---

# UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

_________________

# FORM 10-KSB

# (Mark one)

||X| |  | ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------

# For the fiscal year
ended December 31, 2004

||_| |  | TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------

# For the transition
period from _________________ to _________________

# Commission File Number
0-24285

THE RICEX COMPANY(Name of Small Business
Issuer in Its Charter)

|Delaware                 |  | 68-0412200                          
|------------------------ |  | ------------------------------------
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

|1241 Hawks Flight Court,El Dorado Hills, California |  | 95762     
|---------------------------------------------------- |  | ----------
|(Address of Principal Executive Offices)             |  | (Zip Code)

Issuers Telephone
Number, Including Area Code: (916) 933-3000

_________________

Securities registered
under Section 12(b) of the Exchange Act:

# NONE

_________________

Title of Each Class:
None
Name of Each Exchange
on Which Registered: None

Securities registered
under Section 12(g) of the Exchange Act:

Common Stock, $0.001
par value(Title of Class)

_________________

1



Check
whether the issuer: (1) filed all reports to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 |_|

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X|

State
issuer's revenues for its most recent fiscal year:  $4,010,000

State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was sold, or
the average bid and asked prices of such common equity, as of a specified date within the
past 60 days: As of March 4, 2005, the aggregate market value of the Companys common
stock held by non-affiliates was $4,551,000.

State
the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date: As of March 4, 2005, shares of common stock outstanding
were 36,713,274.

TRANSITIONAL SMALL BUSINESS
DISCLOSURE FORMAT (CHECK ONE):  Yes  |_|  No  |X|

---

2



# FORM 10-KSB

# INDEX

|PART I |  | 
|------ |  | 

| |  | Item 1. |  | DESCRIPTION
OF BUSINESS.
| |  | ------- |  | ------------------------

| |  | Item 2. |  | DESCRIPTION
OF PROPERTY.
| |  | ------- |  | ------------------------

| |  | Item 3. |  | LEGAL
PROCEEDINGS.
| |  | ------- |  | ------------------

| |  | Item 4. |  | SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
| |  | ------- |  | ----------------------------------------------------

|PART II |  | 
|------- |  | 

| |  | Item 5. |  | MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
                  EQUITY SECURITIES.
| |  | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  | Item 6. |  | MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
| |  | ------- |  | ----------------------------------------------------------

| |  | Item 7. |  | FINANCIAL
STATEMENTS.
| |  | ------- |  | ---------------------

| |  | Item 8. |  | CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND       FINANCIAL DISCLOSURE.
| |  | ------- |  | -------------------------------------------------------------------------------------------

| |  | Item 8A. |  | CONTROLS
AND PROCEDURES.
| |  | -------- |  | ------------------------

| |  | Item 8B. |  | OTHER
INFORMATION.
| |  | -------- |  | ------------------

|PART III |  | 
|-------- |  | 

| |  | Item 9. |  | DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT.
| |  | ------- |  | ---------------------------------------------------

| |  | Item 10. |  | EXECUTIVE
COMPENSATION.
| |  | -------- |  | -----------------------

| |  | Item 11. |  | SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
| |  | -------- |  | ---------------------------------------------------------------

| |  | Item 12. |  | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
| |  | -------- |  | -----------------------------------------------

| |  | Item 13. |  | EXHIBITS.
| |  | -------- |  | ---------

| |  | Item 14. |  | PRINCIPAL
ACCOUNTANT FEES AND SERVICES
| |  | -------- |  | --------------------------------------

|Signatures |  | 
|---------- |  | 

|Certifications |  | 
|-------------- |  | 

3



# FORWARD-LOOKING
STATEMENTS

This
document 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. These forward-looking
statements present our estimates and assumptions only as of the date of this annual
report. Except for our ongoing obligation to disclose material information as required by
the federal securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.

Although
we believe that the expectations reflected in any of our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in any
of our forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and inherent
risks and uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:

| |  | increased
competitive pressures from existing competitors and new entrants;
|- |  | ---------------------------------------------------------------------------

| |  | increases
in interest rates or our cost of borrowing or a default under any material debt
agreements;
|- |  | -----------------------------------------------------------------------------------------------------

| |  | deterioration
in general or regional economic conditions;
|- |  | ---------------------------------------------------------

| |  | adverse state or federal legislation or regulation that increases the costs of compliance,
or adverse findings by a regulator with respect to existing operations;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | loss
of customers or sales weakness;
|- |  | ------------------------------------

| |  | inability
to achieve future sales levels or other operating results;
|- |  | --------------------------------------------------------------------

| |  | the
unavailability of funds for capital expenditures; and
|- |  | ---------------------------------------------------------

| |  | operational
inefficiencies in distribution or other systems.
|- |  | ------------------------------------------------------------

For
a detailed description of these and other factors that could cause actual results to
differ materially from those expressed in any forward-looking statement, please see RISK
FACTORS beginning at page 13 below.

4



# PART I

|Item 1. |  | DESCRIPTION
OF BUSINESS.
|------- |  | ------------------------

# OVERVIEW

The
RiceX Company (we, us, our, or the
Company) was incorporated under Delaware law in May 1998. We succeeded to the
business of our predecessor corporation, Food Extrusion, Inc., a Nevada Corporation,
pursuant to a re-incorporation that was effective upon completion of the merger of the
Nevada corporation with the Delaware corporation on August 4, 1998. Food Extrusion, Inc,
was incorporated in California in May 1989 and subsequently merged in a stock-for-stock
exchange into Core Iris, a Nevada corporation and subsequently changed its name to Food
Extrusion, Inc. Food Extrusion, Inc. changed its name to The RiceX Company in May 1998.
RiceX Nutrients, Inc. (formally Food Extrusion Montana, Inc.) was incorporated in Montana
in December 1996, as our wholly owned subsidiary. In January 1997, RiceX Nutrients, Inc.
acquired certain assets of Centennial Foods, Inc., an Idaho corporation in exchange for
common stock and the assumption of certain liabilities, which were paid in full in January
1999.

The
RiceX Process stabilizes rice bran, which is the portion of the rice kernel that lies
beneath the hull and over the white rice. Rice bran contains over 60% of the nutritional
value of rice. However, without stabilization, the nutritional value of rice bran is lost
shortly after the milling process. This is due to the lipase-induced rancidity caused by
the rice milling process. Consequently, a rich nutrient resource must either be thrown
away or disposed of as low value animal feed. The RiceX Process deactivates the lipase
enzyme and makes the bran shelf life stable for a minimum of one year. While other
competing processes have been able to stabilize rice bran for a limited time, the RiceX
Process naturally preserves more of the higher value nutritional and antioxidant compounds
found in rice bran for a significantly longer period of time.

The
RiceX Process has enabled us to develop a variety of nutritional food products, including
our primary product, RiceX Stabilized Rice Bran. The RiceX Stabilized Rice
Bran we produce meets microbiological standards for human consumption. Our customers
include consumer nutrition and healthcare companies, domestic and international food
companies, and companion animal feed manufacturers.

Through
our wholly-owned subsidiary, RiceX Nutrients, Inc., we are engaged in custom manufacturing
of grain based products for food ingredient companies at its production facility in
Dillon, Montana. RiceX Nutrients, Inc. has specialized processing equipment and techniques
for the treatment of grain products to cook, convert, isolate, dry and package finished
food ingredients used in the formulation of health food and consumer food finished
products. RiceX Solubles, a highly nutritious, carbohydrate and lipid rich fraction, is
produced at the Dillon, Montana facility. We believe that these manufacturing capabilities
are unique among grain processors, with custom processing capabilities suited to numerous
food applications.

We
generated approximately $4,010,000 and $3,511,000 in revenue for the years ended December
31, 2004 and 2003, respectively. We reported net loss of $883,000 for the year ended
December 31, 2004 and net loss of $1,292,000 for the year ended December 31, 2003. Our net
operating loss, or NOL, carry-forwards from previous years expire for federal tax purposes
at various dates from 2011 through 2025, and expire for state tax purposes in 2005 through
2014. See Part II  Item 7. FINANCIAL STATEMENTS.

Our
business is not seasonal. See Part II  Item 7. FINANCIAL STATEMENTS.

We
occupy approximately 40,300 square feet of executive offices, warehouse and production
facilities in El Dorado Hills and West Sacramento, California, Burley, Idaho and Dillon,
Montana.

RiceX
and RiceX Solubles are our registered trade names. Mirachol®, Max
E® and Max E Glo® are our registered trademarks. In
addition to our trade names and our trademarks, we hold patents to the production of Beta
Glucan and to a micro nutrient enriched rice bran oil process. We also hold patents to a
method to treat high cholesterol, to a method to treat diabetes and the process for
producing Higher Value Fractions, or (HVF) from stabilized rice bran.

5



# RICEX PRODUCTS

We
produce stabilized, nutrient-rich rice bran that may be used in a wide variety of new
products. We are pursuing the development of proprietary rice bran products from
stabilized rice bran. Our current products include:

|RiceX Stabilized Rice Bran: |  | Stable whole rice bran and germ. This is our basic stabilized rice
bran product that is both a food supplement and an ingredient for cereals, baked goods,
companion animal feed, health bars, etc., and also the base material for producing RiceX
Solubles, oils and RiceX Fiber Complex.
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RiceX Stabilized Rice Bran Fine: |  | This is the same product as our RiceX Stabilized Rice Bran,
except that it has been ground to a particle size that will pass through a 20 mesh screen.
It is used primarily in baking applications.
|-------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dextrinized Rice Bran: |  | A carbohydrate converted RiceX Stabilized Rice Bran that is more suitably used
in baking and mixed health drink applications. This product contains all of the
nutrient-rich components of RiceX Stabilized Rice Bran.
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RiceX Solubles: |  | A highly concentrated soluble carbohydrate and lipid rich fraction component of
RiceX Stabilized Rice Bran with the fiber removed. RiceX Solubles also embodies a
concentrated form of the vitamins and nutrients found in RiceX Stabilized Rice Bran.
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RiceX Fiber Complex: |  | Nutrient-rich insoluble fiber source that contains rice bran oil and
associated nutrients. This product, designed for use by the baking and health food
markets, is the remaining ingredient when RiceX Stabilized Rice Bran is processed to form
RiceX Solubles.
|-------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition to the above, further refining RiceX Stabilized Rice Bran into oil and its
by-products can produce Max E Oil, RiceX Defatted Fiber and Higher Value
Fractions.

|Max E Oil: |  | Nutrient-rich oil made from RiceX Stabilized Rice Bran. This oil has a
high flash point, which provides a very long fry life, and it is not readily absorbed into
food. In addition, the oil maintains many of the nutritional benefits of the whole rice
bran products.
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RiceX Defatted Fiber: |  | Low fat soluble fiber that does not contain rice bran oil. This is a
product designed for use by the baking industry for its high fiber nutritional benefits.
|--------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|Higher Value Fractions: |  | Nutraceutical like compounds naturally occurring in RiceX Stabilized Rice
Bran and Rice Bran Oil that provide specific health benefits. Tocopherols, tocotrienols,
and gamma oryzanol are some of the antioxidant-rich fractions that are found in rice bran
and are enhanced by stabilization, with the gamma oryzanol being unique to rice.
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# INDUSTRY BACKGROUND

# THE IMPORTANCE OF RICE

Rice
is the staple food for approximately 70% of the worlds population, and is the staple
food source for several of the worlds largest countries. World rice production is
expected to be more than 500 million metric tons in the 2004-2005 crop year (according to
the United States Department of Agriculture), constituting more than one quarter of all
cereal grains produced worldwide. The United States accounts for less than 2% of the
worlds riceproduction. Ninety percent (90%) of world rice tonnage is
produced in 13 countries with aggregate populations of 3.2 billion people (according to
the USA Rice Federation, Rice Notes). Approximately 75% of all rice production occurs in
China, India, South East Asia, Africa and South America. Combined, these regions have a
population of 2.3 billion people (nearly 50% of the worlds population), and an
average per capita gross domestic product of $2,000 (less than one tenth of the U.S.
average).

6



Malnutrition
is a common problem in this group of nations, particularly for people located in rural
villages where subsistence rice farming is a primary livelihood. Transportation and
storage are poor. Consequently, locally grown rice is consumed locally and the amount of
food available varies widely over time with changes in seasons and weather. Children are
especially susceptible to variations in local agricultural output due to their heightened
nutritional needs and dependency on others for food. Per capita rice consumption in many
of the poorer rice belt countries exceeds one pound per day.

Despite
the importance of rice as a worldwide food source and the problems associated with
nutritional deficiencies in rice-dependent nations, more than 60% of the nutrients found
in rice are destroyed during milling. Most of the rice nutrients are contained in the
outer brown layer of the rice kernel known as the bran layer, which, because of poor
stability, becomes inedible due to lipase-induced rancidity or microbiological spoilage
shortly after the milling process.

# RICE PROCESSING AND RICE
BRAN STABILIZATION

When
harvested from the field, rice is in the form of paddy, or rough rice. In this
form, the rice kernel is fully enveloped by the rice hull. The hull is dried and then
removed in the first stage of milling, yielding brown rice. In the second stage of
milling, the outer brown layer, or rice bran, is removed to produce white rice. Rice bran
is composed of the rice germ and several sub-layers, which accounts for approximately 8%
by weight of paddy rice and contains over 60% of the nutrients found in each kernel of
rice. (See Juliano, B.O., 1985 Rice: Chemistry and Technology, American Association of
Cereal Chemists, St. Paul, MN, pp. 37-50.)

Under
normal milling conditions, when brown rice is milled into white rice, the oil in the bran
and a potent lipase enzyme found on the surface of the bran come into contact with one
another. The lipase enzyme causes very rapid hydrolysis of the oil, converting it into
glycerol, monoglycerides, diglycerides and free fatty acid, or FFA. As the FFA content
increases, the rice bran becomes unsuitable for human or animal consumption. At normal
room temperature, the FFA level increases to 5-8% within 24 hours and thereafter increases
at the rate of approximately 4-5% per day. Rice bran is unfit for human consumption at 5%
FFA, which typically occurs within 24 hours of milling.

When
the lipase enzyme can be deactivated, rice bran can be stabilized, thus preserving a
potentially important nutrient source that is largely wasted today. Heat will deactivate
the lipase enzyme, reduce microbiological load and reduce moisture levels. Although heat
serves as the basis for most attempts to stabilize rice bran, most of the rice bran
nutrients are lost in this process. Parboiled, or converted rice, is subjected to soaking
and steaming prior to being dried and milled. This process softens the rice kernel and
reduces the problem of lipase-induced hydrolysis. The bran produced from parboiled rice,
however, is only semi-stabilized, typically spoiling in 20 days or less. The parboiling
process also destroys much of the nutritional value of the bran because many of the micro
nutrients are water-soluble and are leached out during the parboiling process. There have
been a number of attempts to develop alternative rice bran stabilization processes that
deactivate the lipase enzyme using chemicals, microwave heating and variants on extrusion
technology. We believe each of these efforts results in an inferior product that uses
chemicals or does not remain stable for a commercially reasonable period, or the nutrients
in the bran are lost thereby significantly reducing the nutritional value in the bran.

# THE RICEX SOLUTION

The
RiceX Process uses proprietary innovations in food extrusion technology to create a
combination of temperature, pressure and other conditions necessary to deactivate the
lipase enzyme without significantly damaging the structure or activity of other, higher
value compounds, oils and proteins found in the bran. The RiceX Process does not use
chemicals to stabilize raw rice bran, and produces an all natural
nutrient-rich product.

Our
processing equipment is designed to be installed on the premises of any two-stage rice
mill and is located downstream from the rice polishers. After hulling, the rice is
transported pneumatically to the rice polishing room where the brown rice kernels are
tumbled and the rice bran is polished from the surface of each kernel. The bran is
separated from the denser polished rice grain and is transported pneumatically to a loop
conveyor system we designed. The loop conveyor system immediately carries the fresh,
unstabilized rice bran to the RiceX Company stabilizer. Stabilization is achieved by
feeding the fresh rice bran into a specially designed auger food extruder that forces the
material under pressure and heat through an orifice. The auger is designed to create the
proper temperature, shear and pressure necessary to selectively deactivate the lipase
enzyme and reduce the microbiological

7



load. Process controllers that
maintain process conditions within the prescribed pressure/temperature regime control the
system. In case of power failure or interruption of the flow of fresh bran into the
system, the electronic control system is designed to purge our equipment of materials in
process and safely shut down.

Bran
leaving our stabilization system is deposited on a food-grade conveyor that tempers the
product and reduces moisture content. We call this bran RiceX Bran. This RiceX
Bran is then discharged onto the cooling unit. A high volume, low-pressure airflow further
dehumidifies and cools the RiceX Bran as it moves forward. The cooled RiceX Bran is then
loaded into one ton shipping containers for transportation to other processing facilities
or is transported by pneumatic conveyor to a bagging unit for packaging in 30, 40, 50 and
2,000 pound sacks. RiceX Bran has a shelf life of at least one year and is rich in
tocopherols, tocotrienols, oryzanols, a complete and balanced amino acid profile and other
nutritional and natural compounds that exhibit positive health properties.

The
RiceX Process system is modular. Each stabilization module can process approximately 2,000
pounds of RiceX Bran per hour and has a capacity of over 5,700 tons per year.
Stabilization production capacity can be doubled or tripled by installing additional RiceX
Company units sharing a common conveyor and stage system, which can handle the output of
the worlds largest rice mills. We have developed and tested a smaller production
unit, which has a maximum production capacity of 840 tons per year, for installation in
countries or locations where rice mills are substantially smaller than those in the United
States.

The
processing conditions created by the RiceX Process are unique. However, the ancillary
equipment used to achieve these processing conditions is in wide use throughout the food
industry. It is in the stabilizer unit that our proprietary technology resides; all of the
other processing, material handling, control, and storage components are off-the-shelf
equipment items.

# BENEFITS OF RICEX
STABILIZED RICE BRAN

Rice
bran is a rich source of protein, oil, vitamins, antioxidants, dietary fiber and other
nutrients. The approximate composition and caloric content of RiceX Stabilized Rice Bran
is as follows:

# RICEX STABILIZED RICE
BRAN COMPOSITION

|                    | 
|------------------- | 
|Fat                 | 
|Protein             | 
|Total Dietary Fiber | 
|Soluble Fiber       | 
|Moisture            | 
|Ash                 | 
|Calories            | 

Rice
bran is unique in the plant kingdom. Its protein is hypoallergenic and contains all of the
essential amino acids, the necessary building blocks of protein in the body. Rice bran
contains approximately 20% oil, which closely resembles peanut oil in fatty acid
composition and heat stability. Rice bran oil contains essential fatty acids and a broad
range of nutraceutical compounds that have been demonstrated to have therapeutic
properties. (See Cheruvanky and Raghuram, 1991 Journal of the American College of
Nutrition, Vol. 10, No. 4, pp. 593-691.)

Nutraceuticals
are food constituents that have human therapeutic effects. Some of these compounds include
a newly discovered complex of Vitamin E called tocotrienols, and gamma
oryzanol, which is only found in rice. These compounds are potent antioxidants that have
been shown to aid in reducing damage from free radicals in the body. RiceX Bran also
contains very high levels of B-complex vitamins, betacarotene (a vitamin A precursor),
other carotenoids and phytosterols, as well as both soluble and insoluble fiber. (See
Saunders, 1990, Rice Bran Oil, presented at Calorie Control Council Meeting, February 14,
1990, Washington, D.C.)

We
have been assigned five U.S. patents relating to the production or use of nutraceutical
HVF products. See PATENTS AND TRADEMARKS below.

8



# BUSINESS STRATEGY

Our
goal is to become the worlds leading producer and distributor of stabilized rice
bran and rice bran based products in the premium consumer food and animal feed sectors of
the marketplace. We produce stabilized rice bran and related products in manufacturing
facilities we own or through joint venture arrangements. See SUPPLY AND MANUFACTURING
below. We intend to protect our process and products through both trade secret protection
and through patent and trademark protection. See PATENTS AND TRADEMARKS below.

We
believe that clinical support for stabilized rice bran products will further enhance the
value of our products as nutraceuticals and functional food ingredients. Finally, we
intend to aggressively market our products in four distinct product areas. These areas are
nutraceuticals, functional food ingredients, performance feed and companion pet food
supplements, and rice bran oils. In further pursuit of this goal, we have focused and will
continue to focus our marketing and development efforts in developed regions, including
the U.S., Europe, South Africa, Argentina, Japan, Korea and Taiwan; and in developing
regions, including in Central and South America, India, China, Indonesia and most of the
other countries in Asia and Africa.

# DEVELOPED NATIONS

In
developed nations, our focus is on producing and selling ingredients to large consumer
product marketers as health enhancing ingredients for existing or newly developed
products, and as stand-alone products to consumers. In addition, we have continued
relationships with Korean, German and other European companies to introduce our products
into these regions. Although there can be no assurance that our products will be
successfully introduced into these regions, we believe that interest of this type
validates the potential opportunity. In addition, we believe that the relationship
reflects the strategy for our foreign ventures. We intend to seek other opportunities in
developed nations by converting stabilized rice bran grown in those countries into
finished goods and into HVFs with demonstrated health or nutritional benefits.

# DEVELOPING NATIONS

Our
strategic development has been focused on making our nutrient-dense stabilized rice bran
products available to developing countries where nutritional deficiencies are a major
concern, particularly among school-aged children. We remain on the cutting edge in
developing nations by reducing malnutrition and enhancing nutritional growth potential
school-aged children. The school nutritional and diet upgrading programs in developing
countries worldwide represent a $30 to $35 million market opportunity for us. The Food and
Agriculture Organization of the United Nations and the Foreign Agricultural Service of the
United States Department of Agriculture have targeted over 800 million nutritionally
deficient humans for assistance in the worldwide program titled American Special
Supplemental Food Programs for Women, Infants and Children.

Our
first international strategic alliance was established in December 2000 with PRODESA and
the Christian Childrens Fund in Guatemala. Under this alliance, we supplied
nutritionally dense ingredients throughout Guatemala over a twelve-month period starting
in January 2001. As a result, our stabilized rice bran product, RiceX Solubles, has been
used as a base for a nutritionally enhanced drink for school breakfast and lunch programs to
over 67,000 children in rural communities throughout Guatemala. The twelve-month program
in Guatemala was highly successful in reducing malnutrition in school age children and
enhancing their nutritional growth potential. This proof-of-concept program in Guatemala
generated nearly $2,300,000 in revenues for us for the year ended December 31, 2001. In
2002, El Salvadors Ministry of Education in San Salvador purchased our stabilized
rice bran product, RiceX Solubles, for applications in its school nutrition programs for
El Salvadorian children. The agreement, which follows the similar program of Guatemala,
resulted in revenues of approximately $1,000,000 for the year ended December 31, 2002.
Other similar programs in the region resulted in receiving payment for RiceX Solubles of
approximately $600,000 in December 2003, and recognizing the revenue during the calendar
year 2004.

We
are in the process of broadening our presence in the international markets. Building on
our year 2001 successful proof-of-concept program in Guatemala, we continue to develop
and expand international market development activities in Central America. We have two
program approaches, 1) year-to-year applications and 2) multi-year self sustaining
programs. The year-to-year applications approach calls for direct sales contracts
financed in part through the United States governments Public Law 416 program. The
multi-year self sustaining strategy will require funding from the USAID programs,
philanthropic contributions and joint participation by the host

9



country government. We believe that
product sales and shipments will continue and expand into Central American countries
during 2005 and beyond.

We
continue to work with major rescue and relief agencies, congressional supporters and
government offices of the USDA and the United States Agency for International Development
to bring a multi-year program to provide nutritional drinks to one million children each
school day from a RiceX facility located within the Central American region. We have
secured a financing commitment from Overseas Private Investment Corporation to assist in
funding the facility. However, there can be no assurance that this financial commitment
will lead to building a facility in the Central American region.

We
also intend to partner with local governments and companies in developing nations, on a
joint venture basis, to stabilize locally grown rice bran for local consumption and for
future export. We plan to introduce our stabilization process systems in large rice mills
located in Central and South America, China, India and Southeast Asia in the future. In
many developing nations, the average person has a 300-500 calorie daily diet deficit. (See
The Food and Agriculture Organization of the United Nations (FAO), Agrostat PC, on
diskette (FAO, Rome, 12993); and the World Resources Institute in collaboration with the
United Nations Environment Programme and the United Nations Development Programme, World
Resources 1994-95 (Oxford University Press; New York, 1994), p. 108.) If we are able to
expand into these areas, the installation of 100 RiceX processing systems has the capacity
to provide up to 500 nutritionally dense calories per day to over 15 million people each
year. The diet supplement provided by the locally grown and stabilized rice bran would
help those people approach U.S. levels of nutrition.

We
have had preliminary discussions regarding the demonstration of our system and the end
products for our technology with a number of companies and governments including countries
in Central America, India, China, Argentina, Brazil, Malaysia and certain African
countries. However, there can be no assurance that these discussions will lead to
implementation of the RiceX Process with these companies or governments.

# SALES AND MARKETING

We
have targeted four distinct product areas in which RiceX Bran and related products may be
used as the primary ingredient. Our key marketing strategy is to form strategic alliances
with industry leaders in each of our target markets. This strategy will allow us to
leverage the research, marketing and distribution strengths of our partners in order to
more economically and efficiently introduce and market products. We have formed alliances,
or have entered into negotiations to form alliances, in each of our target markets, which
are nutraceuticals, functional food ingredients, performance feed and companion pet food
supplements.

Our
overall marketing plans in each of the target markets are discussed below.

# NUTRACEUTICALS

Nutraceuticals
are food-derived substances with pharmaceutical-like properties, including vitamins and
dietary supplements. RiceX Bran can be used as a nutraceutical to provide certain specific
nutrients or food components (including antioxidants, oryzanols, Vitamin E, Vitamin B, and
bran fiber) or to address specific health applications such as cardiovascular health,
diabetes control, fighting free radicals and general nutritional supplementation. We have
sold RiceX Bran products as ingredients to consumer nutrition and healthcare companies,
national nutritional retailers, and multi-level personal product marketers. However, there
can be no assurance that such marketing efforts will be successful or that any of the
proposed products will be developed in a commercially reasonable time or at all.

# FUNCTIONAL FOOD
INGREDIENTS

RiceX
Bran is a low cost, all natural food product that contains a unique combination of oil,
protein, carbohydrates, vitamins, minerals, fibers, and antioxidants that can be used to
enhance the nutritional value of popular consumer products. Foods that are ideally suited
for the addition of RiceX Bran to their products include cereals, snack foods and breads.
We are marketing RiceX Bran to consumer food companies for use in already established
products and for development of new products.

10



The
functional food market in the United States is $16 billion and we estimate that this
represents a $35 to $45 million market share opportunity for us. Premium ingredient
manufacturers are in high demand and we are strategically positioned to take advantage of
this growing and sustainable market opportunity. Our proprietary technology and product
patents represent extremely valuable assets for achieving strategic leverage in this
industry segment.

# PERFORMANCE FEED AND
COMPANION PET FOOD SUPPLEMENTS

We
also market RiceX Bran as a feed supplement for animals. RiceX Bran is used as an equine
feed supplement and has proven to provide greater muscle mass, improved stamina, and
hair-coat luster when added to a normal diet. Show and performance horses represent the
premium end of the equine market and present a $12 to $15 million market share opportunity
for our future revenue growth. During 2003, we launched our own equine supplement label
Max E Glo. In 2004, we entered into a distribution agreement with MannaPro, a
national feed distributor. We continued to hold numerous discussions with several major
domestic equine feed manufacturers and distributors. However, there can be no assurance
that these discussions will be successful.

# RICE BRAN OILS

Nutrient-rich
oil made from RiceX Stabilized Rice Bran has a high flash point, which provides a long fry
life and is not readily absorbed into food. The oil also maintains many of the nutritional
benefits of whole rice bran products, making it ideally suited for healthy salad and
cooking oils. We hold a patent on the process for obtaining micronutrient enriched rice
bran oil. There can be no assurance that any of our Stabilized Rice Bran Oil marketing
efforts will be successful.

# MARKETING METHODS

As
of March 4, 2005, we have an Executive Vice President of Sales and Marketing and two
domestic sales representatives. In addition, we have entered into agreements with PRODESA
for Central America markets, and Kreglinger Europe for the United Kingdom and Benelux
markets, for developing and marketing RiceX Bran products. We also continue to work to
develop additional significant alliances in efforts to increase our sales volume.

Pursuant
to the Stabilized Rice Bran Processing Sales and Marketing Agreement between Farmers
Rice Cooperative, or Farmers, a cooperative association organized under the California
Food and Agriculture Code, and us, dated May 1, 2002, Farmers has an exclusive license to
use our rice bran processing equipment for production of stabilized rice bran for sale to
a limited number of Farmers customers.

# CUSTOMERS

We
have in excess of 125 active customer accounts. For 2004, our major customers were Project
Concern International, Natural Glo, NutraCea, MannaPro and PGP International. We depended
on these customers for approximately 50% of all sales revenue during 2004. Loss of any of
these customers could have a material adverse effect on our business, financial condition
and results of operations.

# SUPPLY AND MANUFACTURING

We
purchase unstabilized rice bran from one major supplier, Farmers. Pursuant to our
agreement with Farmers, our stabilization machinery is physically attached to Farmers rice
processing plants and the rice bran by-product is directly transferred to our machinery
for stabilization without the need for shipping. The relationship with Farmers is
symbiotic, as the rice manufacturer searches for raw rice bran marketing channels while we
have ready access to unstabilized bran. Farmers is currently our only supplier of
unstabilized rice bran. We are seeking additional relationships with rice processors, both
in the United States and abroad as part of our overall business strategy. Our production
capacity currently stands at 1,500 tons per month. We believe suitable alternative supply
arrangements are readily available if needed, however, there can be no assurance that we
will be successful in securing additional supply agreements.

As
required, we ship RiceX Bran from our facility in California to our plant in Dillon,
Montana for further processing into RiceX Solubles, Dextrinized Rice Bran and RiceX Fiber
Complex. Current monthly production

11



capacity is approximately 50 tons of
RiceX Solubles, 50 tons of Dextrinized Rice Bran and 50 tons of RiceX Fiber Complex.
Additional equipment could more than double production capacity. We intend to acquire or
construct an additional processing facility when and if the demand for RiceX Solubles,
Dextrinized Rice Bran and RiceX Fiber Complex justifies expansion.

Every
food product that we manufacture is produced under published FDA and USDA regulations for
Good Manufacturing Practices. Our General Manager oversees quality control and
quality assurance testing. Product samples for each product code are analyzed for
microbiological adherence to a predetermined set of product specifications and each lot is
released only when it demonstrates its compliance with specifications.

# PATENTS AND TRADEMARKS

The
RiceX Process is an adaptation and refinement of standard food processing technology
applied to the stabilization of rice bran. We have chosen to treat the RiceX Process as a
trade secret and not to pursue process or process equipment patents on the original
processes. However, process improvements will be reviewed for future patent protection. We
believe that the unique products, and their biological effects, resulting from our
Stabilized Rice Bran are patentable. We also hold, among other things, patents to a method
to treat high cholesterol, to a method to treat diabetes and to a process for producing
HVF from stabilized rice bran. We have been assigned seven U.S. patents relating to the
production or use of Nutraceutical or HVF products. The patents include patent number
5,512,287 PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT, which issued on
April 30, 1996; patent number 5,985,344 PROCESS FOR OBTAINING MICRONUTRIENT ENRICHED
RICE BRAN OIL, which issued on Nov. 16, 1999; patent number 6,126,943 METHOD
FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND ATHEROSCLEROSIS, which issued
on Oct. 3, 2000; patent number 6,303,586 B1 SUPPORTIVE THERAPY FOR DIABETES,
HYPERGLYCEMIA AND HYPOGLYCEMIA, which issued on Oct. 15, 2001, patent number
6,350,473 B1 METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND
ATHEROSCLEROSIS, which issued on Feb. 26, 2002; patent number6,558,714-B2 A
METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND ATHEROSCLEROSIS, which
issued on May 6, 2003; and patent number 6,773,799-B2 A METHOD FOR TREATING
HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND ATHEROSCLEROSIS, which issued on May 11,
2004. We plan to apply for additional patents in the future as new products, treatments
and uses are developed.

RiceX
and RiceX Solubles are our registered trade names. Mirachol®, Max
E® and Max E Glo® are our registered trademarks. We also
hold patents to a method to treat high cholesterol, to a method to treat diabetes and to a
process for producing HVF from stabilized rice bran.

We
endeavor to protect our intellectual property rights through patents, trademarks, trade
secrets and other measures. However, there can be no assurance that we will be able to
protect our technology adequately or that competitors will not develop similar technology.
There can be no assurance that any patent application we may file will be issued or that
foreign intellectual property laws will protect our intellectual property rights. Other
companies and inventors may receive patents that contain claims applicable to our system
and processes. The use of our systems covered by such patents could require licenses that
may not be available on acceptable terms, if at all. In addition, there can be no
assurance that patent applications will result in issued patents.

Although
there currently are no pending claims or lawsuits against us regarding possible
infringement claims, 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 true, will not have a material adverse
affect on our 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 such litigation could result in
substantial cost and diversion of our resources, which could have a material adverse
effect on our financial condition and results of operations. Adverse determinations in
such litigation could result in the loss of our proprietary rights, subject 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 effect on our financial condition and results of operations. In addition,
there can be no assurance that a license under a third partys intellectual property
rights will be available on reasonable terms, if at all.

12



# COMPETITION

Although
we believe that we are the only company to use non-chemical methods to stabilize all
natural rice bran so that the bran has a shelf life of over one year, we compete with
other companies attempting to stabilize rice bran, as well as companies producing other
food ingredients and nutritional supplements. We believe that our only significant
competitor is Producers Rice Mill. This competitor may have greater capital
resources than us; however, we believe that we have more experience in the rice bran
industry. However, there can be no assurance that we will be able to compete successfully
in the rice bran industry. We believe that our major nutritional supplement competitors
include producers of wheat bran and oat bran, particularly in the functional food
ingredients market segment.

# RESEARCH AND DEVELOPMENT

Rice
bran contains a wide variety of antioxidants, vitamins and other nutrients associated with
good health and resistance to disease. We have conducted a preliminary clinical evaluation
that indicates RiceX products have efficacy in the nutritional management of certain
conditions and diseases, such as diabetes mellitus and coronary vascular disease. Data
from this study has been analyzed and the data supports the initiation of clinical trials.
We intend to vigorously conduct these trials and, if successful, will develop foods
containing the active nutraceutical components of RiceX Bran to manufacture products
targeted at specific conditions or suitable for the maintenance of general health and
well-being. However, there can be no assurance that the results of additional clinical
trials will prove successful or that we will be able to develop additional new products.
See RISK FACTORS GOVERNMENTAL REGULATIONS below.

Expenditures
for research and development for the years ended December 31, 2004 and 2003 totaled
$224,000 and $226,000, respectively. We expect to continue research and development
expenditures to establish the scientific basis for health claims of existing products and
to develop new products and applications.

# EMPLOYEES

As
of March 4, 2005, we had a total of 12 employees, all of whom were full time employees.
Our employee count may change periodically. From year to year we experience normal
variable labor fluctuation at our production facility in Dillon Montana. We believe that
our relations with our employees are good.

# RISK FACTORS

# LIMITED OPERATING HISTORY

There
is limited historical financial information about us upon which to base an evaluation of
our performance or to make a decision regarding an investment in shares of our common
stock. Although we were originally formed in May 1989, commercial manufacturing operations
and marketing efforts did not commence until June 1996. We reported net losses of $883,000
and $1,292,000 for the years ended December 31, 2004 and 2003, respectively. We generated
$295,000 in cash for the year ended December 31, 2003 and used $1,184,000 for the year
ended December, 31 2004. We have shareholders equity of $1,784,000 and aggregated
cash and cash equivalents of approximately $1,035,000 at December 31, 2004. Our management
team has developed a strategic and financially sound business plan to meet the ongoing
liquidity needs of our operations for the year ended December 31, 2005 and thereafter. We
believe we have positioned ourselves to become the foremost premium ingredient supplier in
the food manufacturing and animal feed sectors. However, 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 absence of an operating history.
Therefore, there can be no assurance that our business or products will be successful or
that we will be able to achieve or maintain profitable operations. However, there can be
no assurance that we will not encounter unforeseen difficulties that may deplete our
capital resources more rapidly than anticipated.

# MARKET RISKS OF A NEW
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

13



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 and 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.

# 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. Many of
our competitors have greater financial, managerial, and technical resources than we do. If
we are not successful in competing in these markets, we may not be able to attain our
business objectives.

# GOVERNMENTAL REGULATION

The
processing, formulation, packaging, labeling and advertising of our products is subject to
regulation by one or more federal agencies. Although Congress has recognized the potential
impact of dietary supplements in promoting the health of U.S. citizens by enacting the
Dietary Supplement Health Education Act of 1994, or DSHEA, which severely limits the
FDAs jurisdiction in regulating dietary supplements, there is no way to predict the
potential effect of DSHEA. It may be difficult for any company manufacturing or marketing
dietary supplements to remain in strict compliance with the technical requirements of
DSHEA.

# RELIANCE ON LIMITED
NUMBER OF PRODUCTS

All
of our products are based on stabilized rice bran. Although we will market rice bran as a
dietary supplement, as an active food ingredient for inclusion 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.

# RELIANCE ON ADEQUATE
SUPPLY OF RAW RICE BRAN

Our
proprietary technology is used to stabilize rice bran, which is a by-product from milling
paddy rice to white rice. We currently have a supply arrangement with one of the largest
rice mills in the United States. We are pursuing other supply sources in the United States
and in foreign countries. 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.

# DEPENDENCE ON 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 its marketing and advertising efforts and there can
be no assurance that these efforts will be successful.

# DEPENDENCE ON KEY
EMPLOYEES

We
believe that our success will depend, to a significant extent, upon the efforts and
abilities of the current group of executives, strategic alliance and joint venture
partners. The loss of the services of one or more of these key personnel or partners could
have a material adverse affect on our business, financial condition and results of
operations. In addition, our future success will depend upon our ability to continue to
attract and retain qualified management personnel. We are in the process of searching for
a permanent Chief Executive Officer, or CEO to replace our interim CEO. See Part III
 Item 10 SEPARATION AGREEMENTS However, there can be no assurance that we will be
successful in attracting and retaining such personnel.

14



# PATENTS, LICENSES AND
INTELLECTUAL PROPERTY CLAIMS

Our
success depends in part on our ability to obtain patents, licenses and other intellectual
property rights for our products and technology. We have seven United States patents and we
may decide to file corresponding international applications. We hold patents to the
production of Beta Glucan and to a micro nutrient enriched rice bran oil process. We also
hold patents to a method to treat high cholesterol, to a method to treat diabetes and to a
process for producing HVF 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 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.

# THIN MARKET; POSSIBLE
VOLATILITY OF STOCK PRICE

Our
common stock has been traded on the OTC Bulletin Board since May 1996 under the symbol
RICX. We believe that many factors could cause the price of our common stock
to fluctuate, perhaps substantially, including:

| |  |  | announcements
of developments related to our business,
| | - |  | ------------------------------------------------------

| |  |  | fluctuations
in our quarterly or annual operating results,
| | - |  | ----------------------------------------------------------

| |  |  | failure
to meet securities analysts', or public expectations,
| | - |  | -------------------------------------------------------------

| |  |  | general
conditions in the international marketplace and the worldwide economy,
| | - |  | ------------------------------------------------------------------------------

| |  |  | announcements
of technological innovations or new systems or enhancements by us or our competitors,
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | developments
in patents or other intellectual property rights, and
| | - |  | ------------------------------------------------------------------

| |  |  | developments
in our relationships with customers and suppliers.
| | - |  | ---------------------------------------------------------------

# ANTI-TAKEOVER EFFECT OF
CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW

Under
our Certificate of Incorporation, our Board of Directors, or Board, has the authority,
without action by our stockholders, to fix certain terms of, and to issue, shares of
preferred stock. We are incorporated under Delaware law. Certain provisions of our
Certificate of Incorporation and certain provisions of Delaware law may have the effect of
delaying, deterring or preventing a change in control of our company. Other provisions in
our Certificate of Incorporation and Bylaws, and Delaware law, impose procedural and other
requirements that could make it more difficult to effect certain corporate actions,
including replacing incumbent directors. Furthermore, our Board is divided into three
classes of directors. Each class of directors serves for a staggered three-year term after

15



the initial classification and
election. This may make it more difficult for a third party to gain control of our Board.
By virtue of these provisions, our Board may be able to take or prevent actions affecting
unaffiliated stockholders without such stockholdersapproval or consent. In
addition, these provisions may adversely affect the market price of our common stock and
reduce the possibility that an investor may receive a premium for his or her shares in a
tender offer. See Part III  Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS.

|Item 2. |  | DESCRIPTION
OF PROPERTY.
|------- |  | ------------------------

We
currently lease a 5,600 square foot office facility at 1241 Hawks Flight Court, El
Dorado Hills, California, a 2,000 square foot office facility at 1901 Conant Avenue,
Burly, Idaho and a 17,000 square foot warehouse facility at 1755 Enterprise Boulevard,
West Sacramento, California. Our subsidiary, RiceX Nutrients, Inc. (formally Food
Extrusion, Montana), owns a 15,700 square foot production facility in Dillon, Montana. The
lease for the El Dorado Hills facility expires in September 2006. The lease for our
offices in Burley, Idaho expires in May 2009 and the lease for our West Sacramento,
California warehouse facility is on a month to month basis. We have aggregate annual lease
payments for all the facilities approximating $109,000, net of sub-lease payment
collections approximating $76,000 per year. In November 1999, we entered into a sub-lease
agreement with a company, NutraCea (formally NutraStar), for a portion (10,080 square
feet) of the facility located at 1261 Hawks Flight Court, El Dorado Hills,
California. The sub-lease with NutraCea expires in September 2006.

We
believe that our facilities are adequate for our anticipated needs through 2005 and that
the properties are adequately covered by insurance.

|Item 3. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------

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

|Item 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- |  | ----------------------------------------------------

There
were no matters submitted to our security holders for a vote during the quarter ended
December 31, 2004.

# PART II

|Item 5. |  | MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES.
|------- |  | ---------------------------------------------------------------------------------------------------------------

The
principal United States market for our common stock is the OTC Bulletin Board. These
quotations reflect inter-dealer process, without retail mark-up, mark-down or commissions
and may not represent actual transactions. The following table sets forth the range of
high and low sales prices reported by the OTC Bulletin Board for our common stock for the
periods indicated:

|COMMON STOCK   | HIGH | LOW
|-------------- | ---- | ---
|2004           |      |    
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    
|               |      |    
|2003           |      |    
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    

There were approximately 265 holders
of record of our common stock as of March 4, 2005.

16



# DIVIDENDS

We
have neither paid, nor declared, any dividends since our inception. We do not intend to
declare any such dividends in the foreseeable future. Our ability to pay dividends is
subject to limitations imposed by Delaware law and, as a quasi-California corporation, to
the more restrictive provision of California law. Under Delaware law, dividends may be
paid to the extent that a corporations assets exceed its liabilities and it is able
to pay its debts as they become due in the usual course of business. California law
generally prohibits a corporation from paying dividends unless the retained earnings of
the corporation immediately prior to the distribution exceed the amount of the
distribution. Alternatively, California law allows for a corporation to pay dividends if
the assets of the corporation exceed 1 1/4 times its liabilities, and the current assets
of the corporation equal or exceed its current liabilities. However, if the average
pre-tax earnings of the corporation before interest expense for the two years preceding
the distribution was less than the average interest expense of the corporation for those
years, the current assets of the corporation must exceed 1 1/4 times its current
liabilities.

# SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES

In
April 2004, the Board of Directors approved an agreement authorizing us to purchase
1,346,964 common shares of our own stock and 3,030,669 warrants in a private transaction.
This was the only purchase transaction this year through the period ended June 31, 2004.
We paid $270,007 for the shares and warrants at an average cost of $0.20 per share.

|                                                                                                                                                                                                                                                                                                 |  |  | Total NumberOf Shares | Maximum Number
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | --------------------- | --------------
|
|
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|1/1/04 - 3/31/04                                                                                                                                                                                                                                                                                 |  |  |                       | -             
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|4/1/04 - 6/30/04                                                                                                                                                                                                                                                                                 |  |  |                       | 1,346,964     
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|7/1/04 - 9/30/04                                                                                                                                                                                                                                                                                 |  |  |                       | -             
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|10/1/04 - 12/31/04                                                                                                                                                                                                                                                                               |  |  |                       | -             
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|Total                                                                                                                                                                                                                                                                                            |  |  |                       | 1,346,964     
|                                                                                                                                                                                                                                                                                                
|(1)    
          On April 1, 2004 the Company purchased 1,346,964 shares of its common stock,
          1,346,964 Class I warrants to purchase common stock, 673,482 Class II warrants
          to purchase common stock, and 1,010,223 Class III warrants to purchase common
          stock.

# RECENT SALES OF
UNREGISTERED SECURITIES

During 2004,
2003 and 2002, we did not issue or sell any shares of our common stock.

17



|Item 6. |  | MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|------- |  | ---------------------------------------------------------

The
following is a discussion of our consolidated financial condition as of December 31, 2004
and the results of operations for the fiscal years ended December 31, 2004, 2003 and 2002,
which should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements and notes thereto included elsewhere in this report.

# CRITICAL ACCOUNTING
POLICIES

A
summary of our significant accounting policies is included in Note 1 to our Notes to
Consolidated Financial Statements. We believe the application of these accounting policies
on a consistent basis enables us to provide timely and reliable financial information
about our earnings results, financial condition and cash flows.

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. Our 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. Our 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 inventories.

# Revenue Recognition

Revenues
from product sales are recognized when products are shipped and when the risk of loss has
transferred to the buyer. Deposits are deferred until either the product has shipped or
conditions relating to the sale have been substantially performed.

# Allowance for Doubtful
Accounts

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. While such credit losses have historically not exceeded our
expectations and the provisions established, there is a risk that credit losses in the
future will exceed those that have occurred in the past, in which case our operating
results would be adversely affected.

# Inventory Valuation

Inventories
are stated at lower of cost or market determined on a first-in, first-out basis. The costs
associated with the milling process are allocated to inventory.

# EXECUTIVE SUMMARY

# 2004 Highlights

| |  |  | Domestic
Market Revenue  Total revenues were up by $499,000, or 14%, in 2004 on a
comparative basis to last year. In 2003, we experienced a successful launch of a new
product label, Max E Glo that carried over into 2004 in the equine market. In
connection therewith, we have teamed up with nine national and regional distributors to
distribute Max E Glo to the United States and Canada. In 2004, sales increased in our
Stabilized Rice Bran (SRB) Regular, SRB Fine, and SRB Fiber product lines. We added a new
product line in 2004, SRB Dextrinized. SRB Dextrinized sales of $82,000 equaled 2% of
total sales in 2004. Total SRB Regular sales increased $231,000, or 14%, which includes
human SRB Regular and animal SRB Regular, compared to last year. Our total SRB Fine sales
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



| | increased
$32,000, or 9%, with an increase of $97,000 sold into the functional foods market. Our
SRB Fine sales to the specialty equine market decreased $64,000 in 2004 comparatively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Domestic
Animal Products Animal product sales, mainly to the equine market, rose 19%.
| | - |  | --------------------------------------------------------------------------------------

| |  |  | International
Market Revenue  We were successful in receiving a direct purchase sales contract in
December 2003, which was financed in part through the United States governments
Public Law 416b programs for Central America. We received pre-payment of $539,000 in
December 2003 for this order. The revenue for this purchase was recognized in 2004 when
the shipments were received in Guatemala.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2004 Challenges

| |  |  | Domestic
Market Revenue  Total SRB Solubles revenue was down $469,000 due mostly to
decreased demand from one major customer. We also experienced decreases in human SRB
Regular of $60,000 and animal SRB Fine of $64,000 compared to last year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Domestic
Functional Foods  We experienced a decrease of 13% in functional food sales in 2004
of $298,000 primarily attributed to slow sales to one major customer.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | International
Market Revenue  Two applications for direct purchase sales contracts financed in
part through the United States governments Public Law 416b were submitted to the
United States Department of Agriculture for the 2004  2005 fiscal years. One
application was for Guatemala, the other for Honduras. Both applications were not
approved by USDA due to a massive reduction in non-fat dry milk supply in the United
States. The PL416(b) program allows for donationsof US surplus non-fat dry milk solids to Private
Voluntary Organizations (PVO). The PVO in turn can sell the milk solids in the open market in the destination country
and use the proceeds for purchases of US produced commodities like RiceX solubles. The huge
US surplus of non-fat dry milk has been eliminated as a result of world dairy prices exceeding US dairy support prices.
Therefore, the USDA has sold its surplus into the world market and has not been required to purchase new inventories.
The USDA currently has no surplus inventory or plans to offer non-fat dry milk into the Food Aid channel through PL416(b) programs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Selling, general and administrative, or SG&A
Cost Reduction Efforts  We expected to reduce SG&A costs in 2004 by 20%, however our SG&A increased by 13%. We
were unable to reach expectations primarily because of non-recurring expenses related to
the severance of two executives in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Cash
Balance and Cash Flow  Our cash balance at December 31, 2004 was $1,035,000, a
decrease of $1,184,000. For the year ended December 31, 2004, cash was used for operating
activities totaling $868,000 on a reported net loss of $883,000. Cash was used for
investing activities totaling $46,000, and cash was used for financing activities in the
amount of $270,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2005 Expectations

| |  |  | Revenue
growth  We expect to build on our positive efforts and momentum into the domestic
human functional foods market. We anticipate an 11% increase in pounds sold for domestic
functional foods. We project increases in our domestic animal market, an increase of
approximately 4 million pounds, or 75%. This increase is projected to include sales from
a major customer, increased sales from our recent new product launch, and overall
increased awareness of stabilized rice bran into the equine market in the United States
and Canada. Anticipated sales to Central America in 2005 will be at about $500,000, or
2004 level. Direct purchases of RiceX Solubles for a nutrition program for
pregnant/lactating mothers and children 0-3 years of age in Guatemala has been proposed
to the Government of Guatemala with funding from a PL416 Government-to-Government award.
The proposal, if accepted would fund approximately $500,000 in RiceX solubles purchases
in 2005-2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Price
pressure  We experienced price pressure in the equine market in 2003 and 2004 and
anticipate similar price pressure in the equine market in 2005 as rice bran products have
emerged from certain competitors during 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | SG&A
cost reduction  We expect to trim overall SG&A,
expenses by $650,000, or 20%, in 2005. This will be accomplished by implementing budgetary spending controls and monitoring by management.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following highlights our financial data for December 31, 2004, 2003 and 2002.
| | ---------------------------------------------------------------------------------

# Selected Financial
Summary (in thousands except share
data)

|Consolidated Operating Results               | 2004 | 2003 | 2002
|-------------------------------------------- | ---- | ---- | ----
|Revenue                                      |      |      | $   
|Gross margin                                 |      |      |     
|Percent of revenue                           |      |      |     
|Research and development expenses            |      |      |     
|Selling, general and administrative expenses |      |      |     
|Stock option and warrant expense             |      |      |     
|Professional and investor relations fees     |      |      |     
|Bad debt recovery                            |      |      |     
|Net (loss) income                            |      |      | $   
|(Loss) earnings per share                    |      |      |     

19



|Weighted average number of shares outstanding |  |  |  | 37,061,240 |  |  | 38,301,484 |  |  | 38,792,194 | 
|--------------------------------------------- |  |  |  | ---------- |  |  | ---------- |  |  | ---------- | 

|Consolidated Balance Sheets                  | 2004 | 2003 | 2002
|-------------------------------------------- | ---- | ---- | ----
|Cash and cash equivalents                    |      |      | $   
|Total assets                                 |      |      |     
|Accounts payable and accrued liabilities     |      |      |     
|Deferred revenue, advance payments           |      |      |     
|Shareholders' equity                         |      |      | $   
|Number of shares outstanding at December 31, |      |      |     
|                                             |      |      |     

We
have developed a strategic and financially sound business plan to meet our ongoing
liquidity needs for the year ended December 31, 2005 and thereafter. The operating plan
includes improved gross margins from reduced costs by improved production efficiencies and
product sales mix and by increased sales and expanded marketing efforts domestically and
internationally. These current year changes in strategic plans related to marketing
efforts, production efficiencies and spending controls are expected to facilitate
increased liquidity. For a complete understanding of these activities, this
Managements Discussion and Analysis should be read in conjunction with Part I 
Item 1. DESCRIPTION OF BUSINESS and Part II  Item 7. FINANCIAL STATEMENTS of this
Annual Report on Form 10-KSB.

# YEAR ENDED DECEMBER 31,
2004 AND DECEMBER 31, 2003

Consolidated
revenues for the year ended December 31, 2004 were $4,010,000, an increase of $499,000, or
14% on a comparative basis to the year ended December 31, 2003. We experienced an increase
of $303,000 in sales to our domestic animal SRB Regular and an increase to our human SRB
Fine markets of $97,000 compared to the year ended December 31, 2003. We also had
increased sales in domestic SRB Fiber of $71,000. Central American Solubles sales
increased $539,000 from zero sales last year internationally. We added the SRB Dextrinized
product line in 2004, which produced $82,000 in sales for the year ended December 31,
2004. We experienced decreases in human SRB Regular of $60,000, animal SRB Fine of
$64,000, and domestic SRB Solubles of $469,000, compared to the same period last year.

Gross
margins for the year ended December 31, 2004 were $2,354,000, or 59%, compared to
$1,646,000, or 47%, during the same period last year. The increase in percentage as well
as gross margin dollars of $708,000 was the result of increased sales of $499,000 and
decreased cost of sales of $209,000. The decrease in cost of sales was mostly the result
of production efficiencies and decreased depreciation costs of production equipment at our
Montana manufacturing facility. Gross margins on our different products vary widely and
the gross margins are impacted from period to period by sales mix and utilization of
production capacity.

Research
and development, or R&D, expenses decreased $2,000, to $224,000 for the year ended
December 31, 2004, compared to the same period in 2003. The change in R&D expenses is
mostly due to reduced activity in research and development. R&D expenses were mostly
based on allocating SG&A costs dedicated to research personnel and process research.

SG&A
expenses were $2,465,000 for the year ended December 31, 2004, an increase of $284,000.
The increase was due primarily to employee costs related to an accrual for severance
expenses of two executives that resigned from the Company. Adding to SG&A expenses was
$101,000 of commission expenses related to shipments to Central America and a portion
relating to marketing to the equine market. We put back 130,000 shares of Preferred
Stock priced at $1 per share in the amount of $130,000 per a Put Agreement to NutraCea,
Inc., a related party, and sold 60,000 shares of NutraCea, Inc. common stock offsetting
SG&A expenses by approximately $181,000. Because of NutraCea Inc.s financial
position at the time the Put Agreement was entered into and common stock was received, we
booked an allowance for loss on investment of $190,000.

Professional
fees increased $62,000, to a total of $502,000 for the year ended December 31, 2004
compared to last year. The increase is primarily due to higher legal fees from increased
general corporate legal activity in 2004.

Investor
relations fees decreased $42,000, to a total of $62,000 for the year ended December
31, 2004. The decrease was primarily associated with expenses related to an investor
relations firm and web page design work

20



performed and paid for in 2003.
Investor relations fees this year included expenses related to printing and
distribution of our annual report, annual meeting costs, and costs related to SEC
reporting requirements.

We
had a net loss of $883,000 for the year ended December 31, 2004, or $0.02 per share,
compared to $1,292,000 for 2003, or $.03 per share. The net loss improvement of $410,000
was due to increased total revenues, better utilization of production capacity, and an
increase in higher margin SRB Solubles sales internationally through year ended December
31, 2004. This improvement was offset by $250,000 in additional employee expenses related
to the severance of two executives but was increased by related party debt recovery of
approximately $181,000. There were positive trends in our domestic animal SRB Regular
product line sold to the equine market, domestic functional food product lines of human
SRB Fine, SRB Fiber, and SRB Dextrinized, and sales to Central America of our SRB
Solubles.

The
provision of income taxes for the years ended December 31, 2004 and 2003 consists of the $1,650 minimum state
income tax.

Deferred
taxes arise from temporary differences in the recognition of certain expenses for tax and
financial statement purposes. At December 31, 2004, management determined that realization
of these benefits is not assured and has provided a valuation allowance for the entire
amount of such benefits. At December 31, 2004, net operating loss carryforwards were
approximately $14,510,000 for federal tax purposes that expire at various dates from 2011
through 2025 and $10,782,000 for state tax purposes that expire in 2005 through 2014.

Utilization
of net operating loss carryforwards may be subject to substantial annual limitations due
to the change in ownership provisions of the Internal Revenue Code and similar
state regulations. The annual limitation may result in expiration of net operating loss
carryforwards before utilization.

# YEAR ENDED DECEMBER 31,
2003 AND DECEMBER 31, 2002

Consolidated
revenues for the year ended December 31, 2003 were $3,511,000, a decrease of $1,872,000,
or 35% on a comparative basis to year ended December 31, 2002. We experienced an increase
of $76,000 in sales to our domestic human SRB Regular and Fine markets and an increase of
$81,000 to our domestic animal SRB Fine market, while sales from our domestic SRB Regular
and Central American Solubles markets as well as our domestic Fiber market decreased
$2,029,000 in total during the year ended December 31, 2003, to equal a net decrease in
revenues of $1,872,000 compared to the same period in 2002.

Gross
margins for the year ended December 31, 2003 were $1,646,000, or 47%, compared to
$3,277,000, or 61%, during the same period in 2002. The decrease in percentage as well as
gross margin dollars was the result of decreased sales in all but one product category
(SRB Fine), product sales mix and unabsorbed costs at our Montana manufacturing facility.
Gross margins on our different products vary widely and the gross margins are impacted
from period to period by sales mix and utilization of production capacity. We experienced
a drop in sales of our higher margin product lines. We also experienced unfavorable price
pressure in our SRB Regular equine market, attributable to emerging competition in 2003.

Research
and development, or R&D, expenses decreased $41,000, to $226,000 for the year ended
December 31, 2003 compared to the same period in 2002. The change in R&D expenses is
mostly due to the reduced activity in research and development. R&D expenses were
mostly based on allocating SG&A costs dedicated to research personnel and process research.

SG&A
expenses were $2,174,000 for the year ended December 31, 2003, an increase of $145,000.
The increase was due primarily to expenses relating to our expanding sales and marketing
functions. Included was $101,000 of commission expense related to a Central American
purchase order and a portion related to marketing to the equine market and product launch
in July 2003. This increase had been anticipated by management based upon their 2003
business development plan.

Professional
fees decreased $57,000, to $440,000, for the year ended December 31, 2003, compared to
2002. The decrease is primarily due to lower legal fees from reduced general corporate
legal activity in 2003, and

21



reduced consulting fees, mainly from
discontinuing the retention of a sales consultant after the expiration of a consulting
agreement ended in January 2003.

Investor
relations fees increased $12,000, to $104,000, for the year ended December 31, 2003.
The increase was primarily associated with expenses related to an investor relations firm
and web page design work performed and paid for in 2003. Investor relations fees
this year included expenses related to printing and distribution of our annual report, SEC
reporting requirements and expenses related to finalizing the purchase and control of our
web site files.

We
had a net loss of $1,292,000 for the year ended December 31, 2003, or $0.03 per share,
compared to $374,000 for 2002, or $.01 per share. The net loss is due to decreased total
revenues, lower utilization of production capacity, effects of unfavorable price pressure
in the equine market, decreases in domestic Solubles sales, and no sales to Central
America through the year ended December 31, 2003. There were positive trends in our
domestic functional food product lines as well as our domestic SRB Fine product line
distributed to the equine market.

The
provision of income taxes on the statements of income consists of a $1,650 minimum state
income tax. The California net operating losses have been suspended for 2002 and 2003,
which caused us in 2002 to prepay but subsequently receive a refund on actual income
versus projected income. Our provision for 2003 is $15,000 for the year ended December 31,
2003, which was booked as prepaid expenses. We expect a refund of this provision except
for a California State corporate income tax minimum of $1,650 in 2004.

Deferred
taxes arise from temporary differences in the recognition of certain expenses for tax and
financial statement purposes. At December 31, 2003, management determined that realization
of these benefits is not assured and has provided a valuation allowance for the entire
amount of such benefits. At December 31, 2003, net operating loss carryforwards were
approximately $12,500,000 for federal tax purposes that expire at various dates from 2011
through 2024 and $8,800,000 for state tax purposes that expire in 2004 through 2013.

Utilization
of net operating loss carryforwards may be subject to substantial annual limitations due
to the change in ownership provisions of the Internal Revenue Code and similar
state regulations. The annual limitation may result in expiration of net operating loss
carryforwards before utilization.

# LIQUIDITY AND CAPITAL
RESOURCES

For
the year ended December 31, 2004, our cash balance decreased by $1,184,000, compared to
the same period last year. Our cash balance at December 31, 2004 was $1,035,000, down from
$2,219,000 at December 31, 2003. Our cash position has not required cash from financing
activities in order to fund operations since retiring all of our long term debt in 2000.
Management believes our cash reserve is adequate to meet future operating requirements.

In
April 2004, the Board of Directors approved an agreement authorizing us to purchase
1,346,964 common shares of our own stock and 3,030,669 warrants in a private transaction.
This was the only purchase transaction through the period ended December 31, 2004. We paid
$270,007 for the shares and warrants at an average cost of $0.20 per share.

We
are in the process of broadening our presence in the international markets. Building on
year 2001 successful proof-of-concept program in Guatemala, we continue to develop and
expand international market development activities in Central America. We have two program
approaches, 1) year-to-year applications and 2) multi-year self sustaining programs. The
year-to-year applications approach calls for direct sales contracts financed in part
through the United States governments Public Law 416 program. The multi-year self
sustaining strategy will require funding from the USAID programs, philanthropic
contributions and joint participation by the host country government. We believe that
product sales and shipments will continue and expand into Central American countries
during 2005 and beyond.

We
are working with major rescue and relief agencies, congressional supporters and government
offices of the USDA and the United States Agency for International Development to bring a
multi-year program to provide nutritional drinks to one million children each school day
from a RiceX facility located within the Central American region. We have secured a
financing commitment from Overseas Private Investment Corporation to assist in funding the
facility. However, there can be no assurance that this financial commitment will lead to
building a facility in the Central American region.

22



We
have had preliminary discussions regarding the demonstration of our system and the end
products for our technology with a number of companies and governments including countries
in Central America, India, China, Argentina, Brazil, Malaysia and certain African
countries. However, there can be no assurance that these discussions will lead to
implementation of the RiceX Process with these companies or governments.

We
also continue to initiate strategic alliance discussions to identify and formulate
potential joint venture opportunities with domestic equine feed manufacturers and
distributors, including new, creative long-term supply arrangements.  Domestic
markets for these segments currently represent a potential opportunity of over $250
million annually.  While we anticipate new opportunities in this field through the
cultivation of strategic alliances, we cannot be certain that we will be able to secure
and retain such alliances.

We
also have initiated a marketing transition in our domestic functional food business. 
Our marketing staff actively cultivates substantial new product development projects
underway with key strategic allies and customers.  Several of these customers are
launching new food and beverage products this year that will include RiceX products. 
The customers include nationally recognized baked goods, beverage, nutritional supplement
and ready to eat food manufacturing companies. These market segments currently
represent multimillion dollar potential market opportunities, although we can offer no
assurances that we will be able to capture such opportunities.

These
efforts could significantly increase demand for our products beyond our current production
capacity.  While we believe we can increase our production capacity to meet sales
demand, significant additional capital could be required to meet such expansion
requirements.  We have sufficient cash reserves to meet all anticipated short-term
operating requirements.  However, the timing and amount of any long-term capital
requirements cannot be predicted at this time.

23



|Item 7. |  | FINANCIAL
STATEMENTS.
|------- |  | ---------------------

# THE RICEX COMPANY INDEX TO FINANCIAL
STATEMENTS

|                                                             | Page 
|------------------------------------------------------------ | -----
|Reports of Independent Registered Public Accounting Firms    | 25-26
|                                                            
|Financial Statements                                         |      
|                                                            
|Consolidated Balance Sheets as of December 31, 2004 and 2003 | 27   
|Consolidated Statements of Operations                       
|for the years ended December 31, 2004 and 2003               | 28   
|Consolidated Statement of Shareholders' Equity              
|as of December 31, 2004 and 2003                             | 29   
|Consolidated Statements of Cash Flows                       
|for the years ended December 31, 2004 and 2003               | 30   
|Notes to Consolidated Financial Statements                   | 31   

24



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of DirectorsThe RiceX Company

We have audited the accompanying
consolidated balance sheet of The RiceX Company and Subsidiary (the Company) as of
December 31, 2004 and the related consolidated statements of operations,
shareholders equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of The RiceX Company and Subsidiary as of December 31, 2004, and the
results of their consolidated operations and their consolidated cash flows for the year
then ended in conformity with U.S. generally accepted accounting principles.

/s/ Perry-Smith LLP

Sacramento, CaliforniaMarch 4, 2005

25



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors The RiceX Company

We have audited the accompanying
consolidated balance sheets of The RiceX Company and Subsidiary (the Company) as of
December 31, 2003, and the related consolidated statements of operations,
shareholders equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of The RiceX Company and Subsidiary as of December 31, 2003, and the
results of their consolidated operations and their consolidated cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of
America.

/s/ Moss Adams LLP

Stockton, CaliforniaFebruary 20, 2004

26



# THE RICEX COMPANY CONSOLIDATED BALANCE
SHEETS

# ASSETS

|                                            | DECEMBER 31, | 
|------------------------------------------- | ------------ | 
|
|CURRENT ASSETS:                             |              | 
|Cash and cash equivalents                   |              | 
|Trade accounts receivable, net of allowance |              | 
|for doubtful accounts, $20,000 in 2004      |              | 
|and 2003                                    |              | 
|Inventories                                 |              | 
|Deposits and other current assets           |              | 
|                                            |              | 
|Total current assets                        |              | 
|                                           
|PROPERTY AND EQUIPMENT, net                 |              | 
|OTHER ASSETS, net                           |              | 
|                                            |              | 
|                                           
|                                            |              | 
|                                            |              | 

# LIABILITIES AND
SHAREHOLDERS' EQUITY

|                                              |  | 
|--------------------------------------------- |  | 
|CURRENT LIABILITIES:                          |  | 
|Accounts payable and accrued liabilities      |  | 
|Deferred revenue                              |  | 
|                                              |  | 
|Total current liabilities                     |  | 
|                                             
|COMMITMENTS AND CONTINGENCIES                 |  | 
|                                             
|SHAREHOLDERS' EQUITY                          |  | 
|Preferred stock, par value $.00l per share,   |  | 
|10,000,000 shares authorized,                 |  | 
|no shares issued and outstanding              |  | 
|Common stock, par value $.001 per share,      |  | 
|100,000,000 shares authorized, 36,713,274 and |  | 
|38,060,238 shares issued and outstanding in   |  | 
|2004 and 2003, respectively                   |  | 
|Additional paid-in capital                    |  | 
|Accumulated deficit                           |  | 
|                                              |  | 
|                                             
|                                             
|Total shareholders' equity                    |  | 
|                                              |  | 
|                                             
|                                              |  | 
|                                              |  | 

The accompanying notes
are an integral part of these statements.

27



# THE RICEX COMPANY CONSOLIDATED
STATEMENTS OF OPERATIONS

|                                              | YEARS ENDED DECEMBER 31, | 
|--------------------------------------------- | ------------------------ | 
|
|REVENUES:                                     |                          | 
|Sales                                         |                          | 
|                                              |                          | 
|                                             
|TOTAL REVENUES                                |                          | 
|                                             
|COST OF SALES                                 |                          | 
|                                              |                          | 
|                                             
|GROSS MARGINS                                 |                          | 
|                                             
|RESEARCH AND DEVELOPMENT EXPENSES             |                          | 
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  |                          | 
|STOCK OPTION AND WARRANT EXPENSE              |                          | 
|INVESTOR RELATIONS                            |                          | 
|PROFESSIONAL FEES                             |                          | 
|                                              |                          | 
|                                             
|Loss from operations                          |                          | 
|                                             
|OTHER INCOME (EXPENSE):                       |                          | 
|Interest and other income                     |                          | 
|                                              |                          | 
|                                             
|Loss before income taxes                      |                          | 
|                                             
|INCOME TAX expense                            |                          | 
|                                              |                          | 
|                                             
|Net loss                                      |                          | 
|                                              |                          | 
|                                             
|BASIC AND DILUTED EARNINGS PER SHARE,         |                          | 
|Net loss per share                            |                          | 
|                                              |                          | 
|                                             
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                          | 
|                                              |                          | 

The accompanying notes
are an integral part of these statements.

28



# THE RICEX COMPANY CONSOLIDATED STATEMENT
OF SHAREHOLDERS EQUITY

YEARS ENDED DECEMBER
31, 2004 AND 2003

|                           | Common Stock |  | AdditionalPaid-In |            | Accumu-lated |   | DeferredExpensesRelated toEquity |   | TotalShare-holders' |           
|-------------------------- | ------------ |  | ----------------- | ---------- | ------------ | - | -------------------------------- | - | ------------------- | ----------
|
|Balance, January 1, 2003   |              |  |                   | 38,680,724 |              | $ | 38,681                           |   | $                   | 29,315,287
|                          
|                          
|Stock repurchase           |              |  |                   | (620,486   | )            |   | (621                             | ) |                     | (163,859  
|                          
|Amortization of warrants   |              | 
|issued to former employees |              |  |                   | -          |              |   | -                                |   |                     | 3,000     
|                          
|Amortization of warrants   |              | 
|issued for consulting fees |              |  |                   | -          |              |   | -                                |   |                     | -         
|                          
|Net loss for the year      |              |  |                   | -          |              |   | -                                |   |                     | -         
|                           |              |  |                   |            |              |   |                                  |   |                     |           
|                          
|Balance, December 31, 2003 |              |  |                   | 38,060,238 |              |   | 38,060                           |   |                     | 29,154,428
|                          
|                          
|                          
|Stock repurchase           |              |  |                   | (1,346,964 | )            |   | (1,346                           | ) |                     | (268,661  
|                          
|Amortization of warrants   |              | 
|issued to employees        |              |  |                   | -          |              |   | -                                |   |                     | 15,000    
|                          
|Net loss for the year      |              |  |                   | -          |              |   | -                                |   |                     | -         
|                           |              |  |                   |            |              |   |                                  |   |                     |           
|                          
|Balance, December 31, 2004 |              |  |                   | 36,713,274 |              | $ | 36,714                           |   | $                   | 28,900,767
|                           |              |  |                   |            |              |   |                                  |   |                     |           

The accompanying notes
are an integral part of these statements.

29



# THE RICEX COMPANY CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                       | YEARS ENDED DECEMBER 31, | 
|------------------------------------------------------ | ------------------------ | 
|
|CASH FLOW FROM OPERATING ACTIVITIES:                   |                          | 
|Net loss                                               |                          | 
|Adjustments to reconcile net loss to                   |                          | 
|net cash (used in) provided by operating activities:   |                          | 
|Depreciation and amortization                          |                          | 
|Amortization of shares and warrants issued             |                          | 
|for services, prepaid interest, and debt issuance cost |                          | 
|Net changes in operating assets and liabilities:       |                          | 
|Trade accounts receivable                              |                          | 
|Inventories                                            |                          | 
|Deposits and other current assets                      |                          | 
|Accounts payable and accrued liabilities               |                          | 
|Deferred revenue                                       |                          | 
|                                                       |                          | 
|                                                      
|Net cash from operating activities                     |                          | 
|                                                       |                          | 
|                                                      
|CASH FLOWS FROM INVESTING ACTIVITIES:                  |                          | 
|Purchases of property and equipment, and other assets  |                          | 
|                                                      
|Net cash from investing activities                     |                          | 
|                                                       |                          | 
|                                                      
|CASH FLOWS FROM FINANCING ACTIVITIES:                  |                          | 
|Repurchase of common stock and warrants                |                          | 
|                                                      
|Net cash from financing activities                     |                          | 
|                                                       |                          | 
|                                                      
|NET INCREASE IN CASH                                   |                          | 
|AND CASH EQUIVALENTS                                   |                          | 
|CASH AND CASH EQUIVALENTS, beginning of year           |                          | 
|                                                       |                          | 
|CASH AND CASH EQUIVALENTS, end of year                 |                          | 
|                                                       |                          | 

The accompanying notes
are an integral part of these statements.

30



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE 1 
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The
RiceX Company (RiceX), formerly Food Extrusion, Inc., was incorporated in
California in 1989 and in 1998 was reincorporated in Delaware and changed its name to The
RiceX Company. RiceX has a wholly owned subsidiary, RiceX Nutrients, Inc. (formally Food
Extrusion Montana, Inc.). The consolidated financial statements include the accounts of
RiceX and RiceX Nutrients (collectively the Company), after the elimination of
all inter-company balances and transactions.

The
Company is an agribusiness food technology company, which has developed a proprietary
process to stabilize rice bran. RiceX is headquartered in El Dorado Hills, California and
has stabilization equipment located at a rice mill in Northern California. The Company
purchases raw rice bran from the mill and mill employees, under Company supervision,
operate the Companys equipment to stabilize rice bran. The Company pays a processing
fee to the mill for this service. Under an agreement with the mill, the mill may use the
Companys equipment to stabilize rice bran for its customers in exchange for the
payment of a royalty fee to the Company. The Company intends to enter into additional
relationships with rice processors as part of its overall business strategy.

RiceX
Nutrients is engaged in the business of custom manufacturing grain-based products for food
ingredient companies at its production facility in Dillon, Montana. The facility has
specialized processing equipment and techniques for the treatment of grain products to
cook, enzyme treat, convert, isolate, dry and package finished food ingredients. The
soluble and fiber concentrate forms of the Companys rice bran products are produced
at the Montana facility.

The
processing, formulation, packaging, labeling and advertising of the Companys
products are subject to regulation by one or more federal agencies. Congress enacted the
Dietary Supplement Health Education Act of 1994 (DSHEA), which limits the
FDAs jurisdiction in regulating dietary supplements.

A
summary of the significant accounting principles and practices used in the preparation of
the consolidated financial statements follows:

Use
of estimates  The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Concentration
of credit risk  Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of trade accounts receivable
for sales to major customers. The Company performs credit evaluations on its
customers financial condition and generally does not require collateral on accounts
receivable. The Company maintains an allowance for doubtful accounts on its receivables
based upon expected collectibility of all accounts receivable. Uncollected accounts have
not been significant.

In
2004, three major customers each accounted for 13%, 12%, and 10% of sales, respectively.
Accounts receivable includes amounts due from three customers comprising of 17%, 14%, and
12% of the total outstanding.

In
2003, three major customers each accounted for 22%, 17%, and 7% of sales, respectively.
Accounts receivable includes amounts due from two customers comprising 29% and 24% of the
total outstanding.

31



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 1 
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash
and cash equivalents Cash equivalents consist of highly liquid investments with
an original or remaining maturity at the time of purchase of three months or less.

Allowance
for doubtful accounts  The Company provides an allowance for accounts receivable
it believes it may not collect in full. It evaluates collectibility of its accounts based
on a combination of factors. In circumstances where it is aware of a specific
customers inability to meet its financial obligations such as bankruptcy, it records
a specific reserve. For all other customers, the Company recognized reserves for bad debts
based on current and historical collection experience. Accounts receivable are considered
delinquent based on contractual terms. The Company does not charge interest on delinquent
accounts.

Inventories Inventories are stated at the lower of cost or market determined on a first-in,
first-out basis. The costs associated with the milling process are allocated to inventory.

Property
and equipment  Property and equipment are stated at cost. Depreciation or
amortization is computed on the straight-line method over the shorter of the estimated
life of the asset or the lease term, generally ranging from three to ten years. Upon sales
or retirement, the related cost and accumulated depreciation or amortization are removed
from the accounts and the resulting gain or loss, if any, is included in results of
operations. The cost of additions, improvements, and interest on construction are
capitalized, while maintenance and repairs are charged to operations when incurred.

The
estimated lives used in determining depreciation and amortization are:

|Buildings              | 10 years    | 
|---------------------- | ----------- | 
|                       |             | 
|Equipment              | 5 - 7 years | 
|                       |             | 
|Leasehold improvements | 7 years    
|                       |             | 
|Furniture and fixtures | 5 - 7 years | 
|                       |             | 

Deferred
expenses related to equity issuance  Costs incurred in connection with equity
issuances are deferred and are amortized over the terms of the related service.

Revenue
recognition  Revenues from product sales are recognized as products are shipped
and when the risk of loss has transferred to the buyer. Deposits are deferred until either
the product has shipped or conditions relating to the sale have been substantially
performed.

Shipping
and handling Shipping and handling expenses totaled $61,000 and $74,000 in 2004
and 2003 respectively and are captured in SG&A.

Research
and development  Research and development costs are expensed when incurred.

Stock
options  At December 31, 2004, the Company has one stock-based employee
compensation plan, which is described more fully in Note 6. The Company accounts for this
plan under the recognition and measurement principles of Accounting Principles Board
Opinions No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The amount of $15,000 stock-based employee compensation cost is reflected
in net income, as some options granted under those plans had an exercise price lower than
the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.

32



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 1 
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

|                                                   | DECEMBER 31, | 
|-------------------------------------------------- | ------------ | 
|
|Net loss, as reported                              |              | 
|Deduct:  Total stock-based employee                |              | 
|compensation expense determined                    |              | 
|under fair value based method for all awards       |              | 
|                                                   |              | 
|                                                  
|Pro forma net loss                                 |              | 
|                                                   |              | 
|                                                  
|Loss per share:                                    |              | 
|Basic and diluted net loss per share - as reported |              | 
|Basic and diluted net loss per share - pro forma   |              | 
|                                                  
|Weighted average fair value of options granted     |              | 
|to employees during the year                       |              | 

Net
loss per share  Basic net loss per share is computed based on the weighted
average number of shares of common stock outstanding during each period. Diluted loss
per share reflect the potential dilution that could occur if common shares were issued
pursuant to the exercise of options or warrants. For the years ended December 31, 2004 and
2003 there is no diffeence between basic and diluted loss per share, as there were no
dilutive stock options.

Income
taxes  Deferred income tax assets and liabilities result from the future tax
consequences associated with temporary differences between the carrying amounts and the
tax bases of assets and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not, that all, or some portion, of such
deferred tax assets will not be realized.

Accounting
for long-lived assets  Long-lived assets are recorded at the lower of amortized
cost or fair value. As part of an ongoing review of the valuation of long-lived assets,
management assesses the carrying value of such assets if facts and circumstances suggest
they may be impaired. If this review indicates that the carrying value of these assets may
not be recoverable, as determined by a non-discounted cash flow analysis over the
remaining useful life, the carrying value would be reduced to its estimated fair value.
There has been no impairment recognized in these consolidated financial statements.

Reclassifications
 Certain reclassifications have been made to the 2003 financial information to
conform to the 2004 presentation.

Recent
accounting pronouncements

Consolidation
of Variable Interest Entities (VIE).

In
January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities(VIE). It defined a VIE as a
corporation, partnership, trust, or any other legal structure used for the business
purpose that either a) does not have equity investors with voting rights or b) has equity
investors that do not provide sufficient financial resources for the entity to support its
activities. This interpretation will require a VIE to be consolidated or deconsolidated by
a company if that company is subject to a majority of the risk of loss from the VIEs
activities or entitled to receive a majority of the entitys residual return. Most of
the provisions of FIN 46 have been delayed until March 31, 2004. The Company does not have
any VIE and accordingly the implementation of FIN 46 will not have any impact on the
Companys financial position or results of operations.

33



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 1 
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent
accounting pronouncements (continued)

Amendment
of Statement 133 on Derivative Instruments and Hedging Activities.

Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

In
May 2003, FASB issued Statement No. 150 (Statement No. 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Statement No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously classified as
equity. Statement No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. Adoption of Statement No. 150 did not result in an
impact on the Companys statement of financial position or results of operations.

Share-Based
Payments

In
December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)),
Share-BasedPayments. FAS 123 (R) requires all entities to recognize compensation
expense in an amount equal to the fair value of share-based payments, such as stock
options, granted to employees. The company is required to apply FAS 123 (R) on a modified
prospective method. Under this method, the Company is required to record compensation
expense (as previous awards continue to vest) for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. In addition, the Company
may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing
the expense on that previously reported in their pro forma disclosures required by FAS
123. FAS 123 (R) is effective for the first reporting period beginning after June 15,
2005. Management has not completed its evaluation of the effect that FAS 123 (R) will
have, but believes that the effect will be consistent with its previous pro forma
disclosures.

Inventory
Costs

In
November 2004, the FASB issued Statement Number 151 (FAS 151), Inventory Costs. FAS
151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated
that . . . under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require treatment
as current period charges. . . . FAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so
abnormal. In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production
facilities. FAS 151 is effective for fiscal years beginning after June 15, 2005.
Management has not completed its evaluation of the effect that FAS 151 will have on the
Companys financial statements.

34



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 2  INVENTORY

Inventory
consists of the following:

|               |  | DECEMBER 31, |  
|-------------- |  | ------------ | -
|
|Finished goods |  |              | $
|Packaging      |  |              |  
|               |  |              |  
|               |  |              | $
|               |  |              |  

# NOTE 3  PROPERTY
AND EQUIPMENT

Property
and equipment consists of the following:

|                              | DECEMBER 31, | 
|----------------------------- | ------------ | 
|
|                             
|Land and buildings            |              | 
|Equipment                     |              | 
|Leasehold improvements        |              | 
|Furniture and fixtures        |              | 
|                              |              | 
|                              |              | 
|Less accumulated depreciation |              | 
|and amortization              |              | 
|                              |              | 
|                             
|                              |              | 
|                              |              | 

# NOTE 4  ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES

Accounts
payable and accrued liabilities consist of the following:

|                          | DECEMBER 31, | 
|------------------------- | ------------ | 
|
|                         
|Trade accounts payable    |              | 
|Other accrued liabilities |              | 
|Deferred revenue          |              | 
|                          |              | 
|                         
|                          |              | 
|                          |              | 

Included in
Other accrued liabilities at December is $250,000 for the severance cost of two executives
whose resignations from the Company were finalized in January 2005.

# NOTE 5 
COMMITMENTS AND CONTINGENCIES

The
Company leases office, laboratory and warehouse space under operating leases which expire
in 2006 and 2009. The Company has the unilateral right to terminate the facilities operating
leases with six months written notice. Rent expense under operating leases was
$77,350 and $59,577 for the years ended December 31, 2004 and 2003, respectively.

35



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 5 
COMMITMENTS AND CONTINGENCIES (continued)

The
following is a schedule of future minimum lease payments required under the above leases:

|Year ending December 31, | 
|------------------------ | 
|2005                     | 
|2006                     | 
|                         | 
|                        
|Total                    | 
|                         | 

Lease
expenses of $4,000 per month on a month by month basis for a warehouse facility in West
Sacramento, California are included in the 2005 and 2006 minimum lease payments.

# NOTE 6 
SHAREHOLDERS EQUITY

A.    
          Common and preferred stock.

In
conjunction with RiceXs re-incorporation in Delaware, the Company increased its
authorized number of common shares from 50,000,000 to 100,000,000, authorized 10,000,000
shares of preferred stock which may be issued from time to time, in one or more series,
and authorized its Board of Directors to establish the rights, preferences and privileges
of each such series, when issued. At December 31, 2004, an aggregate of 18,971,047 shares
of the Companys common stock was reserved for future issuance upon the exercise of
stock options and warrants.

B.    
          Stock issued for services.

None

C.    
          Conversion of debt to equity.

None

D.    
          Private placement.

During
2000, the Company issued 182,137 shares of common stock and warrants to purchase 182,137
shares of common stock for cash proceeds of $116,400 in conjunction with a $6 million
dollar private placement. The warrants, which expire three years from issue date, have an
exercise price for the first year of $1.00 per share, for the second year of $1.25 per
share and for the third year of $1.50 per share. As of December 31, 2003, all warrants
issued in conjunction with this private placement had expired.

E.    
          Repurchase of common stock.

In
2002, the Board of Directors approved resolutions authorizing the Company to repurchase up
to a total of $1,000,000 of its own stock on the open market for a period of one year. The
Company repurchased 620,486 shares of its own stock on the open market during the year
ended December 31, 2003.

In
April 2004, the Board of Directors approved an agreement authorizing us to purchase
1,346,964 common shares of our own stock and 3,030,669 warrants in a private transaction.
This was the only purchase transaction through the period ended December 31, 2004. We paid
$270,007 for the shares and warrants at an average cost of $0.20 per share.

36



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 6 
SHAREHOLDERS EQUITY (continued)

F.    
          Warrants and non-qualified stock options issued.

At
December 31, 2004, warrants and non-qualified stock options outstanding were as follows:

|Shares issuable under warrantsand non-qualified options |  | Number ofShares |   | Exercise PricePer Share |  | ExercisePeriod | 
|------------------------------------------------------- |  | --------------- | - | ----------------------- |  | -------------- | 
|                                                       
|Balance, January 1, 2003                                |  | 18,330,923      |   | $0.70 - $1.65           |  | 1 - 10 years   | 
|                                                       
|Cancelled during the year                               |  | (4,091,207      | ) | $0.75 - $1.50           |  | 3 - 5 years    | 
|                                                        |  |                 |   |                         |  |                | 
|                                                       
|Balance, December 31, 2003                              |  | 14,239,716      |   | $0.70 - $1.65           |  | 1 - 10 years   | 
|                                                       
|Issued during the year                                  |  | 75,000          |   | $0.18                   |  | 3 years        | 
|                                                       
|Expired during the year                                 |  | (25,000         | ) | $0.75                   |  | 5 years        | 
|                                                       
|Canceled during the year                                |  | (3,030,699      | ) | $0.70                   |  | 5 years        | 
|                                                        |  |                 |   |                         |  |                | 
|                                                       
|Balance, December 31, 2004                              |  | 11,259,047      |   | $0.18 - $1.65           |  | 3 - 10 years   | 
|                                                        |  |                 |   |                         |  |                | 

The
balances outstanding at December 31, 2004 and 2003 includes incentive warrants to purchase
6,030,582 and 7,714,287 shares, respectively, which are restricted from sale and or
transfer until such time when certain sales targets are achieved.

G.    
          Stock option plan.

The
Company has 10,000,000 shares of common stock reserved for grant to its officers,
directors and key employees under its stock option plan (the Plan). At
December 31, 2004, options to purchase 7,712,000 shares of common stock had been granted
under the Plan and 2,288,000 shares were available for future grants. Options granted
pursuant to the Plan have lives of 10 years from the date subject to earlier expiration in
certain cases, such as termination of the grantees employment. Options vest 1/3 on
the date of the grant, 1/3 on the first anniversary, and 1/3 on the second anniversary.
Stock option information is as follows:

|                                         | Number ofShares |  | Weighted-AverageExercisePrice |          
|---------------------------------------- | --------------- |  | ----------------------------- | ---------
|                                        
|Shares under option at January 1, 2003   |                 |  |                               | 6,849,000
|Granted                                  |                 |  |                               | 330,000  
|Forfeited                                |                 |  |                               | (196,000 
|                                         |                 |  |                               |          
|                                        
|Shares under option at December 31, 2003 |                 |  |                               | 6,983,000
|Granted                                  |                 |  |                               | 750,000  
|Forfeited                                |                 |  |                               | (21,000  
|                                         |                 |  |                               |          
|                                        
|Shares under option at December 31, 2004 |                 |  |                               | 7,712,000
|                                         |                 |  |                               |          
|                                        
|Options exercisable at December 31, 2004 |                 |  |                               | 7,220,333
|                                         |                 |  |                               |          

37



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 6 
SHAREHOLDERS EQUITY (continued)

The weighted average fair value of
the options granted in 2004 and 2003 were $0.21 and $0.15 respectively.

|             |  |             | Options Outstanding |              | Options Exercisable
|------------ |  | ----------- | ------------------- | ------------ | -------------------
|             |  |             |                     | Weighted     |                    
|             |  |             |                     | Average      |                    
|Range of     |  |             |                     | Remaining    |                    
|Exercise     |  | Number      |                     | Contractual  |                    
|Prices       |  | Outstanding |                     | Life (Years) |                    
|             |  |             |                     |              |                    
|$0.15-0.30   |  | 1,350,000   |                     | 8.40         |                    
|0.36-0.40    |  | 1,450,000   |                     | 6.71         |                    
|0.72-0.79    |  | 4,772,000   |                     | 4.68         |                    
|1.81         |  | 140,000     |                     | 3.69         |                    
|$.15 - $1.81 |  | 7,712,000   |                     | 6.91         |                    



# Pro Forma Information
related to Option Grants

Pro
forma information regarding net income and earnings per share is required by SFAS 123 for
awards granted after December 31, 1995, as if the Company had accounted for its
stock-based awards to employees under the fair value method of SFAS 123. The fair value of
the Companys stock-based awards to employees was estimated using a Black-Scholes
option pricing model. The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because the
Companys stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. The fair value of the Companys
options grants under the 1997 plan was estimated assuming no expected dividends and the
following weighted-average assumptions:

|                        | 2004 | 2003
|----------------------- | ---- | ----
|Expected life (years)   |      | 3   
|Expected volatility     |      | 104 
|Risk-free interest rate |      | 2.06

# NOTE 7  EMPLOYEE
BENEFIT PLAN

The
Company has a 401(k) plan, The RiceX Company 401(k) Profit Sharing Plan & Trust, which
requires an employee to have completed one year of service and attained the age of 21 to
participate in the plan. The Company contributes 3% of each employees salary
annually to the plan regardless of employee participation. Additionally, the Company may,
at its discretion, make additional employer contributions. In order to participate in the plan, the employee must work 1000
hours in and be employed on the last day of the plan year. Employees are immediately
vested in company contributions. Plan contributions amounted to $36,000 in 2004 and 2003.

38



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 8  RELATED
PARTY TRANSACTIONS

Ms. Patricia
McPeak, the spouse of Daniel L. McPeak, Sr., Chairman of the Board of           Directors
of the Company and its Chief Executive Officer until March 31, 2004,           served as
a director of the Company from its  formation in 1989 until the
expiration of her term on June 29, 2001. From February 1989 to March 2000, Ms. McPeak also
served as the President of the Company. Ms. McPeak, who resigned that position on March
31, 2000, retained her seat on Board of Directors until June 29, 2001, at which time her
term expired.

Ms.
          McPeak is an officer and director of NutraCea (formally NutraStar) a California
          corporation. NutraStar changed its name to NutraCea in November 2003. In late
          2001, the Company entered into an Exclusive Distribution Agreement and
Licensing           Agreement with NutraStar. This agreement was terminated in July 2002
for           NutraStars failure to meet certain performance requirements as
specified           in the Exclusive Distribution Agreement. Also during December 2001
the Company           agreed to cancel $190,000 of NutraStars indebtedness in
exchange for           190,000 shares of NutraStars Series A preferred stock.
Subsequently, in           2004, the Company put 130,000 shares back to NutraCea for
$130,000 under a put           provision and sold 60,000 shares in the open market for
$52,000. The Company has           recognized sales to NutraCea of $405,000 and $229,000
during 2004 and 2003,           respectively.

In
connection with the conversion of a $2,500,000 note to equity in 2000, the Company issued
common stock and warrants to two principle parties, one of which is GBV Intermark Fund,
LLC. The manager of this fund was appointed to the Companys Board of Directors in
October 2000 until the expiration of his term in June 2003. The shares of RiceX common
stock and warrants issued to GBV Intermark Fund, LLC, were acquired by Intermark Group
Holdings, LLC, on April 4, 2002 in a private transaction. The principle owner of Intermark
Group Holdings, LLC was elected to the Companys Board of Directors in June 2003. Mr.
Lintzenich remains on our Board.

# NOTE 9  INCOME
TAXES

The
provision for income taxes on the statements of income consists of $1,650 for the years
ended December 31, 2004 and 2003, respectively.

Deferred
tax assets (liabilities) are comprised of the following:

|                                | DECEMBER 31, | 
|------------------------------- | ------------ | 
|
|                               
|Net operating loss carryforward |              | 
|Options and warrants            |              | 
|Accrued reserves                |              | 
|Research costs                  |              | 
|Fixed assets                    |              | 
|Other                           |              | 
|                                |              | 
|                               
|                                |              | 
|Less valuation allowance        |              | 
|                                |              | 
|                               
|                                |              | 
|                                |              | 

39



# THE RICEX COMPANY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)

# NOTE 9  INCOME
TAXES (continued)

Deferred
taxes arise from temporary differences in the recognition of certain expenses for tax and
financial statement purposes. At December 31, 2004 and 2003, management determined that
realization of these benefits is not assured and has provided a valuation allowance for
the entire amount of such benefits. At December 31, 2004, net operating loss carryforwards
were approximately $14,510,000 for federal tax purposes that expire at various dates from
2011 through 2025 and $10,782,000 for state tax purposes that expire in 2005 through 2014.

Utilization
of net operating loss carryforwards may be subject to substantial annual limitations due
to the change in ownership provisions of the Internal Revenue Code of 1986, as
amended, and similar state regulations. The annual limitation may result in the expiration
of substantial net operating loss carryforwards before utilization.

The
provision for income taxes differs from the amount computed by applying the U.S. federal
statutory tax rate (34% in 2004 and 2003) to income before taxes as follows:

|                                        | DECEMBER 31, | 
|--------------------------------------- | ------------ | 
|
|                                       
|Computed expected tax                   |              | 
|Change in valuation allowance           |              | 
|Change in carryovers and tax attributes |              | 
|                                        |              | 
|                                       
|                                        |              | 
|                                        |              | 

# NOTE 10 
SUPPLEMENTAL CASH FLOW INFORMATION

|                                          | YEARS ENDED DECEMBER 31, | 
|----------------------------------------- | ------------------------ | 
|
|Non cash activities:                      |                          | 
|Amortization/issuance of common stock and |                          | 
|warrants for services                     |                          | 

# NOTE 11  FAIR
VALUE OF FINANCIAL INSTRUMENTS

The
fair value of the Companys financial instruments approximated carrying value at
December 31, 2004 and 2003. The Companys financial instruments include cash and
accounts receivable for which the carrying amount approximates fair value due to the short
maturity of the instruments.

|Item 8. |  | CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- |  | -------------------------------------------------------------------------------------

On
October 1, 2004, we dismissed Moss Adams LLP (Moss Adams) as our independent
auditors and engaged Perry-Smith LLP (Perry-Smith) as our independent auditors
effective October 4, 2004. Such decision to change independent auditors was approved
by our Board of Directors and by the Audit Committee of the Board of Directors.

During
the fiscal years ended December 31, 2003 and 2002 and the period from December 31, 2003
through the end of Moss Adams' engagement with the Company, there have been no
disagreements between the Company and Moss Adams on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moss Adams, would have caused it to
make

40



reference to the subject matter of
the disagreements in its report on the Company's financial statements for either of such
fiscal years, except the following:

| |  |  | In
connection with the audit of the Company's financial statements for the fiscal year ended
December 31, 2003, Moss Adams had a disagreement with the Company relating to the timing
of revenue recognition with respect to one of the Company's customer contracts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Audit Committee of the Board of Directors of the Company discussed the subject matter of
such disagreement with Moss Adams, and the matter was resolved to each party's
satisfaction prior to the filing of the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003. The Company has authorized Moss Adams to respond
fully to the inquiries of Perry-Smith, LLP concerning the subject matter of such
disagreement.

|Item 8A. |  | CONTROLS
AND PROCEDURES.
|-------- |  | ------------------------

Disclosure
Controls and Procedures.

We
carried out an evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the year covered by this report. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiary) that is required to be included in
our periodic reports.

Changes
in Internal Control Over Financial Reporting.

There
was no change in our internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

|Item 8B. |  | OTHER
INFORMATION.
|-------- |  | ------------------

None

# PART III

|Item 9. |  | DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|------- |  | ---------------------------------------------------

|NAME                      |  | AGE |  | POSITION                                               
|------------------------- |  | --- |  | -------------------------------------------------------
|Daniel L. McPeak, Sr. (1) |  | 70  |  | Class III Director, CEO, and Chairman of the Board     
|Terrence Barber (2)       |  | 51  |  | CEO, Class II Director                                 
|Kirit S. Kamdar (3)(4)    |  | 63  |  | Class I Director                                       
|Steven W. Saunders (3)    |  | 49  |  | Class I Director                                       
|James C. Lintzenich (4)   |  | 51  |  | Class II Director                                      
|Edward L. McMillan (3)    |  | 59  |  | Class III Director                                     
|Todd C. Crow (5)          |  | 56  |  | Class III Director, Vice President Finance & CFO       
|Ike E. Lynch (6)          |  | 60  |  | CEO & Vice President International Business Development
|Daniel L. McPeak, Jr.     |  | 45  |  | Vice President and General Manger                      
|Karen B. Halliburton (7)  |  | 37  |  | Vice President Global Strategic Operations             



_________________

| | (1) |  | Retired
as CEO effective March 31, 2004, remains the Chairman of the Board.
| | --- |  | ---------------------------------------------------------------------------

| | (2) |  | Appointed
CEO June 14, 2004, appointed Class II Director June 25,                     2004,
resigned both positions in January 2005.  For more information regarding Mr. Barbers
resignation, see Item 10.  EXECUTIVE COMPENSATION SEPARATION AGREEMENTS.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Member
of the Compensation Committee.
| | --- |  | -------------------------------------

| | (4) |  | Member
of the Audit Committee.
| | --- |  | ------------------------------

| | (5) |  | Director
until the expiration of his term, July 1, 2004.
| | --- |  | --------------------------------------------------------

| | (6) |  | Appointed
interim                     CEO in January 2005.
| | --- |  | ----------------------------------------------------------

| | (7) |  | Resigned
from the Company in January 2005.
| | --- |  | ------------------------------------------

41



# DIRECTORS AND EXECUTIVE
OFFICERS

DANIEL
L. MCPEAK. Mr. McPeak co-founded our company in February 1989 and has served as Chairman
of our Board since our formation. In November 1998, Mr. McPeak was re-appointed to act as
our Chief Executive Officer, or CEO. Mr. McPeak retired as our CEO in March 2004. Mr.
McPeak previously served as our CEO from May 1989 to April 1997. Mr. McPeak was re-elected
Class III Director July 2004 and will serve as a Class III Director until the next
election of Class III Directors in 2007. Mr. McPeak is the father of Daniel L. McPeak,
Jr., our Vice President and General Manager.

TERRENCE
BARBER. Mr. Barber was appointed as our CEO by the Board of Directors on June 14, 2004 and
appointed a Class II Director on June 28, 2004. He resigned both positions in January
2005. Mr. Barber formed Tenso Institute in 2003 and acted as its Chairman of the Board
until 2004 when he joined our Company. From 2001 to 2003, Mr. Barber served as President
of Stamford Group, an educational and economic development advisory firm. From 2000 to
2001, Mr. Barber served as Managing Director of Asia for the California State Offices of
Trade and Investment. From 1996 to 2000, Mr. Barber served as Executive Director of the
United States Agriculture Trade offices in Japan for the American Embassy. From 1994 to
1996, Mr. Barber was Senior Director of Strategic Planning, Evaluation and Compliance for
the United States Department of Agriculture Foreign Agricultural Services.

KIRIT
S. KAMDAR. Mr. Kamdar has served as a Class I Director of our Company since August 1998.
He will serve as a Class I Director until the next election of Class I Directors in 2005.
From January 1990 to September 1992, Mr. Kamdar also served as a director on our Board,
and from January 1990 to April 1994 as our Executive Vice President. Since July 1974, Mr.
Kamdar has been Chairman of the Board and Chief Executive Officer of Kamflex Corporation,
a manufacturing corporation.

STEVEN
W. SAUNDERS. Mr. Saunders has served as a Class I Director of our company since August
1998. He will serve as a Class I Director until the next election of Class I Directors in
2005. Mr. Saunders has been President of Saunders Construction, Inc., a commercial
construction firm, since February 7, 1991, and President of Warwick Corporation, a
business-consulting firm since 1991.

JAMES
C. LINTZENICH. Mr. Lintzenich has served as a Class II Director of our Company
since June 2003. He will serve as a Class II Director until the next election of Class II
Directors in 2006. From August 2000 to April 2001, Mr. Lintzenich served as President and
Chief Operating Officer of SLM Corporation (Sallie Mae), an educational loan institution.
From December 1982 to July 2000, Mr. Lintzenich held various senior management and
financial positions including Chief Executive Officer and Chief Financial Officer of USA
Group, Inc., a guarantor and servicer of educational loans. Mr. Lintzenich currently
serves on the Board of Directors of AdminaStar Federal, Inc., a subsidiary of WellPoint, a
Medicare contractor.

EDWARD
L. MCMILLAN. Mr. McMillan was elected as a Class III Director in July 2004 and will serve
as a Class III Director until the next election of Class III Directors in 2007. From
January 2000to the present, Mr. McMillan has owned and managed McMillan LLC, a
transaction consulting firm which provides strategic consulting services and facilitates
mergers and/or acquisitions predominantly to food and agribusiness industry sectors. From
June 1969 to December 1987 he was with Ralston Purina, Inc. and Purina Mills, Inc. where
he held various senior level management positions including marketing, strategic planning,
business development, product research, and business segment management. From January 1988
to March 1996, Mr. McMillan was President and CEO of Purina Mills, Inc. From August 1996
to July 1997, Mr. McMillan presented graduate seminars at Purdue University on strategic
planning and business valuation. From August 1997 to April 1999, he was with Agri Business
Group, Inc. Mr. McMillan currently serves on the boards of directors of Balchem, Inc.
(AMEX:BCP); Durvet, Inc.; Newco Enterprises, Inc.; CHB LLC; and Hintzsche, Inc. Mr.
McMillan also serves as Chair of the University of Illinois Research Park, LLC and the
University of Illinois Alumni Association.

TODD
C. CROW. Mr. Crow served as a Class III Director of our company from June 2001 until the
expiration of his term in July 2004. Mr. Crow joined us in May 1996 and has been our Vice
President of Finance and Chief Financial Officer since November 1998, and our Secretary
since January 1999. From September 1997 to November 1998, Mr. Crow was our Controller.
From May 1996 to September 1997, he was our Chief Financial Officer. Mr. Crow also served
as a director of our Company from June 1996 to January 1997. From 1989 until

42



joining us, Mr. Crow held senior
financial positions with the Morning Star Group, an agri-business holding company, and
Harter, Inc., a food-processing manufacturer.

IKE
E. LYNCH. Mr. Lynch currently serves as our CEO and Vice President of International
Business Development and since January 1997, President and Chief Operating Officer of our
subsidiary, RiceX Nutrients, Inc. From 1966 through 1982, Mr. Lynch was employed by the H.
J. Heinz Company in various management roles, culminating with the President and CEO
position of the Hubinger Company, a subsidiary of Heinz. In 1982, Mr. Lynch left Heinz to
become President and CEO of Dawn Enterprises LLC, specializing in Ethanol production and
marketing. Mr. Lynch left Dawn Enterprises in 1989 to form Centennial Foods, Incorporated,
where he served as President and Chief Executive Officer until our acquisition of
Centennial Foods in 1997.

DANIEL
L. MCPEAK, JR. Mr. McPeak joined our Company in July 1996 and has been our Vice President
and General Manager since November 1998. From July 1996 to July 1997, he served as
Director of Sales and Marketing, then moved to the position of Business Manager until
November 1998. From 1994 until joining us, Mr. McPeak served as Vice President of
Marketing for Fort Knox, Inc., a security products manufacturer. Daniel L. McPeak, Jr. is
the son of Daniel L. McPeak, Sr., our CEO and Chairman of the Board.

KAREN
B. HALLIBURTON. Ms. Halliburton joined our Company in July 2004 as the Vice President of
Global Strategic Operations. She resigned her position with our Company in January 2005.
From 2003 until she joined our Company, Ms. Halliburton co-founded Tenso Institute in 2003
and acted as its President. From 2002 to 2003, Ms. Halliburton served as Senior Market
Analyst for the United States Department of Agriculture Foreign Agricultural Services.
From 1999 to 2002, Ms. Halliburton was Deputy Director of the United States Agriculture
Trade Office for the American Embassy in Tokyo, Japan. In 1996, Ms. Halliburton was
awarded the Mansfield Fellowship by Mansfield Center for Public Affairs, representing the
United States Department of Agriculture to work towards enhancing long-term strategic and
commercial collaboration between the United States and Japan.

# BOARD OF DIRECTORS

Our
Board is classified into three classes, designated Class I, Class II and Class III. The
term of office of the initial Class I Directors expired at the first regularly scheduled
meeting of the stockholders following the effective date of our Certificate of
Incorporation (August 4, 1998). The term of office of the initial Class II Directors
expired at the second annual meeting of the stockholders following the effective date of
our Certificate of Incorporation. The term of office of the initial Class III Directors
expired at the third annual meeting of the stockholders following the effective date of
our Certificate of Incorporation. Presently, each of our directors holds office for a
three-year term. The classification of our Board has the effect of generally requiring at
least two annual stockholder meetings, instead of one, to replace a majority of the
members of our Board. There have been no material changes to the procedures by which
security holders may recommend nominees to our Board.

# BOARD COMMITTEES

Our
Board has established an Audit Committee and a Compensation Committee.

Our Audit
Committee, consisting of James C. Lintzenich and Kirit S. Kamdar, facilitates and
maintains open communications among our Board, our Audit Committee, senior management and
our independent auditors. Our Audit Committee also serves as an independent and objective
party to monitor our financial reporting process and internal control system. In addition,
our Audit Committee reviews and appraises the efforts of our independent auditors. Our
Audit Committee meets periodically with management and our independent auditors. The Audit
Committee held three meetings in fiscal year 2004 and all members participated. Our Board
has determined that the chair of our Audit Committee, Mr. Lintzenich, meets the Securities
and Exchange Commissions definition of audit committee financial expert. Mr.
Lintzenich is independent, as such term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Securities Exchange Act of 1934, as amended.

Our
Compensation Committee, consisting of Kirit S. Kamdar, Steven W. Saunders, and Edward L.
McMillan, establishes salary, incentive and other forms of compensation for our CEO, and
administers our 1997 Stock Option Plan. Our Compensation Committee meets periodically with
management and our independent auditors. The Compensation Committee held two meeting in
fiscal year 2004.

43



# SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

Based
upon a review of our records, we are not aware of any of our officers, directors or
beneficial owners of more than 10% of our securities that failed to timely file one or
more reports disclosing beneficial ownership of our securities as required under Section
16(a) of the Securities Exchange Act of 1934, as amended, during the fiscal year ended
December 31, 2004.

# CODE OF ETHICS

We
have a Code of Ethics that applies to our chief executive officer, our chief financial
officer and our principal accounting officer, as well as to other senior management and
senior financial staff of our company, and complies with the requirements imposed by the
Sarbanes-Oxley Act of 2002 and the rules issued thereunder for codes of ethics applicable
to such officers. Our Board has reviewed and will continue to evaluate its role and
responsibilities with respect to the new legislative and other requirements of the
Securities and Exchange Commission. Interested persons can obtain a copy of our Code of
Ethics, without charge and upon request, by writing to: Investor Relations c/o The RiceX
Company, 1241 Hawks Flight Court, El Dorado Hills, California 95762.

|Item 10. |  | EXECUTIVE
COMPENSATION.
|-------- |  | -----------------------

The
following table sets forth the total compensation for our CEO and each of our current
executive officers whose total salaries and bonuses for fiscal 2002, 2003 and 2004
exceeded $100,000. We refer collectively to these executives as the Named Executive
Officers.

# SUMMARY COMPENSATION
TABLE

|                                           |  |      | Annual Compensation |        | Long Term Compensation |                          | All Other Compensation |        
|------------------------------------------ |  | ---- | ------------------- | ------ | ---------------------- | ------------------------ | ---------------------- | -------
|Name & Principal Position                  |  | Year |                     | Salary |                        | Other AnnualCompensation |                        | Awards 
|SecuritiesUnderlying Options/SARs (#)     
|Daniel L. McPeak, Sr. (1)                  |  | 2004 |                     | $      | 202,000                | (2)                      |                        | 50,000 
|Chairman of the Board                      |  | 2003 |                     | $      | 269,000                | (2)                      |                        |       
|Chief Executive Officer                    |  | 2002 |                     | $      | 269,000                | (2)                      |                        | 175,000
|                                           |  |      |                     |        |                        |                          |                        |        
|Terrence Barber (3)                        |  | 2004 |                     | $      | 108,000                | (2)                      |                        | 300,000
|Chief Executive Officer                    |  |      |                     |        |                        |                          |                        |        
|                                           |  |      |                     |        |                        |                          |                        |        
|Ike E. Lynch (5)                           |  | 2004 |                     | $      | 95,000                 | (2)                      |                        |       
|CEO, VP International Business Development |  | 2003 |                     | $      | 149,000                | (2)                      |                        |       
|                                           |  | 2002 |                     | $      | 149,000                | (2)                      |                        | 125,000
|                                           |  |      |                     |        |                        |                          |                        |        
|                                           |  |      |                     |        |                        |                          |                        |        
|Todd C. Crow (6)                           |  | 2004 |                     | $      | 156,000                | (2)                      |                        |       
|Chief Financial Officer                    |  | 2003 |                     | $      | 149,000                | (2)                      |                        |       
|                                           |  | 2002 |                     | $      | 149,000                | (2)                      |                        | 175,000
|                                           |  |      |                     |        |                        |                          |                        |        
|Daniel L. McPeak, Jr. (7)                  |  | 2004 |                     | $      | 156,000                | (2)                      |                        |       
|Executive VP,                              |  | 2003 |                     | $      | 149,000                | (2)                      |                        |       
|General Manager                            |  | 2002 |                     | $      | 149,000                | (2)                      |                        | 125,000
|                                           |  |      |                     |        |                        |                          |                        |        
|                                           |  |      |                     |        |                        |                          |                        |        

_________________

|(1) | Mr. McPeak was CEO from May 1989 to April 1997 and from November 1998 to March
          31, 2004, at which time he retired from the office of CEO. He remains our
          Chairman of the Board.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



|(2) | Other Annual Compensation is less than 10% of Salary.
|--- | -----------------------------------------------------

|(3) | Mr.
Barber was appointed CEO and held that office from June 2004 and resigned
          January 2005.
|--- | -----------------------------------------------------------------------------------------------------

|(4) | Represents
severance payments.
|--- | ------------------------------

|(5) | In
May 2004, Mr. Lynch           reduced his responsibilities and his annual employment
compensation base salary           to $36,000 and to focus primarily on international
business development. In           January 2005 and upon Mr. Barbers resignation,
Mr. Lynch was appointed           CEO.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Mr.
Crow was Chief Financial Officer from May 1996 to September 1997 and from
          November 1998 to present.
|--- | -----------------------------------------------------------------------------------------------------------------

|(7) | Mr.
McPeak, Jr. was Vice President of Sales and           Marketing from July 1996 to October
1997 and from November 1998 to present Executive Vice President, General Manager.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# OPTION ACTIVITY IN 2004
TO EXECUTIVES

The
following table sets forth for each of the Named Executive Officers certain information
concerning stock options activity granted during 2004.

# OPTION/SAR GRANTS IN
LAST FISCAL YEAR (Individual Grants)

|Name                  |  | Number ofSecuritiesUnderlyingOptions/SARsGranted (#) |  | Percent of TotalOptions/SARsGranted toEmployees inFiscal Year |  | ExercisePrice($/Sh) |        | MarketPrice($/Sh) |  | ExpirationDate | 
|--------------------- |  | ---------------------------------------------------- |  | ------------------------------------------------------------- |  | ------------------- | ------ | ----------------- |  | -------------- | 
|Daniel L. McPeak, Sr. |  | 50,000(1)                                            |  | 9.1%                                                          |  |                     | $ 0.29 |                   |  | $ 0.29         | 
|Terrence Barber       |  | 300,000(2)                                           |  | 54.5%                                                         |  |                     | $ 0.15 |                   |  | $ 0.18         | 

_________________

|(1) |  | Options were granted in accordance with our Director Compensation Program on
               July 1, 2004. The 50,000 option shares vest over twelve months.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Options were granted as required by Mr. Barbers employment agreement on
               June 25, 2004. One third of the option shares were fully vested and exercisable
               at $0.15 per share upon date of grant. One third of the option shares vest and
               become exercisable at $0.15 per share on the first anniversary of the date of
               grant. One third of the option shares vest and become exercisable at $0.15 per
               share on the second anniversary of the date of grant.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# STOCK OPTION EXERCISES
AND YEAR-END VALUE TABLE

The
table below reflects the number of shares covered by both exercisable and non-exercisable
stock options as of December 31, 2004 for the Named Executive Officers. Values for
in-the-money options represent the position spread between the exercise price
of existing options and the market value for our common stock on December 31, 2004.

|Name        |  | SharesAcquired onExercise (#) |  | ValueRealized ($) |  | Number ofUnexercised Options |  | Value of UnexercisedIn-the-Money Options | 
|----------- |  | ----------------------------- |  | ----------------- |  | ---------------------------- |  | ---------------------------------------- | 
|Exercisable |  | Unexercisable                 |  | Exercisable       |  | Unexercisable               
|None        |  |                               |  |                   |  |                              |  |                                          | 

# DIRECTOR COMPENSATION

On
July 9, 1997, our Board adopted a non-employee director compensation plan pursuant to
which non-employee directors are compensated. Under the terms of the plan, non-employee
directors receive a $15,000 annual retainer, which is paid in annual installments for
participation at up to six meetings of our Board. Non-employee directors also receive an
immediately exercisable, nonqualified stock option to purchase 50,000 shares of our common
stock, which is granted upon appointment to our Board. In addition, non-employee directors
also receive

45



an immediately exercisable,
nonqualified stock option to purchase 15,000 shares of our common stock to be granted on
the day of each annual stockholdersmeeting during the non-employee directors
service on our Board. The options are to be granted as free-standing options and not
under the 1997 Stock Option Plan. The exercise price is the fair market value of a share
of our common stock on the date of grant. Directors are also reimbursed for reasonable
expenses incurred in attending meetings of our Board and Board committees.

On
April 27, 1999, our Board voted to temporarily suspend the grant of options and the
payment of the annual retainer to members of our Board. The annual retainer remains
suspended.

Effective
February 22, 2001, the options program was reinstated and amended. The amendments include
issuing options to purchase 50,000 shares of our common stock to each Board member on the
anniversary of their appointment as a Board member. These options are to be granted under
the 1997 Stock Option Plan. The options will be fully vested at the end of one year.
Should a member leave prior to 100 percent vesting, the option shares will be prorated to
the vested period.

# EMPLOYMENT AGREEMENTS

MCPEAK,
SR. EMPLOYMENT AGREEMENT. We entered into an Employment Agreement with Daniel L. McPeak,
Sr. in April 2000, pursuant to which Mr. McPeak agreed to serve as Chairman of our Board,
and as our CEO. The employment agreement provided that Mr. McPeak would receive an annual
base salary of $250,000. The agreement originally was set to terminate on March 31, 2003,
unless Mr. McPeaks employment was terminated earlier. In April 2003 the Board of
Directors extended Mr. McPeaks employment agreement until such time as the Board of
Directors notified Mr. McPeak that his extended employment agreement will terminate in
ninety days. Mr. McPeak retired effective March 31, 2004. Thereafter, for a five-year
period ending on March 31, 2008, the employment agreement has converted to a consulting
agreement. During the consulting period, we will pay Mr. McPeak a consulting fee of
$125,000 per year. If during the consulting period, our annual sales revenues reach or
exceed $12,000,000, the consulting fee will be increased to $175,000 per year. The term
will be automatically extended for additional one-year periods unless either party
delivers notice of election not to extend the term at least 60 days prior to the end of
the then current term. Mr. McPeaks employment may be terminated prior to the
expiration of the term, in the event of Mr. McPeaks death or termination by us for
Cause (as defined in the employment agreement). In addition, the agreement may
be terminated if we terminate Mr. McPeak without cause. If Mr. McPeak is terminated
without cause, he is entitled to the base salary in effect at such time for the remainder
of the term of the agreement. Within six months of first receiving notice of a
Change in Control (as defined in the employment agreement), Mr. McPeak may
elect to retire from service and render, on a non-exclusive basis, only such consulting
and advisory services to us as he may reasonably accept. In such an event, he is also
entitled to continue receiving his benefits and salary until the latter of six months
after the date of such election, subsequent full-time employment with another enterprise,
or the expiration of the term of the agreement.

BARBER
EMPLOYMENT AGREEMENT. In June 2004, we entered into a two year employment agreement with
Terrence Barber, pursuant to which Mr. Barber agreed to serve as our Chief Executive
Officer. The Barber employment agreement provides that Mr. Barber will receive an annual
base salary of one hundred ninety thousand dollars ($190,000) and will be reviewed
annually. In addition, Mr. Barber was entitled to a grant of options to purchase 300,000
shares of our common stock. One-third, or 100,000 option shares were vested on the date of
grant, one-third become vested on his first anniversary date of hire and one third on his
second anniversary date of hire. The employment term will be automatically extended for
an additional two-year term unless either party delivers notice of election not to extend
the employment at least 90 days prior to the expiration of the initial term. Mr. Barbers
employment may be terminated prior to the expiration of the agreement by the mutual
written agreement of the parties or Mr. Barbers disability. For the purposes of the
employment agreement, disability means Mr. Barbers inability, due to
physical or mental impairment, to perform his duties and obligations, despite reasonable
accommodation by us, for a period exceeding three months. Mr. Barbers employment
may also be terminated in the event of his death, notice by us of termination for cause
(as defined in the agreement), or written notice by us of termination without, cause upon
fifteen (15) days notice. Mr. Barber is entitled to compensation for early termination.
If Mr. Barber is terminated without cause, we will pay to him, as liquidated damages and
in lieu of any and all other claims which Mr. Barber may have against us, the amount
equal to Mr. Barbers monthly base salary multiplied by the number of months
remaining in the term of this agreement, or a payment amount equal to two years of Mr.
Barbers base salary, whichever is greater. Mr. Barber indicated to us his desire to
resign his

46



employment as our Chief Executive
Officer and as a director on our Board of Directors. In January 2005, Mr. Barber and our
Board of Directors entered into a Mutual General Release whereby we agreed to pay Mr.
Barber one hundred and fifty thousand dollars ($150,000) as severance pay. See SEPARATION
AGREEMENTS below.

LYNCH
EMPLOYMENT AGREEMENT. In May 1999, we entered into an employment agreement with Ike E.
Lynch, pursuant to which Mr. Lynch agreed to serve as our Vice President of Operations and
the Chief Operating Officer of our subsidiary, RiceX Nutrients. The employment agreement
provides that Mr. Lynch will receive an annual base salary of $125,000, which salary will
be increased to $135,000 on May 1, 2000 and will be reviewed annually. The agreement was
extended and terminates on May 1, 2009, unless it is terminated earlier. Mr. Lynchs
annual base salary during the extended agreement is $36,000. The term will be
automatically extended for an additional five-year term unless either party delivers
notice of election not to extend the employment at least 90 days prior to the expiration
of the initial term. Mr. Lynchs employment may be terminated prior to the expiration
of the agreement by the mutual written agreement of the parties or in the event of Mr.
Lynchs disability. For the purposes of the employment agreement,
disability means Mr. Lynchs inability, due to physical or mental
impairment, to perform his duties and obligations, despite reasonable accommodation by us,
for a period exceeding three months. Mr. Lynchs employment may also terminated in
the event of his death, notice by us of termination for cause (as defined in the
agreement), or written notice by us of termination without cause, upon fourteen (14) days
notice. Mr. Lynch is entitled to compensation for early termination. If Mr. Lynch is
terminated without cause, we will pay to Mr. Lynch, as liquidated damages and in lieu of
any and all other claims which Mr. Lynch may have against us, the amount equal to Mr.
Lynchs monthly base salary multiplied by the number of months remaining in the term
of this agreement, or a payment amount equal to two years of Mr. Lynchs base salary,
whichever is greater. In January 2005, Mr. Lynch was appointed as our interim Chief
Executive Officer upon the resignation of Terrence Barber.

CROW
EMPLOYMENT AGREEMENT. In May 1999, we entered into an employment agreement with Todd C.
Crow, pursuant to which Mr. Crow agreed to serve as our Chief Financial Officer. Mr.
Crows employment agreement provides that he will receive an annual base salary of
$125,000 increased to $135,000 on May 1, 2000, and will be reviewed annually. The
agreement was extended and terminates on May 1, 2009, unless it is terminated earlier. The
term will be automatically extended for an additional five-year term unless either party
delivers notice of election not to extend the employment at least 90 days prior to the
expiration of the initial term. Mr. Crows employment may be terminated prior to the
expiration of the agreement by the mutual written agreement of the parties or in the event
of Mr. Crows disability. For the purposes of the employment agreement,
disability means Mr. Crows inability, due to physical or mental
impairment, to perform his duties and obligations, despite reasonable accommodation by us,
for a period exceeding three months. Mr. Crows employment may also be terminated in
the event of his death, notice by us of termination for cause (as defined in the
agreement), or written notice by us of termination without cause, upon fourteen (14) days
notice. Mr. Crow is entitled to compensation for early termination. If Mr. Crow is
terminated without cause, we will pay to him, as liquidated damages and in lieu of any and
all other claims which Mr. Crow may have against us, the amount equal to Mr. Crows
monthly base salary multiplied by the number of months remaining in the term of this
agreement, or a payment amount equal to two years of Mr. Crows base salary,
whichever is greater.

MCPEAK,
JR. EMPLOYMENT AGREEMENT. In May 1999, we entered into employment agreement with Daniel L.
McPeak, Jr., pursuant to which Mr. McPeak agreed to serve as our Executive Vice President
and General Manager. The McPeak, Jr. employment agreement provides that Mr. McPeak will
receive an annual base salary of $125,000 increased to $135,000 on May 1, 2000, and will
be reviewed annually. The McPeak, Jr. employment agreement was extended and terminates on
May 1, 2009, unless it is terminated earlier. The term will be automatically extended for
an additional five-year term unless either party delivers notice of election not to extend
the employment at least 90 days prior to the expiration of the initial term. Mr.
McPeaks employment may be terminated prior to the expiration of the agreement by the
mutual written agreement of the parties or Mr. McPeaks disability. For the purposes
of the employment agreement, disability means Mr. McPeaks inability, due
to physical or mental impairment, to perform his duties and obligations, despite
reasonable accommodation by us, for a period exceeding three months. Mr. McPeaks
employment may also be terminated in the event of his death, notice by us of termination
for cause (as defined in the agreement), or written notice by us of termination without,
cause upon fourteen (14) days notice. Mr. McPeak is entitled to compensation for early
termination. If Mr. McPeak is terminated without cause, we will pay to him, as liquidated
damages and in lieu of any and all other claims which Mr. McPeak may have against us, the
amount equal to Mr. McPeaks monthly base salary multiplied by the number

47



of months remaining in the term of
this agreement, or a payment amount equal to two years of Mr. McPeaks base salary,
whichever is greater.

# SEPARATION AGREEMENTS

BARBER
SEPARATION AND MUTUAL RELEASE AGREEMENT.  On January 28, 2005, we accepted the
resignation of, and entered into a separation and mutual release agreement with, Terrence
Barber, our Chief Executive Officer. The
agreement provides for the resignation by Mr. Barber as the Chief Executive Officer, as
well as his resignation from our Board of Directors, and, in exchange for mutual releases
between us and Mr. Barber, the agreement provides for Mr. Barber to receive a severance
payment of $150,000.00.  The agreement also provides for the termination of all
unvested stock options previously granted to Mr. Barber pursuant to that certain
Non-Statutory Stock Option Agreement dated June 25, 2004, as well as the return of all of
our property held by Mr. Barber.

|Item 11. |  | SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- |  | --------------------------------------------------------------

The
following table sets forth certain information as of March 4, 2004, or the Reference Date,
with respect to the beneficial ownership of our common stock, by each person known by us
to own beneficially more than five percent of our common stock, by each executive officer
and director, and by all officers and directors as a group. Unless otherwise indicated,
all persons have sole voting and investment powers over such shares, subject to community
property laws. As of the Reference Date, there were 36,713,276 shares of our common stock
outstanding and unexercised warrants and options representing 18,971,047 shares.

|Name and Address (1)                                                           | Amount & Nature ofBeneficial Owner (2) |  | Percentof Class | 
|------------------------------------------------------------------------------ | -------------------------------------- |  | --------------- | 
|Monsanto                                                                       |                                        |  |                 | 
|800 N. Lindbergh, St. Louis, MO  63167                                         | 7,167,479                              |  | 19.52%          | 
|Daniel L. McPeak, Sr., Chairman of the Board                                   |                                        |  |                 | 
|and Director                                                                   | 5,965,762 (3)                          |  | 15.25%          | 
|Intermark Group Holdings, LLC                                                  |                                        |  |                 | 
|10707 Club Chase, Fisher, IN 46038                                             | 5,803,574 (4)                          |  | 14.25%          | 
|Glenn H. Sullivan                                                              |                                        |  |                 | 
|13778 Driftwood Drive, Carmel, IN 46033                                        | 4,062,572 (5)                          |  | 9.96%           | 
|Kirit Kamdar, Director                                                         | 2,080,417 (6)                          |  | 5.62%           | 
|Steven W. Saunders, Director                                                   | 1,129,167 (6)                          |  | (7)             | 
|James C. Lintzenich, Director                                                  | 95,833 (6)                             |  | (7)             | 
|Terrence Barber, Director, Chief Executive Officer                             | 100,000 (6)                            |  | (7)             | 
|Edward L. McMillan, Director                                                   | 164,767 (6)                            |  | (7)             | 
|Todd C. Crow, Secretary and Chief Financial Officer                            | 1,335,000 (6)                          |  | (7)             | 
|Ike E. Lynch, Chief Executive Officer, V.P. International Business Development | 1,572,054 (6)                          |  | (7)             | 
|Daniel L. McPeak, Jr., V.P. and General Manager                                | 1,090,500 (6)                          |  | (7)             | 
|All directors and executive officers,                                          |                                        |  |                 | 
|As a group (9 persons)                                                         | 19,336,573                             |  | 40.47%          | 
|                                                                               |                                        |  |                 | 
|                                                                               |                                        |  |                 | 

_________________

|(1) | Except as otherwise noted, the address for each person is c/o The RiceX Company,
          1241 Hawks Flight Court, El Dorado Hills, California 95762.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Unless
otherwise noted, we believe that all persons named in the table have sole
          voting and investment power with respect to all shares of common stock listed
as           beneficially owned by them. A person is deemed to be the beneficial holder
of           securities that can be acquired by such person within 60 days from the
Reference           Date upon the exercise of warrants or options. Each beneficial owners
          percentage ownership is determined by
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48



| | including
shares underlying options or           warrants which are exercisable by such person
currently or within 60 days           following the Reference Date, and excluding shares
underlying options and           warrants held by any other person.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes options to purchase 2,416,667 shares of common stock, 1,708,225 shares
          in Mr. McPeaks name and 1,640,870 shares in his wifes name, Ms.
          Patricia McPeak, and 200,000 shares held in a joint trust.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes warrants to purchase 4,017,859 shares of common stock. The warrants are
          currently exercisable. Warrants to purchase 2,232,144 shares are restricted from
          sale and/or transfer until such time when our revenues at various stages reach
          an annualized equivalent of $12,000,000 and $25,000,000. The principal owner of
          Intermark Group Holdings, LLC is James C. Lintzenich, one of our directors.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Represents warrants to purchase 4,062,572 shares of common stock. The warrants
          are currently exercisable. Warrants to purchase 2,600,000 shares are restricted
          from sale and/or transfer until such time when our revenues at various stages
          reach an annualized equivalent of $12,000,000 and $25,000,000.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes options for the purchase of common stock as follows: Kirit S. Kamdar,
          329,167; Steven W. Saunders, 329,167; James C. Lintzenich, 95,833; Terrence
          Barber, 100,000; Edward L. McMillan, 41,667 (also includes 23,100 shares of common stock and warrants to purchase 100,000
shares of common stock); Todd C. Crow, 1,335,000; Ike E.
          Lynch, 1,165,000 (also includes 14,409 shares of common stock and 52,000 options
          for the purchase of common stock held by Mr. Lynchs wife to which Mr.
          Lynch disclaims beneficial ownership); Daniel L. McPeak, Jr., 1,085,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Percent of class less than five percent.
|--- | ----------------------------------------

# 1997 STOCK OPTION PLAN

Our
Board adopted the 1997 Stock Option Plan, or the 1997 Plan, in November 1997 and the
stockholders approved the 1997 Plan in May 1998. At our meeting of the stockholders held
on June 29, 2001, the stockholders approved increasing authorized shares of common stock
to be issued under the 1997 Plan from 5,000,000 to 10,000,000, increasing the number of
reserved shares of common stock from 5,000,000 shares to 10,000,000 shares. As of December
31, 2004, a total of 2,288,000 shares are available for future grants. The 1997 Plan
provides for the grant of incentive stock options as defined in Section 422A
of the Internal Revenue Code of 1986, as amended, or the Code, to our employees. The 1997
Plan also provides for the grant of options that are not intended to qualify as incentive
stock options under Section 422A of the Code to our employees, non-employee directors and
consultants. The exercise price of any incentive stock option granted under the 1997 Plan
may not be less than 100% of the fair market value of our common stock on the date of
grant, and the exercise price of any nonqualified stock option may not be less than 85% of
fair market value and 110% of fair market value in the case of a participant owning stock
possessing more than 10% of the voting rights of our companys outstanding capital
stock. Shares subject to an option granted under the 1997 Plan may be purchased for cash,
in exchange for shares of common stock owned by the optionee, or other consideration as
set forth in the plan. Our Board administers the 1997 Plan. Under the 1997 Plan, options
vest not less than 20% per year and have 10-year terms (except with respect to 10%
stockholders which have five-year terms). If we sell substantially all of our assets, are
a party to a merger or consolidation in which we are not the surviving corporation, then
we have the right to accelerate unvested options and will give the option holder written
notice of the exercisability and specify a time period in which the option may be
exercised. All options will terminate in their entirety to the extent not exercised on or
prior to the date specified in the written notice unless an agreement governing any change
of control provides otherwise.

49



# SECURITIES AUTHORIZED
FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Securities
authorized for issuance under equity compensation plans at December 31, 2004 are as
follows:

|Plan category                    |  | Number of securitiesto be issued upon theexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights |  | Number of securities remainingavailable for future issuanceunder equity compensation(excluding securities reflected
in the first column) | 
|-------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- | 
|Equity compensation plans        |  |                                                                                             |  |                                                                         |  |                                                                                                                                          | 
|approved by security holders     |  | 7,712,000                                                                                   |  | $    0.61                                                               |  | 2,288,000                                                                                                                                | 
|                                
|Equity compensation plans        | 
|not approved by security holders |  | 0                                                                                           |  | $    0.00                                                               |  | 0                                                                                                                                        | 
|                                
|Total                            |  | 7,712,000                                                                                   |  |                                                                         |  | 2,288,000                                                                                                                                | 
|                                

|Item 12. |  | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- |  | -----------------------------------------------

Mr.
Daniel McPeak, Sr. has served as the Chairman of our Board since our formation
          in 1989. In November 1998, Mr. McPeak was re-appointed as our CEO, and served
as           our CEO until his retirement on March 31, 2004. Mr. McPeak previously served
as           our CEO from May 1989 to April 1997. Mr. McPeak is the spouse of Ms.
Patricia           McPeak (see below) and the father of Daniel L. McPeak, Jr. On July 1,
2004, when           elected to our Board, we issued Mr. McPeak a non-statutory stock
option to           purchase 50,000 shares of common stock at an exercise price of $0.29
per share.           The market price on the date of grant was $0.29 per share. The
option will be           fully vested at the end of one year on the anniversary date of
the grant. The           expiration date of the option agreement is June 30, 2014. See
Part III, Item 9,           DIRECTOR COMPENSATION for further discussions.

Ms. McPeak, the spouse of Daniel L. McPeak, Sr., Chairman of our Board and           our
former Chief Executive Officer, served as a director on our Board from our
          formation in 1989 until the expiration of her term on June 29, 2001. From
          February 1989 to March 2000, Ms. McPeak also served as the President of our
          Company. Ms. McPeak, who resigned that position on March 31, 2000, retained her
          seat on our Board until June 29, 2001, at which time her term expired.

Ms.
McPeak is an officer and director of NutraCea (formally NutraStar) a California
          corporation. NutraStar changed its name to NutraCea in November, 2003. In late
          2001 the Company entered into an Exclusive Distribution Agreement and Licensing
          Agreement with NutraStar. This agreement was terminated in July 2002 with
          NutraStar for its failure to meet certain performance requirements as specified
          in the Exclusive Distribution Agreement. Also during December 2001, the Company
          agreed to cancel $190,000 of NutraStars indebtedness in exchange for
          190,000 shares of NutraStars Series A preferred stock. Subsequently, in
          2004, we put 130,000 shares back to NutraCea for $130,000 under a put provision
          and sold 60,000 shares in the open market for $52,000. The Company has
          recognized sales to NutraCea of $405,000 and $229,000 during 2004 and 2003,
          respectively.

Mr.
James C. Lintzenich has been a director of our Company since June 2003 and
          currently is the principle owner of Intermark Group Holdings, LLC. On April 4,
          2002 in a private transaction, Intermark Group Holdings, LLC purchased
1,785,715           shares of our common stock and warrants to purchase 1,785,715 shares
of our           common stock at $0.70 per share from GBV Intermark Fund LLC. The
warrants are           immediately exercisable and have a term of five years. In
connection with this           transaction, Intermark Group Holdings, LLC also acquired
warrants to purchase up           to 2,232,144 shares of our common stock at $0.70 per
share, exercisable at any           time during the five-year period commencing from the
date of grant. The warrant           shares are restricted from sale and/or transfer
until such time as our revenues           at various stages reach an annualized
equivalent of $12,000,000 and $25,000,000.           Upon the anniversary date of Mr.
Lintzenichs election to our Board, we           issued Mr. Lintzenich a
non-statutory stock option to purchase 50,000 shares of           common stock at an
exercise price of $0.25 per share. The market price on the           date of grant was
$0.25 per share. The option will be fully vested at the end of           one year on the
anniversary date of the grant. The expiration date of the option           agreement is
June 27, 2014. In June 2003, on Mr. Lintzenichs election to           our Board, we
issued him nonqualified options to purchase 50,000 shares of our           common stock
at an exercise

50



price of $0.25 per share. The market
price of our           common stock on the date of grant was $0.25 per share. The options
will be fully           vested at the end of one year on the anniversary date of the
grant. The           expiration date of the options is June 23, 2013. See Part III, Item
9, DIRECTOR           COMPENSATION for further discussions.

We
believe that the transactions set forth above were made on terms no less favorable to us
than could have been obtained from unaffiliated third parties. We intend that all future
transactions, including loans, between our officers, directors, principal stockholders and
their affiliates, and us be approved by a majority of our Board, including a majority of
the independent and disinterested outside directors who serve on our Board. In addition,
we intend that all such transactions be on terms no less favorable to us than could be
obtained from unaffiliated third parties.

|Item 13. |  | EXHIBITS.
|-------- |  | ---------

| | (a) |  | INDEX
TO EXHIBITS
| | --- |  | -----------------

|Exhibit No. |  | Description
of Exhibit
|----------- |  | ----------------------

|3.1 |  | Certificate
of Incorporation of the Company. (1)
|--- |  | ------------------------------------------------

|3.2 |  | Bylaws.
(2)
|--- |  | -----------

|4.1 |  | Form
of Directors Stock Option Agreement. (1)(3)
|--- |  | ------------------------------------------------

|4.2 |  | Form
of Non-statutory Stock Option Agreement not issued under the 1997 Stock Option Plan,
governing               options granted to employees by the Company. (1)(3)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Form
of non-statutory Stock Option Agreement issued under the 1997 Stock Option Plan between
the               Company and employees dated October 1, 1999. (3)(5)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Form
of non-statutory Stock Option Agreement issued under the 1997 Stock Option Plan between
the               Company and Vice President, Operations, Ike Lynch dated November 1,
1999. Identical Agreements with               Vice President and General Manager, Daniel
McPeak, Jr. and Vice President of Finance, Chief Financial               Officer, Todd C.
Crow. (3)(5)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Warrant
agreement between the Company and GBV Intermark Fund, LLC dated September 29, 2000. (7)
|--- |  | -----------------------------------------------------------------------------------------------

|4.6 |  | Warrant
agreement between the Company and Gilbert L. McCord, Sr. dated September 29, 2000. (7)
|--- |  | ----------------------------------------------------------------------------------------------

|4.7 |  | Definitive
agreement between the Company and Intermark Partners, LLC dated September 29, 2000. (7)
|--- |  | --------------------------------------------------------------------------------------------------

|4.8 |  | Form
of Warrant Agreement between the Company and certain former employees dated as of March
31, 2000.                 (8)
|--- |  | --------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Non-statutory
Stock Option Agreement issued under the 1997 Stock Option Plan between the Company and
              Daniel L. McPeak, Sr. dated October 27, 2000. (3)(8)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Warrant
agreement between the Company and Intermark Partners Strategic Management, LLC
representing               the Class I Warrant dated October 2, 2000. (8)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Warrant
agreement between the Company and Intermark Partners Strategic Management, LLC
representing               the Class II Warrant dated October 2, 2000. (8)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Warrant
agreement between the Company and Intermark Partners Strategic Management, LLC
representing               the Class III Warrant dated October 2, 2000. (8)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Form
of Board Member Non-statutory Stock Option Agreement issued under the 1997 Stock
        Option Plan between the Company and the Board Members dated February 22, 2001,
September         23 and 29, 2001. (9)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Alliance
Consumer International, Inc. Exchange Offer For The Common Stock Of NutraStar dated
              December 11, 2001. (10)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | Put/Call
Agreement between the Company and NutraStar, Inc. dated January 15, 2002. (11)
|---- |  | ---------------------------------------------------------------------------------------

|4.16 |  | Form
of Non-statutory Stock Option Agreement issued under the 1997 Stock Option Plan between
theCompany and employees dated January 2, 2000. (12)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | Form
of Non-statutory Stock Option Agreement issued September 23, 2002 between the Company and
theBoard of Directors. (15)
|---- |  | --------------------------------------------------------------------------------------------------------------------------

|4.18 |  | Form
of Non-statutory Stock Option Agreement issued July 19, 2004 between the Company and
Karen Halliburton. (15)
|---- |  | -----------------------------------------------------------------------------------------------------------------

|4.19 |  | Form
of Non-statutory Stock Option Agreement issued July 1, 2004 between the Company and
Daniel L. McPeak, Sr. (15)
|---- |  | -------------------------------------------------------------------------------------------------------------------

51



|4.20 |  | Form
of Non-statutory Stock Option Agreement issued July 1, 2004 between the Company and
Edward McMillan.                 (15)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.21 |  | Non-statutory
Stock Option Agreement issued June 25, 2004 between the Company and Terrence Barber. (14)
|---- |  | -------------------------------------------------------------------------------------------------------

|4.22 |  | Form
of Warrant agreement between the Company and our Global Advisory Board dated October 4,
2004.
|---- |  | --------------------------------------------------------------------------------------------------

|4.23 |  | Form
of Non-statutory Stock Option Agreement issued October 18, 2004 between the Company and
two Board                 Directors.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Form
of Indemnification Agreement by and among the Company and certain officers and directors.
(1)(3)
|---- |  | -----------------------------------------------------------------------------------------------------

|10.2 |  | Commercial
Lease and Deposit Receipt between Roebbelen Land Company and the Company dated December
23,                 1991. (1)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | First
Amendment of Lease between Roebbelen Land Company and the Company dated January 19, 1994.
(1)
|---- |  | ---------------------------------------------------------------------------------------------------

|10.4 |  | Second
Amendment of Lease between Roebbelen Land Company and the Company dated July 11, 1996. (1)
|---- |  | -------------------------------------------------------------------------------------------------

|10.5 |  | Third
Amendment of Lease Agreement between Roebbelen Land Company and the Company dated
February 1, 1998.                 (1)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Lease
Agreement between Roebbelen Land Company and the Company dated July 11, 1996. (1)
|---- |  | ---------------------------------------------------------------------------------------

|10.7 |  | First
Amendment of Lease between Roebbelen Land Company and the Company dated September 1996.
(1)
|---- |  | -------------------------------------------------------------------------------------------------

|10.8 |  | Second
Amendment of Lease Agreement between Roebbelen Land Company and the Company dated
February 1, 1998. (1)
|---- |  | --------------------------------------------------------------------------------------------------------------

|10.9 |  | Executive
Employment Agreement for Daniel L. McPeak Jr., Executives Todd C. Crow and Ike Lynch have
              similar employment agreements. (3)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Stabilized
Rice Bran Processing, Sales, and Marketing Agreement between Farmers' Rice Cooperative
              and the Company dated May 1, 2002. (3)(12)*
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Sublease
Agreement between the Company and NutraStar, Inc. effective November 1, 1999. (6)
|----- |  | ------------------------------------------------------------------------------------------

|10.12 |  | Employment
Agreement between Daniel L. McPeak, Sr. and the Company dated April 1, 2000. (3)(8)
|----- |  | ----------------------------------------------------------------------------------------------

|10.13 |  | Exclusive
Distribution Agreement between the Company and NutraStar, Inc., dated December 21, 2001.
(10)
|----- |  | -------------------------------------------------------------------------------------------------------

|10.14 |  | License
Agreement between the Company and NutraStar Technologies, Inc. dated January 9, 2002. (10)
|----- |  | --------------------------------------------------------------------------------------------------

|10.15 |  | Indemnity
Agreement between the Company and NutraStar, Inc. dated December 13, 2001. (10)
|----- |  | -----------------------------------------------------------------------------------------

|10.16 |  | Agreement
on Exclusive Distribution in Europe between the Company and KREGLINGER EUROPE N.V. dated
October                 1, 2002. (13)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Employment
Agreement between Terry H. Miller and the Company dated October 1, 2004.
|----- |  | -----------------------------------------------------------------------------------

|10.18 |  | Employment
Agreement between Terrence Barber and the Company dated June 14, 2004 (14)
|----- |  | -------------------------------------------------------------------------------------

|10.19 |  | Employment
Agreement between Karen Halliburton and the Company dated July 12, 2004 (15)
|----- |  | ---------------------------------------------------------------------------------------

|10.20 |  | Mutual
Release Agreement between Terrence Barber and the Company dated January 28, 2005
|----- |  | ---------------------------------------------------------------------------------------

|10.21 |  | Mutual
Release Agreement between Karen Halliburton and the Company dated January 28, 2005
|----- |  | -----------------------------------------------------------------------------------------

|21 |  | List
of  Subsidiaries (6)
|-- |  | -------------------------

|23.1 |  | Consent
of Independent Accountants
|---- |  | ----------------------------------

|31.1 |  | Certification
of the Chief Executive Officer of The RiceX Company dated March 31, 2005.
|---- |  | ---------------------------------------------------------------------------------------

|31.2 |  | Certification
of the Chief Financial Officer of The RiceX Company dated March 31, 2005.
|---- |  | ---------------------------------------------------------------------------------------

|32.1 |  | Written
Statement of the Chief Executive Officer of The RiceX Company dated March 31, 2005.
|---- |  | -------------------------------------------------------------------------------------------

|32.2 |  | Written
Statement of the Chief Financial Officer of The RiceX Company dated March 31, 2005.
|---- |  | -------------------------------------------------------------------------------------------

_________________

|(1) |  | Previously
filed as an exhibit to the Companys Registration Statement No.
               000-24285 filed with the Commission on May 18, 1998.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Previously
filed as an exhibit to the Companys Amendment No. 2 to the
               Registration Statement No. 000-24285 filed with the Commission on August
26,                1998.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Represents
a management contract or compensatory plan or arrangement.
|--- |  | ---------------------------------------------------------------------

|(4) |  | Previously
filed as an exhibit to the Companys Form 10-KSB filed with the
               Commission on April 15, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

52



|(5) |  | Previously
filed as an exhibit to the Companys Form 10-KSB filed with the
               Commission on March 30, 2000 and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on August 18, 2000 and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on November 14, 2000 and incorporated herein by reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously
filed as an exhibit to the Companys Form 10-KSB filed with the
               Commission on April 17, 2001 and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on August 10, 2001 and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Previously
filed as an exhibit to the Companys Form 10-KSB filed with the
               Commission on March 29, 2002 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on May 10, 2002 and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on August 12, 2002 and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Previously
filed as an exhibit to the Companys Form 10-KSB filed with the
               Commission on March 31, 2003 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on August 16, 2003 and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously
filed as an exhibit to the Companys Form 10-QSB filed with the
               Commission on November 15, 2003 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

* Confidential treatment granted as
to certain portions.

|Item 14. |  | PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|-------- |  | ---------------------------------------

During
the last two fiscal years, Moss Adams LLP and Perry-Smith LLP has billed our company the
following fees for its services:

|                       | Fiscal Year EndingDecember 31, | 
|---------------------- | ------------------------------ | 
|                      
|
|                      
|Audit Fees (1)         |                                | 
|Audit Related Fees (2) |                                | 
|Tax Fees (3)           |                                | 
|All Other Fees (4)     |                                | 

(1)       
          Audit fees include fees billed by Moss Adams LLP and Perry-Smith LLP for
          professional services rendered for auditing our annual consolidated financial
          statements for the years ended December 31, 2004 and 2003 and the reviews of the
          unaudited interim financial statements included in our Quarterly Reports on
          Forms 10-QSB for the years ended December 31, 2004 and 2003.

(2)       
          Audit related fees include fees billed by Moss Adams LLP and Perry-Smith LLP for
          assurance and related services in connection with the performance of the audit
          of our annual consolidated financial statements for the years ended December 31,
          2004 and 2003.

(3)       
          Tax fees include fees billed by Moss Adams LLP for professional services other
          than audit fees for the years ended December 31, 2004 and 2003. These fees were
          primarily for income tax reporting services.

(4)       
          All Other Fees would include fees for any professional services with respect to
          financial information systems design and implementation for the years ended
          December 31, 2004 and 2003. Moss Adams LLP and Perry-Smith LLP did not perform
          any of these other services for the years ended December 31, 2004 and 2003.

53



# Audit Committee
Pre-Approval Policies

Rules
adopted by the Securities and Exchange Commission in order to implement requirements of
the Sarbanes-Oxley Act of 2002 require public company audit committees to pre-approve
audit and non-audit services. Our Audit Committee has adopted a detailed policy for the
pre-approval of all audit, audit related and tax services, and permissible non-audit
services provided by the independent auditors. The policy provides for an annual review
of an audit plan and budget for the upcoming annual financial statement audit, and
entering into an engagement letter with the independent auditors covering the scope of
the audit and the fees to be paid. The Audit Committee may also from time-to-time review
and approve in advance other specific audit, audit related, tax or permissible non-audit
services. In addition, the Audit Committee may from time-to-time give pre-approval for
audit services, audit related services, tax services or other non-audit services by
setting forth such pre-approved services on a schedule containing a description of,
budget for, and time period for such pre-approved services. The policies require the
Audit Committee to be informed of each service, and the policies do not include any
delegation of the Audit Committees responsibilities to management. The Audit
Committee may  delegate pre-approval authority to one or more of its members. The member
to whom such authority is delegated will report any pre-approval decisions to the Audit
Committee at its next scheduled meeting.

54



# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized:

|                      |     |                                                                                
|--------------------- | --- | -------------------------------------------------------------------------------
|Date:  March 30, 2005 | By: | /s/ IKE E. LYNCHIke E. LynchChief Executive Officer                            
|                      |     |                                                                                
|Date:  March 30, 2005 | By: | /s/ TODD C. CROWTodd C. Crow
Vice President, Finance andChief Financial Officer

In
accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates
indicated.

|                      |     |                                                           
|--------------------- | --- | ----------------------------------------------------------
|Date:  March 30, 2005 | By: | /s/ DANIEL L. MCPEAK
Daniel L. McPeakChairman of the Board
|                      |     |                                                           
|Date:  March 30, 2005 | By: | /s/ KIRIT S. KAMDARKirit S. Kamdar
Director               
|                      |     |                                                           
|Date:  March 30, 2005 | By: | /s/ STEVEN W. SAUNDERSSteven W. Saunders
Director         
|                      |     |                                                           
|Date:  March 30, 2005 | By: | /s/ JAMES C. LINTZENICHJames C. Lintzenich
Director       
|                      |     |                                                           
|Date:  March 30, 2005 | By: | /s/ EDWARD L. MCMILLANEdward L. McMillan
Director         

55