses) income**
            
            **September 30,**
              **2008**
            
            **September 30,**
              **2007**
            
            **(Increase)/Decrease**Interest
                income
            
            $
            597,000
            
            $
            2,167,000
            
            $
            (1,570,000
            )Interest
                expense
            
            
            (448,000
            )
            
            -
            
            
            (448,000
            )Gain
                on lawsuit settlement
            
            
            -
            
            
            1,250,000
            
            
            (1,250,000
            )Loss
                on disposal of assets
            
            
            (462,000
            )
            
            (309,000
            )
            
            (153,000
            )Loss
                on equity investments
            
            
            (115,000
            )
            
            (286,000
            )
            
            171,000Total
                other (expenses) income
            
            $
            (428,000
            )
            $
            2,822,000
            
            $
            (3,250,000
            )





Interest
      income decreased $1,570,000 due to lower cash balances being available for
      investment.




Interest
      expense increased $448,000 for the nine months ended September 30, 2008 due
      to
      $341,000 of interest expense on our Irgovel subsidiary for interest on notes
      payable and $10,000 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 $97,000 of interest incurred during the second
      quarter for the 90 day note payable issued for the purchase of our new building
      in Phoenix, Arizona.




In
      the
      nine months ended September 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 $153,000 due to a write-down of $331,000 of
      inventory related to an infomercial product line offset by a $204,000 gain
      on
      the disposal of assets in the sale of our NutraCea/Cura LLC.




The
      loss
      on equity investments decreased $171,000. Our loss on the equity investments
      in
      GE and PIN from operations was $115,000. The $286,000 loss in the prior period
      was primarily composed of the payment of $250,000 for the broker’s commission
      relating to the formation of GE.




Income
      Taxes




Income
      taxes were $541,000 and $18,000 for the nine months ended September 30, 2008
      and
      2007, respectively. The increase of $523,000 is primarily due to Brazilian
      income taxes due for our Irgovel subsidiary.




**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      September 30, 2008, our source of liquidity was cash and cash equivalents in
      the
      amount of $8,702,000, exclusive of restricted cash. Our cash decreased by
      $32,596,000 in the nine months ended September 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 $21,989,000 (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 $19,416,000 (net of
      expenses) from the our registered direct offering and the exercise of
      warrants.





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.





For
      the
      nine months ended September 30, 2008, net cash used in operations was
      $8,740,000, compared to cash used in operations in the same period of 2007
      of
      $1,566,000, an increase of $7,174,000. This increase in cash used in operations
      resulted from the increase in our net loss of $14,350,000, offset by the net
      increase in non-cash charges against income of $1,301,000 and the net increase
      in the change in operating assets and liabilities of $5,875,000.




31




Inventories
      increased in the nine months ended September 30, 2008 by $3,137,000, from the
      $1,808,000 balance at December 31, 2007. $1,068,000 of this increase is due
      to
      our acquisition of Irgovel. The remaining increase, or $2,069,000, is made
      up of
      a $777,000 increase in our Irgovel segment and a $1,292,000 increase in our
      NutraCea segment. We have been intentionally growing our 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
      demand. We have increased sales of our core SRB product lines by $1,850,000
      in
      the nine months ended September 30, 2008 compared to the same period last year,
      and believe that such sales growth will continue.





Cash
      used
      in investing activities in the nine months ended September 30, 2008 was
      $42,027,000, compared to $19,527,000 for the same period of 2007. This increase
      of $22,500,000 was primarily caused by our $25,646,000 (net of $79,000 cash
      acquired with the purchases) investment in Irgovel and PIN (see Note 10 in
      our
      consolidated financial statements contained herein), and an increase of
      $13,781,000 in expenditures for plant expansions and other fixed assets. The
      following table lists the amounts invested in subsidiaries during the nine
      months ended;





**September 30, 2008**
            ****
            **September 30, 2007**Investment
                in Irgovel
            
            $
            14,970,000
            
            $
            -Investment
                in PIN
            
            
            10,675,000
            
            
            -Investment
                in Vital Living, Inc.
            
            
            -
            
            
            5,143,000Investment
                in Grainnovations, Inc.
            
            
            -
            
            
            2,169,000Total
                investment in subsidiaries
            
            $
            25,646,000
            
            $
            7,312,000





Cash
      provided by financing activities for the nine months ended September 30, 2008
      and 2007 was $18,177,000, and $55,772,000, respectively, a decrease of
      $37,595,000. This decrease is due to the $28,030,000 decrease in the proceeds
      of
      our direct offerings, and a decrease of $8,222,000 decrease in proceeds from
      the
      exercise of common stock options and warrants.





*Issuance
      of preferred stock:*




On
      October 20, 2008 we issued to two institutional investors, for the purchase
      of
      $5 million, shares of our Series D Convertible Preferred Stock ("Preferred
      Stock") and five-year warrants to purchase up to 4,545,455 shares of NutraCea
      Common Stock. The securities were offered in "units" at a price of $1,000 per
      unit. The units immediately separated upon issuance. Each unit consisted of
      one
      share of Preferred Stock convertible into 1,818.18 shares of Common Stock at
      a
      conversion price per share of Common Stock of $0.55, and a warrant to purchase
      909.09 shares of NutraCea Common Stock at an exercise price of $0.55 per share.
      The investors also received additional warrants that grant the investors the
      right, for a period of 60 days after the initial issuance, to purchase an
      additional $5 million of Preferred Stock and associated warrants on the same
      terms as the initial issuance. For the sale of 5,000 units we received an
      aggregate of $5,000,000 less $300,000 placement fees and $200,000 estimated
      expenses.




The
      Preferred Stock will accrue dividends at 8.0% per annum preferred dividend.
      These dividends are payable quarterly in arrears, commencing on January 1,
      2009.
      Subject to the satisfaction of certain conditions, the dividends are payable
      in
      shares of NutraCea Common Stock, but may be paid in cash at NutraCea's election.
      NutraCea will redeem all of the Preferred Stock (unless converted) over nine
      months and in nine equal monthly installments commencing on February 1, 2009.
      The redemption amount is payable in shares of NutraCea Common Stock, but may
      be
      paid in cash at NutraCea's election. The conversion price of the Preferred
      Stock
      and the exercise price for the warrants are each subject to anti-dilution
      adjustments upon certain stock issuances at a price per share less than the
      conversion price. Subject to certain limitations, we may redeem the Preferred
      Stock at any time upon 10 days notice at a price equal to 110% of the aggregate
      state value of the Preferred Stock being redeemed plus accrued and unpaid
      dividends thereon. The proceeds will be used by NutraCea for the completion
      and
      further expansion of projects in the U.S. and Brazil as well as for general
      working capital .




32




*Cash
      raised in equity financing* *:*





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 0.30 of a share of
      NutraCea common stock at an exercise price of $1.20 per share. An advisor for
      the financing received a customary 6.0% 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 five-year 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 6.0% 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.





Based
      on
      our current plans and business conditions we believe we have sufficient cash
      and
      cash equivalents to meet our anticipated operating requirements for the next
      twelve months. However, we may require additional funds for operations if our
      revenues or expenses fail to meet our current projections or if other
      operational requirements develop beyond those anticipated during this period.
      In
      such event, we anticipate we would use any available facilities from bank
      financing of receivables, equipment and/or real estate, which we currently
      are
      seeking, or additional equity funding. There can be no assurance, however,
      that
      such funding would be available on favorable terms or any terms.





*Purchase
      of customer list*





During
      the fourth quarter of 2008 we anticipate 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.





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
      plan
      to meet these funding needs by raising additional capital through sales of
      equity or debt or a combination thereof. There can be no assurance, however,
      that such funding would be available on favorable terms or any terms.





**OFF
      BALANCE SHEET ARRANGEMENTS**





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.




33




**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:





(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.




34




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 2008 and 2007, NutraCea recorded significant credit losses of $726,000 (as
      of
      the nine months ended September 30, 2008) and $3,233,000, respectively. 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.




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.




35




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, No. 142, “Goodwill
      and Other Intangible Assets”, (“SFAS No. 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 No. 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.





For
      the
      nine months ended September 30, 2008 we assessed the fair value of our reporting
      units (NutraCea and Irgovel) compared to their respective carry values as of
      September 30, 2008 and determined that the fair value exceeded the carry value
      and therefore no goodwill impairment was deemed to have occurred.





***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 No. 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.





36





***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 SFAS
      No. 157 did not have a material impact on the Company’s fair value
      measurements. The provisions of SFAS No. 157 have not been applied to
      non-financial assets and non-financial liabilities.




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"
      ("SFAS No. 159"). SFAS No. 159 permits companies to measure many
      financial instruments and certain other items at fair value. The Company adopted
      SFAS No. 159 in the first quarter of 2008; as the Company did not apply the
      fair value option to any of its outstanding instruments, SFAS No. 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 SFAS No. 141R, *“Business
      Combinations”* (“SFAS
      No. 141R”) and SFAS No. 160, *“Non-controlling
      Interests in Consolidated Financial Statements.”*(“SFAS No. 160”) Both
      standards will be effective for transactions that occur after January 1,
      2009.





SFAS
      No. 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 SFAS No. 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.





In
      March 2008, the FASB issued Statement of Financial Accounting Standards
      No. 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities — an amendment of FASB
      Statement No. 133”* (“SFAS
      No. 161”). This Standard requires enhanced disclosures regarding
      derivatives and hedging activities, including: (a) the manner in which an
      entity uses derivative instruments; (b) the manner in which derivative
      instruments and related hedged items are accounted for under Statement of
      Financial Accounting Standards No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ;
      and
      (c) the effect of derivative instruments and related hedged items on an
      entity’s financial position, financial performance, and cash flows. The Standard
      is effective for financial statements issued for fiscal years and interim
      periods beginning after November 15, 2008. As FAS No. 161 relates
      specifically to disclosures, the Standard will have no impact on our financial
      condition, results of operations or cash flows.





In
      May 2008, the FASB issued Statement of Financial Accounting Standards
      No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles”* (“SFAS
      No. 162”). This Standard identifies the sources of accounting principles
      and the framework for selecting the principles to be used in the preparation
      of
      financial statements of nongovernmental entities that are presented in
      conformity with generally accepted accounting principles. FAS 162 directs the
      hierarchy to the entity, rather than the independent auditors, as the entity
      is
      responsible for selecting accounting principles for financial statements that
      are presented in conformity with generally accepted accounting principles.
      The
      Standard is effective 60 days following SEC approval of the Public Company
      Accounting Oversight Board amendments to remove the hierarchy of generally
      accepted accounting principles from the auditing standards. SFAS No. 162 is
      not
      expected to have an impact on our financial condition, results of operations
      or
      cash flows.


In
        May
        2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
        Position ("FSP") APB 14-1, "*Accounting for Convertible Debt Instruments That
        May Be Settled in Cash upon Conversion (Including Partial Cash
        Settlement)*". FSP No. APB 14-1 clarifies that convertible debt instruments
        that may be settled in cash upon either mandatory or optional conversion
        (including partial cash settlement) are not addressed by paragraph 12 of
        APB
        Opinion No. 14, "*Accounting for Convertible Debt and Debt issued with Stock
        Purchase Warrants*". Additionally, FSP No. APB 14-1 specifies that issuers
        of such instruments should separately account for the liability and equity
        components in a manner that will reflect the entity's nonconvertible debt
        borrowing rate when interest cost is recognized in subsequent periods. FSP
        No.
        APB 14-1 is effective for financial statements issued for fiscal years beginning
        after December 15, 2008, and interim periods within those fiscal years. We
        will
        adopt FSP No. APB 14-1 beginning in the first quarter of fiscal 2009, and
        this
        standard must be applied on a retrospective basis. We are evaluating the
        impact
        the adoption of FSP No. APB 14-1, if any, will have on our consolidated
        financial position and results of operations.
 
 In
        April
        2008, the FASB issued FSP No. 142-3, "*Determination of the Useful Life of
        Intangible Assets*" ("FSP No. 142-3"). FSP No. 142-3 amends the factors an
        entity should consider in developing renewal or extension assumptions used
        in
        determining the useful life of recognized intangible assets under FASB Statement
        No. 142, "Goodwill and Other Intangible Assets". This new guidance applies
        prospectively to intangible assets that are acquired individually or with
        a
        group of other assets in business combinations and asset acquisitions. FSP
        No.
        142-3 is effective for financial statements issued for fiscal years and interim
        periods beginning after December 15, 2008. Early adoption is prohibited.
        We are
        currently evaluating the impact, if any, that FSP No. 142-3 will have on
        our
        consolidated financial statements.




37





**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 September 30, 2008, we had approximately
      $4,379,000 of long-term debt bearing interest at rates from 6% to 21.4%. 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.




***Foreign
      Exchange Risks***





Our
      financial results are affected by changes in foreign currency exchange rates
      and
      economic conditions in the foreign markets in which our products are
      manufactured and/or sold.




**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 September 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.




38





**PART
      II.**  **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.





***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.





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.





On
      September 3, 2008, we filed a complaint against Vital Living in Superior Court
      of Arizona, Maricopa County (CV2008-021291) alleging that Vital Living has
      breached its obligations to us under the notes and the security agreement
      relating to the notes. We are seeking, among other things, immediate payment
      of
      all outstanding amounts under the notes and a judgment foreclosing our security
      interest in Vital Living’s assets that secure the notes. No assurance can be
      given that we will be able to achieve any of our objectives in the litigation
      or
      otherwise.




**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.




39




***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:




·
            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;




40




·
            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.





***Fluctuations
      in foreign currency exchange could adversely affect our financial
      results.***





We
      earn
      revenues, pay expenses, own assets and incur liabilities in countries using
      currencies other than the U.S. dollar, including primarily the Brazilian real.
      Currently, a significant portion of our revenues and expenses occur with our
      Brazilian subsidiary, Irgovel. Because our consolidated financial statements
      are
      presented in U.S. dollars, we must translate revenues, income and expenses,
      as
      well as assets and liabilities, into U.S. dollars at exchange rates in effect
      historically, during or at the end of each report period. Therefore, increases
      or decreases in the value of the U.S. dollar against the Brazilian real and
      any
      other currency which affects a material amount of our operations, will affect
      our revenues, cost of sales, gross profit (loss), operating expenses, or other
      income and expenses and the value of balance sheet items denominated in foreign
      currencies. These fluctuations may have a material adverse effect on our
      financial results. Moreover, recent disruptions in financial markets have
      resulted in significant changes in foreign exchange rates in relatively short
      periods of time which further increases the risk of an adverse currency effect.
      Since we plan to expand our international operations through capital
      contributions, we will likely increase our exposure to foreign currency risks.
      We do not hedge our currency risk, and do not expect to as currency hedges
      are
      expensive and do not necessarily reduce the risk of currency fluctuations over
      longer periods of time.




***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 nine months ended September 30, 2008, three customers accounted
      for
      17% of our sales in our NutraCea segment, and in our Irgovel segment three
      customers accounted for 27% of sales. A loss of any of these customers could
      have a material adverse effect on our revenues and results of
      operations.




***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. On our Irgovel segment as of September 30, 2008 one
      customer accounted for 30% of Irgovel’s $1,667,000 gross trade accounts
      receivable. For our NutraCea segment, as of September 30, 2008, two customers
      accounted for 64% of our $4,729,000 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 acquisition of their assets through foreclosure
      or
      otherwise, 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.





41




***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.




***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.


42




***We
      must comply with our contractual obligations.***




We
      have
      numerous and ongoing contractual obligations under various purchase, sale,
      supply, production and other agreements which govern our business operations.
      We
      also have contractual obligations which require ongoing payments such as for
      example, various lease obligations and the agreement of Irgovel to pay tax
      obligations to the Brazilian government over a ten year period. While we seek
      to
      comply at all times with these obligations, there can be no assurance that
      we
      will be able to comply with the terms of all contracts during all periods of
      time, especially if there are significant changes in market conditions or our
      financial condition. If we are unable to comply with our material contractual
      obligations, there likely would be a material adverse effect on our financial
      condition and results of operations **.**




***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
      $5,000,000 gross proceeds in a preferred stock offering in October 2008 and
      $20,000,000 gross proceeds in a common stock and warrants offering 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, based on our current plans and business conditions,
      that
      we have adequate cash and cash equivalents to fund our anticipated operating
      requirements for the next twelve months, our ability to meet long term business
      objectives likely will 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.




***We
      are in the process of seeking to consummate bank debt financing and this and
      any
      other borrowing we undertake will increase our financial
      risks.***




We
      are in
      the process of seeking to consummate bank debt financing for purposes of
      financing inventory, equipment and real estate and we may seek other debt
      financing. Bank debt financing and similar type debt financing typically is
      not
      dilutive to shareholders. However, debt has priority over equity holders. Debt
      financing typically requires the regular payments of interest and repayment
      of
      principal on a fixed schedule and compliance with various financial covenants.
      Since we currently do not have positive cash flow from operations, the use
      of
      debt to finance our activities increase the risk that we will create a financial
      obligation we cannot repay when due or that we will be unable to comply with
      financial covenants even if we are able to repay the debt in accordance with
      its
      terms. If such an event were to occur, and we could not refinance or otherwise
      satisfy any obligation, we could default on such debt and shareholders could
      suffer the loss of their entire investment.




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




The
      food
      products and dietary supplement industries are subject to considerable
      government regulation, including regulation of processing, packaging, storage,
      distribution, advertising, labeling, quality, and safety. There is no assurance
      that all of our products and marketing strategies will satisfy all of the
      applicable regulations, including those 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. The Company’s products
      and operations also are subject to regulation in various instances by other
      federal, state, local and foreign governmental agencies and their regulations.
      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, and could result in negative
      publicity which could adversely affect our business.


43




***We
      may be subject to product liability claims and product
      recalls.***




We
      sell
      food and nutritional products primarily for human consumption, which involves
      risk such as product contamination or spoilage, product tampering and other
      adulteration of food products. We may be subject to liability if the consumption
      of any of our products causes injury, illness or death. In addition, we may
      voluntarily recall products in the event of contamination or damage. A
      significant product liability judgment or a widespread product recall may cause
      a material adverse effect on our financial condition. Even if a product
      liability claim is unsuccessful, there may be negative publicity surrounding
      any
      assertion that our products caused illness or injury which could adversely
      affect our reputation with existing and potential customers.




***Many
      of the risks of our business have only limited insurance coverage and many
      of
      our business risks are uninsurable.***




Our
      business operations are subject to potential product liability, environmental,
      fire, employee, manufacturing, shipping and other risks. Although we have
      insurance to cover some of these risks, the amount of this insurance is limited
      and includes numerous exceptions and limitations to coverage. Further, no
      insurance is available to cover certain types of risks, such as acts of God,
      war, terrorism, major economic and business disruptions, and similar events.
      In
      the event we were to suffer a significant uninsured claim, our financial
      condition would be materially and adversely affected.




***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, Olga
      Hernandez-Longan, 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, 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.


44


***We
      may be required to record a significant charge to earnings if our goodwill
      becomes impaired.***





Goodwill
      comprises a significant portion of our total assets. We tested our goodwill
      for
      impairment for the nine months ended September 30, 2008 and determined that
      no
      goodwill impairment had occurred. Consistent with past years, we also will
      be
      conducting our annual test for goodwill impairment in the fourth quarter of
      2008. If we determine that impairment of our goodwill exists during a period
      in
      the future, we may be required to record a significant charge to earnings in
      our
      consolidated financial statements during that period. This would adversely
      impact our results of operations. Factors that may be considered a change in
      circumstances indicating that the carrying value of our goodwill may not be
      recoverable include declines in stock prices and market capitalization. In
      October 2008, our stock price declined significantly, and if our stock price
      were to decline further, our goodwill impairment test would be negatively
      impacted during the fourth quarter of 2008. Please see Item 2. Management's
      Discussion and Analysis of Financial Condition and Results of Operations for
      our
      critical accounting policies related to goodwill.





***If
      we fail to maintain an effective system of internal controls, we may not be
      able
      to accurately report financial results or prevent
      fraud.***




Effective
      internal controls are necessary to provide reliable financial reports and to
      assist in the effective prevention of fraud. Any inability to provide reliable
      financial reports or prevent fraud could harm our business. We must annually
      evaluate our internal procedures to satisfy the requirements of Section 404
      of the Sarbanes-Oxley Act of 2002, which requires management and auditors to
      assess the effectiveness of internal control over financial reporting. In prior
      periods, we have identified material weaknesses in our internal controls.
      Although we believe we have addressed those weaknesses, no assurance can be
      given that these or other material weaknesses will not occur in the future.
      If
      we fail to maintain the adequacy of our internal controls, as such standards
      are
      modified, supplemented or amended from time to time, we could be subject to
      regulatory scrutiny, civil or criminal penalties or shareholder litigation.
      In
      addition, failure to maintain adequate internal controls could result in
      financial statements that do not accurately reflect our financial condition.




**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:




**High**
            
            **Low**Three
                months ended September 30, 2008
            
            $
            0.70
            
            $
            0.39Nine
                months ended September 30, 2008
            
            $
            1.56
            
            $
            0.39Twelve
                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;


45




·
            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
      October 31, 2008, 168,124,554 shares of our common stock were outstanding and
      4,945 shares of our Series D Preferred Stock were outstanding. Additionally,
      as
      of November 3, 2008, options and warrants to purchase approximately 60,802,000
      shares of our common stock were outstanding and our currently outstanding Series
      D Preferred Stock was convertible into 8,990,798 shares of our common stock.
      In
      addition, warrants to acquire an additional 5,000 shares of our Series D
      Preferred Stock were outstanding, which if exercised to acquire additional
      Series D Preferred Stock, would be convertible into 9,090,909 shares of our
      common stock and would also have accompanying warrants to acquire an additional
      4,545,455 shares of our common stock. Further, dividends on the Series D
      Preferred Stock may be paid in common stock depending on compliance with the
      terms of such preferred stock and we have the right to convert the Series D
      Preferred Stock into common stock, subject to certain conditions, which may
      result in greater number of shares of common stock being issued than in a
      voluntary conversion by holders of the Series D Preferred Stock. 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 October 31, 2008,
      approximately 23,622,000 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 and we sold 5,000 shares of our Series D Preferred Stock, warrants
      purchase 4,545,455 shares of our common stock, and warrants to acquire an
      additional 5,000 shares of Series D Preferred Stock together with warrants
      to
      acquire an additional 4,545,455 shares of common stock for gross proceeds of
      $5,000 in October, 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 warrant sand conversion of Preferred Stock
      may dilute current shareholders.***




As
      of
      October 31, 2008, there were outstanding options and warrants to purchase
      approximately 60,802,000 shares of our common stock. In addition, as of such
      date there were 4,945 shares of our Series D Preferred Stock outstanding which
      were convertible into 8,990,798 shares of our common stock. Further, warrants
      to
      acquire an additional 5,000 shares of our Series D Preferred Stock were
      outstanding, which if exercised to acquire additional Series D Preferred Stock,
      would be convertible into 9,090,909 shares of our common stock and would also
      have accompanying warrants to acquire an additional 4,545,455 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.




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




We
      likely
      will need to raise funds through debt or equity financings in order to complete
      our planned capital expenditures and ultimate business objectives. We also
      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.


46




**The
      authorization and issuance 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. W have designated and
      issued four series of preferred stock, of which only our Series D Preferred
      Stock remains outstanding as of October 31, 2008. In October 2008 we sold 5,000
      shares of our Series D Preferred Stock and warrants to acquire an additional
      5,000 shares of Series D Preferred Stock. We may issue additional series of
      preferred stock in the future.




***The
      Series D Preferred Stock we have issued has significant rights and benefits
      and
      is senior in priority to our common stock or any class of equity security we
      may
      issue in the future.***




In
      October 2008 we sold 5,000 shares of our Series D Preferred Stock and we granted
      warrants to acquire an additional 5,000 shares of Series D Preferred Stock.
      The
      Series D Preferred Stock has significant rights and benefits which are not
      available to holders of our common stock. Holders of the Series D Preferred
      Stock may elect to convert into common stock at any time at a conversion rate
      of
      $0.55 per share, subject to adjustment downwards in the event we issue common
      stock, warrants or options at a price less than $0.55 per share, except in
      certain limited circumstances. The Series D Preferred Stock entitles its holders
      to dividends on a quarterly basis at an annual rate of 8%, which dividends
      may
      be payable in common stock if certain conditions are satisfied. The Series
      D
      Preferred Stock may be converted into common stock over a nine month period
      in
      equal installments commencing February 1, 2009, based on the lesser of the
      then
      current conversion price or 90% of the volume weighted average price of our
      common stock over the 10 trading days immediately prior to conversion as long
      as
      certain conditions are satisfied. If those conditions are not satisfied, we
      must
      pay cash to redeem the Series D Preferred Stock on the applicable dates, and
      if
      we do not have such cash, we will be in default on the Series D Preferred Stock
      and subject to penalty provisions. The Series D Preferred Stock are senior
      in
      priority to our common stock and any class of equity security we may issue
      in
      the future unless the Series D Preferred Stock is converted or redeemed in
      its
      entirety. Thus, in the event of our liquidation, the payment of the outstanding
      stated amount of the Series D Preferred Stock and any accrued but unpaid
      dividends on such preferred stock must be satisfied before any payments to
      common stock holders or the holders of any other class of preferred stock.
      If we
      fail to comply with the terms of the Series D Preferred Stock, we will be
      subject significant penalties, including in certain circumstances the
      requirement to pay additional interest at the rate of 2% per month or the
      issuance of additional shares of common stock. The Series D Preferred Stock
      also
      has certain rights in connection with a fundamental transaction, generally
      involving a change in control of our company, including the right to be redeemed
      at a premium price of 135% of the outstanding amount of the Series D Preferred
      Stock, plus any accrued but unpaid dividends.




***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.


47


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




None




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




None




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




None




**Item
      5.** **Other
      Information**




None




**Item
      6.  E** **xhibits**




The
      following exhibits are attached hereto and filed herewith:




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**1.1(1)
            
            Form
                of Placement Agency Agreement, dated October 16, 2008, by and between
                NutraCea and Rodman & Renshaw, LLC3.1(1)
            
            Certificate
                of Determination, Preferences and Rights of the Series D Convertible
                Preferred Stock of NutraCea4.1(1)
            
            Form
                of Series A Warrant.4.2(1)
            
            Form
                of Series B Warrant4.3(1)
            
            Form
                of Series C Warrant10.1(1)
            
            Form
                of Securities Purchase Agreement, dated as of October 16, 2008, by
                and
                between NutraCea and each investor signatory thereto.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.




**** (1)
      incorporated herein by reference to exhibits previously filed on Registrant’s
      Current Report on Form 8-K, filed on October 20, 2008.


48


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:
                November 6, 2008
            /s/
                Bradley EdsonBradley
                EdsonChief
                Executive OfficerDated:
                November 6, 2008
            /s/
                Olga Hernandez-LonganOlga
                Hernandez-Longan,Chief
                Financial Officer(Principal
                Accounting Officer)




49