**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**______________________**





**FORM
      10-KSB/A**


**(Amendment
      No. 3)**




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




**For
      the Fiscal Year Ended December 31, 2007**




Commission
      File Number 000-33211


______________




**VITAL
      LIVING, INC.**


*(Exact
      Name of Small Business Issuer in Its Charter)*




**Nevada**
            
            **88-0485596***(State or Other Jurisdiction of Incorporation or Organization)*
            **
            *(I.R.S. Employer Identification No.)*




**1289 Clint Moore Road**


**Boca
      Raton, FL 33487**


**(561)
      300-9022**


*(Address,
      including zip code, and telephone number, including area code, of principal
      executive offices)*




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




**Title of Each Class**
            
            **Name of Each Exchange on Which Registered**None
            
            Not
                Applicable




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


Common
      Stock, $0.001 par value


*(Title
      of Class)*




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. £




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the 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 S No £




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of 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. £




Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act). Yes £ No S




State
      issuer’s revenue for the most recent fiscal year: $2,224,000.




As
      of
      March 30, 2008, the aggregate market value of the voting and non-voting common
      stock held by non-affiliates of the issuer (based on the closing sales price
      as
      reported by the OTC Bulletin Board) was $165,000 assuming all officers and
      directors are deemed affiliates for this purpose).




As
      of
      March 30, 2008, the issuer had 164,559,000 shares of its common stock, $0.001
      par value, outstanding.




**Documents
      Incorporated by Reference.** None.










**VITAL
      LIVING, INC.**


**ANNUAL
      REPORT ON FORM 10-KSB/A**


**FOR
      THE YEAR ENDED DECEMBER 31, 2007**




**TABLE
      OF CONTENTS**




**PART
                I.**ITEM
                1.
            DESCRIPTION
                OF BUSINESS
            4ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            17ITEM
                3.
            LEGAL
                PROCEEDINGS
            17ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            17**PART
                II.**ITEM
                5.
            MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS
                ISSUER
                PURCHASES OF EQUITY SECURITIES
            17ITEM
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS
            18ITEM
                7.
            FINANCIAL
                STATEMENTS
            23ITEM
                8.
            CHANGES
                AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            23ITEM
                8A(T)
            CONTROLS
                AND PROCEDURES
            23ITEM
                8B.
            OTHER
                INFORMATION
            24**PART
                III.**ITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(a) OF THE EXCHANGE ACT
            24ITEM
                10.
            EXECUTIVE
                COMPENSATION
            26ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            29ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            30ITEM
                13.
            EXHIBITS.
            31ITEM
                14.
            PRINCIPAL
                ACCOUNTANTS FEES AND SERVICES
            34SIGNATURES
            36EXHIBITSCONSOLIDATED
                FINANCIAL STATEMENTS
            F-1




***Regarding
      Forward-Looking Statements***




*The
      statements contained in this report on Form 10-KSB that are not purely
      historical are forward-looking statements within the meaning of applicable
      securities laws. Forward-looking statements include statements regarding our
      “expectations, “ “anticipation, “ “intentions, “ “beliefs, “ or “strategies”
regarding the future. Forward looking statements also include statements
      regarding revenue, margins, expenses, and earnings analysis for fiscal 2006
      and
      thereafter; future products or product development; our product development
      strategies; potential acquisitions or strategic alliances; the success of
      particular product or marketing programs; the amounts of revenue generated
      as a
      result of sales to significant customers; and liquidity and anticipated cash
      needs and availability. All forward-looking statements included in this report
      are based on information available to us as of the filing date of this report,
      and we assume no obligation to update any such forward-looking statements.
      Our
      actual results could differ materially from the forward-looking statements.
      Among the factors that could cause actual results to differ materially are
      the
      factors discussed in Item 1, “Business - Risk Factors. “*










**EXPLANATORY
      NOTE**




Vital
      Living, Inc., a Nevada corporation, is filing this Amendment No. 3 on Form
      10-KSB/A to amend and restate our Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2007, as filed with the Securities and Exchange
      Commission on April 15, 2008, as amended by Amendment No. 1 on Form 10-KSB/A,
      as
      filed with the Commission on June 10, 2008, and Amendment No. 2 on Form
      10-KSB/A, as filed with the Commission on October 6, 2008. We are filing this
      Amendment No. 3 in response to certain comments raised by the
      Commission.




The
      certifications pursuant to the Sarbanes-Oxley Act of 2002, filed as exhibits
      31.1 and 32.1 have been re-executed and re-filed as of the date of this
      Amendment No. 3.


3


**PART
      I.**




**Item
      1.**  **Description
      of Business**




**Overview**




**Our
      Company**




We
      develop and market nutritional fruit and vegetable supplements, protein
      supplements, and nutraceuticals products. Our principal products currently
      are
      Greensfirst®, Red AlertTM, Dream ProteinTM and Complete EssentialsTM. We distribute
      our products primarily through regional nutritional distributors that market
      our
      proprietary products and patient selling system directly to healthcare
      practitioners who utilize our proprietary selling system to market our products
      directly to consumers.




Nutritional
      supplements represent a convenient and cost-effective way for an individual
      to
      obtain the nutritional benefits of whole foods. Nutritional supplements are
      formulated from whole foods and are intended to provide for improved health,
      reduced risk of diseases, and the delayed onset of age related indicators while
      resulting in little added caloric and fat intake. Nutritional supplements come
      in powder, capsule, cracker, and other forms.




Nutraceuticals,
      consisting of vitamins, minerals, herbs, and supplements, are products that
      are
      isolated or purified from foods and generally sold in medicinal forms not
      usually associated with foods, including tablets, capsules, and drops.
      Nutraceuticals are intended to have physiological benefits or have the ability
      to reduce the risk of chronic disease beyond basic nutritional products. We
      develop and test our nutraceuticals in collaboration with leading medical
      experts in the nutraceuticals field.




We
      have
      designed our products to be incorporated by healthcare practitioners into
      standard patient routines in which healthcare practitioners recommend and sell
      our nutritional supplements and nutraceuticals products to their patients.
      Use
      of vitamins, minerals, herbs, and nutritional supplements continues to rise
      as
      consumers seek nutritional products to improve general health, increase
      longevity, and enhance the overall quality of life.




We
      were
      incorporated in the state of Nevada on January 22, 2001 under the name
      Nutritional Systems, Inc. We acquired substantially all of the assets of Vital
      Living, Inc. effective as of May 7, 2001 and changed our name to Vital Living,
      Inc. on May 20, 2001. On August 16, 2001, we merged with VCM Technology Limited,
      a company reporting under the Securities Exchange Act of 1934. Following the
      merger, we continued as the surviving corporation and commenced reporting under
      the Exchange Act.




Our
      corporate office is now located at 1289 Clint Moore Road, Boca Raton, FL, 33487.
      Our phone number is 561-300-9022. Our toll-free number remains 866-409-6262.
      Our
      website is located at www.vitalliving.com.




In
      June
      2007 due to business considerations, we made an agreement with one of our
      suppliers to allow them to sell some of our branded products directly to one
      of
      our major distributors. This agreement was necessary as the company did not
      have
      the capacity to service the sales needs of this customer.





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





The
      purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
      (ii) cancellation of outstanding indebtednesses of Vital Living, its
      subsidiaries and certain related entities to NutraCea, including all of the
      Notes, and (iii) cancellation of all shares of Series D Preferred Stock of
      Vital
      Living held by NutraCea.




4




Re-statement
      of financial statements




In
      the
      second quarter of 2008 we amended our 2005 10K to reflect an impairment of
      the
      goodwill associated with our Wellness Watchers Systems LLC (“WWS”) acquisition
      in 2004 and 2005. In August 2004, we formed WWS with Wellness Watchers Systems,
      Inc. (“WWI”) (a CA corporation), giving 3,000,000 shares of our common stock
      valued then at $805,000 and $25,000 in cash to the principles of WWI. This
      resulted in a 50% interest in WWS. In connection with the allocation of the
      purchase price in accordance with purchase accounting $805,000 was recorded
      as
      goodwill. In February 2005, we acquired the remaining 50% interest from the
      principles of WWI giving 1,000,000 shares of our common valued then at $70,000.
      As of result of the second transaction we determined that the entity value
      of
      WWS as of December 31, 2005, was approximately $140,000 based on the amount
      of
      the consideration given in February 2005 for the 50% interest in WWS purchased
      from the principles of WWI. Therefore we should have recorded an impairment
      charge of $805,000 as the year ended December 31, 2005. The effect of our
      re-statement for 2005 was to reduce net income by $805,000 in 2005 and reduce
      goodwill by that amount. We also re-stated our 2006 and 2007 10K to reduce
      goodwill by $805,000 and increase the retained deficit by the same amount.




**Strategy**




Our
      goal
      is to become a major participant in the nutritional supplement and nutraceutical
      markets. Key elements of our strategy to achieve this goal include the
      following:




·
            capitalize
                on the growing consumer interest in the use of nutritional supplements
                and
                nutraceuticals to complement traditional health care
                routines,




·
            develop
                products that appeal to health care professionals and
                consumers,




·
            enhance
                our distribution channels and the participants in those channels,
                and




·
            pursue
                strategic acquisitions in the highly fragmented nutritional supplement
                and
                nutraceuticals markets to expand our product offerings, distribution
                channels, and geographic reach.




**Products**




Our
      current principal products are GreensFIRST®, Red AlertTM, Dream ProteinTM, and
      Complete EssentialsTM, and ReliefFIRST®. These products represented nearly all of
      our revenue during fiscal 2006.




*GreensFIRST* ®
is
      a
      highly concentrated formulation of fruits and vegetables with natural, organic,
      whole foods and extracts, produced in a powder for mixing with a variety of
      liquids. GreensFIRST® supplies natural vitamins, minerals, plant enzymes,
      antioxidants, phytonutrients, and symbiotic intestinal flora designed to provide
      for more optimal energy metabolism, fat burning, digestion, detoxification,
      immunity, repair, recovery, rejuvenation, and vital longevity. GreensFIRST® is
      currently distributed through more than 8,000 healthcare practitioners
      throughout the United States.




*Red
      Alert* TM
is
      a
      highly concentrated formulation of fruits and vegetables made with organic
      and
      all natural products. Red Alert is a phytonutrient-antioxident energy drink
      formulated to boost energy with no added stimulants. Red Alert may also help
      improve immune function, help support weight management, alkalize and balance
      pH, and aid in healthy digestion.




*Dream
      Protein* TM
is
      a
      whey protein highly concentrated formula, consisting of proprietary hormone
      free, ultra-lowtempTM whey protein isolate. We start with hormone free whey from
      cows that are “meadow fed” and not given any rBGH or BST hormones. Dream Protein
      is also made with an Ultra-Low TempTM process in which the protein is not
      denatured (damaged) from an extensive heat treatment.




*Complete
      Essentials* TM
is
      a
      ultra pure omega 369 dietary supplement that contains essential fatty acids
      derived from organic flaxseed oil, borage seed oil, and deep sea cold water
      fish
      oil. Because the human body cannot manufacture essential fatty acids on its
      own,
      our unique dietary supplement is a blend of healthy oils designed to satisfy
      an
      individual’s need for essential fatty acids.




5




*ReliefFIRST* TM
is
      a
      patented dietary supplement for joint health comprised of a proprietary
      stabilized rice bran derivative, fortified with glucosomines, MSM, and
      additional herbs which may support joint flexibility and promote healthy
      joints.




**Sales
      and Marketing**




We
      market
      our products through the following distribution channels:




·
            healthcare
                practitioners, which includes physicians, condition specialists,
                chiropractors, nutritionists, and trainers, who promote or prescribe
                our
                products; and




·
            regional
                nutritional distributors that market our proprietary products and
                patient
                selling system directly to healthcare practitioners who utilize our
                proprietary selling system to market directly to consumers. We distribute
                a majority of our products, including GreensFIRST®, Red AlertTM, Dream
                ProteinTM, ReliefFIRSTTM, and Complete EssentialsTM, primarily through
                healthcare practitioners. During both 2007 and 2006, our GreensFIRST®
                product was primarily responsible for a significant portion of our
                revenue.




During
      the third quarter of 2004, we entered a joint venture with Wellness Watchers
      Systems providing for the development and marketing of the Healthy Living Kit.
      The Healthy Living Kit creates a Wellness Smoothie, which is a meal replacement
      designed for all types of metabolisms and blood types. It consists of one scoop
      of GreensFIRST® and one scoop of Dream ProteinTM in eight ounces of water along
      with one of our Complete EssentialsTM Ultra Pure Omega 3-6-9 capsules. Each
      Healthy Living Kit Wellness Smoothie meal replacement is a balanced,
      low-calorie, low-glycemic, hypoallergenic, high-antioxidant, nutrient-dense
      food
      source. It is created from a combination of potent organic, hormone and
      pesticide free all-natural foods. The Health Living Kit along with the lifestyle
      program was created to assist healthcare practitioners in dealing with chronic
      diseases, such as cancer, heart disease, and diabetes.




We
      continue to explore other possibilities to distribute our products nationally
      and internationally. We may evaluate the regulatory and distribution structures
      in Europe, Asia, and other international markets to determine the best way
      to
      distribute our products in those markets.




**Research
      and Development**




Our
      research and development efforts focus on developing, testing, and
      substantiating the efficacy of new products in response to what we perceive
      is a
      need in the healthcare practitioner distribution channel to complement existing
      product lines currently available to our customers. Additionally, we continually
      reformulate existing products in response to literature and market
      demand.




We
      believe that flexibility and innovation with respect to new products are crucial
      factors in remaining competitive in the nutritional supplements and
      nutraceuticals markets and being able to produce the most effective products,
      which healthcare practitioners will be willing to prescribe for their patients
      for specific conditions. By monitoring market trends and avoiding short-lived
      “fad” products, we attempt to anticipate healthcare practitioners demand for
      certain product categories. Maintaining flexibility is a key to enabling us
      to
      capitalize on emerging sciences relative to nutritional products as well as
      shifts in consumer needs.




Research
      and development costs amounted to $0 and $151,000 for 2007 and 2006,
      respectively. Research and development costs incurred from our formation until
      December 31, 2007 were $2.4 million.




**Manufacturing**




We
      utilize independent contract manufacturers to produce all of our products.
      . The
      potential loss of our relationships with our manufacturers or their inability
      to
      conduct their manufacturing services for us as anticipated in terms of cost,
      quality and product delivery could adversely affect our ability to provide
      cost-effective, high-quality, and timely product delivery to our customers.
      We
      depend to a great extent on our manufacturers for the safety, purity, and
      potency of our products.




6




**Raw
      Materials and Quality Control**




The
      principal raw materials used in the manufacture of our nutritional supplements
      and nutraceuticals are natural ingredients purchased from manufacturers and
      other suppliers in the United States, with certain materials imported from
      other
      countries. We purchase these raw materials directly or through our manufactures
      and other suppliers. Therefore, with our suppliers and manufacturers, we
      maintain the responsibility for documenting all certificates of analysis for
      the
      materials in accordance with good manufacturing practices (“GMP”) and
      guidelines. All raw materials are sent directly to our manufacturers for milling
      and other fabrication. We do not have contracts with any of the suppliers of
      raw
      materials used in the production of our products.




Historically,
      we have not experienced difficulties obtaining raw ingredients for our products
      on customary terms. We believe that the materials used in our products are
      readily available from numerous sources and that the loss of any of our current
      suppliers would not adversely affect our operations. There is no assurance,
      however, that suppliers will continue to provide the raw materials needed by
      us
      in the quantities required or on favorable terms. Because we do not control
      the
      source of these raw materials, we also are subject to delays caused by
      interruptions in production of materials based on conditions outside our
      control. Any significant delay in, or disruption of, the supply of raw materials
      could harm our business. If supply shortages were to occur and we were unable
      to
      meet the demands of our customers, even if for only a short time, the result
      could be a long-term decrease in the sales of our products. We cannot assure
      you
      that, on a long-term basis, an adequate supply of ingredients will be available
      to us on commercially reasonable terms in order for us to meet the supply
      obligations to our customers.




Finished
      products are produced by our manufacturers, which maintain quality control
      laboratories and testing facilities. Our manufactured products are packaged
      by
      and protected by a tamper-resistant outer safety seal. All of this is done
      by
      our manufacturers according to current GMP guidelines *.*




**Acquisitions
      and Strategic Initiatives**




We
      have
      completed four acquisitions. We discontinued the operations of two of the
      acquired businesses because the acquisitions did not meet our
      expectations.




On
      August
      17, 2004, we consummated a joint venture with Wellness Watchers International,
      Inc., or WWI, and together formed Wellness Watchers Systems, LLC, or WWS. We
      paid WWI $805,000 for its 50% interest in WWS. The purchase price consisted
      of
      3.0 million shares of our common stock along with a $25,000 cash payment. We
      and
      WWI originally owned 50% of WWS. The operating agreement gave us overall
      operating responsibility. WWS manufactures a proprietary brand of dietary
      protein powder called Dream ProteinTM, which is directly marketed to the health
      practitioners together with our GreensFIRST® product. WWS plans to introduce
      complementary products that will be marketed as part of WWS’ Healthy Living
      Program®. Part of WWI’s contribution to WWS was the exclusive licensing of
      certain products, client lists and marketing strategies, which included Dream
      ProteinTM. WWS has developed a unique marketing strategy that channels products
      directly to health practitioners. Prior to forming WWS, WWI had no prior
      operating history. During 2004, WWS had total revenue of $400,000. During
      February 2005, we acquired 100% interest in WWS by issuing an additional 1.0
      million shares of our stock. In conjunction with our acquisition of the
      remainder of WWS and certain other marketing and operation strategic
      productivity decisions, during the first quarter of 2005, we have consolidated
      the operations of WWS into DFN.




We
      plan
      to continue our acquisition strategy in the future. In particular, we intend
      to
      focus on candidates that have strong relationships with key vendors or have
      established complimentary distribution channels or customers. We believe that
      a
      number of factors will facilitate our acquisition strategy, including the
      following:




7




·
            the
                highly fragmented composition of the nutritional supplement and
                nutraceuticals markets;




·
            our
                status as a public corporation;




·
            a
                decentralized management strategy, which facilitates the acquired
                company’s management remaining involved in operations should they desire
                to do so; and




·
            the
                ability of our management to identify acquisition opportunities.
                Trademarks and Patents.




**Trademarks
      and Patents**




We
      own
      numerous trademarks registered with the U.S. Patent and Trademark Office and
      with agencies in certain other major jurisdictions of the world. Our trademarks
      include Vital Living®, Vital Living - The Physician Nutraceutical Company® (plus
      a logo), GreensFIRST®, Dream ProteinTM, and Complete EssentialsTM.




Federally
      registered trademarks have a perpetual life as long as they are renewed on
      a
      timely basis and used properly as trademarks, subject to the rights of third
      parties to seek cancellation of the marks. We believe that our registered and
      unregistered trademarks, patents, and other proprietary rights are valuable
      assets and that they have significant value in the marketing of our products.
      Accordingly, we intend to vigorously protect our intellectual property against
      infringement.




**Competition**




Our
      competitors vary by the nature of the distribution channel. In the healthcare
      practitioner and regional nutritional distributor channels, we compete with
      a
      number of companies selling whole foods and nutritional supplements, including
      Douglas Labs, Integration Therapeutics, Phyto Pharmacia, Metagenics Standard
      Process, Allergy Research, and Enzymatic Therapy.




Many
      of
      our competitors are substantially larger than we are and have significantly
      greater financial, technical, marketing, and other resources. We compete
      primarily based on our ability to be first to market and the desire of
      healthcare practitioners to have a nutritional line of products to supplement
      their practices.




**Governmental
      Regulation**




The
      formulation, manufacturing, packaging, labeling, advertising, distribution,
      and
      sale [hereafter, collectively “sale” or “sold”] of dietary and nutritional
      supplements, such as those sold by us, are subject to regulation by one or
      more
      federal agencies, principally the Food and Drug Administration, or FDA, the
      Federal Trade Commission, or FTC, and to a lesser extent, the Consumer Product
      Safety Commission and the U.S. Department of Agriculture. Our activities are
      also regulated by various governmental agencies for the states and localities
      in
      which our products are sold, as well as by governmental agencies in certain
      countries outside the United States. Among other matters, regulation by the
      FDA
      and FTC covers product safety and claims made with respect to a product’s
      ability to provide health-related benefits.




Federal
      agencies, primarily the FDA and FTC, have a variety of procedures and
      enforcement remedies available to them, including the following:




·
            initiating
                investigations,




·
            issuing
                warning letters and cease and desist
                orders,




·
            requiring
                corrective labeling or advertising,




·
            requiring
                consumer redress, such as requiring that a company offer to repurchase
                products previously sold to
                consumers,




8




·
            seeking
                injunctive relief or product
                seizures,




·
            imposing
                civil penalties, or




·
            commencing
                civil procedures or criminal
                prosecution.




In
      addition, certain state agencies have similar authority. These federal and
      state
      agencies have in the past used these remedies in regulating participants in
      the
      dietary supplements industry, including the imposition by federal agencies
      of
      civil penalties in the millions of dollars against industry participants. We
      cannot assure you that the regulatory environment in which we operate will
      not
      change or that such regulatory environment, or any specific action taken against
      us, will not result in a material adverse effect on our operations. In addition,
      increased sales of, and publicity about, dietary supplements may result in
      increased regulatory scrutiny of the dietary supplements industry.




The
      Dietary Supplement Health and Education Act, or DSHEA, was enacted in 1994,
      amending the Federal Food, Drug, and Cosmetic Act, or FFD&CA. We believe the
      DSHEA is generally favorable to consumers and to the dietary supplement
      industry. DSHEA establishes a statutory class of “dietary supplements,” which
      includes vitamins, minerals, herbs, amino acids, and other dietary ingredients
      for human use to supplement the diet. Dietary ingredients on the market as
      of
      October 15, 1994 do not require the submission by the manufacturer or
      distributor to the FDA of evidence of a history of use or other evidence of
      safety establishing that the ingredient will reasonably be expected to be safe,
      but a dietary ingredient that was not on the market as of October 15, 1994
      may
      need to be the subject of such a submission to FDA at least 75 days before
      marketing. Among other things, the DSHEA prevents the FDA from regulating
      dietary ingredients in dietary supplements as “food additives” and allows the
      use of statements of nutritional support on product labels. The FDA has issued
      proposed and final regulations in this area and indicates that further guidance
      and regulations are forthcoming. We cannot assure you that the FDA will accept
      the evidence of safety for any new dietary ingredient that we may decide to
      use
      and the FDA’s refusal to accept such evidence could result in regulation of such
      dietary ingredients as food additives, requiring FDA pre-approval based on
      newly
      conducted, costly safety testing. In addition, while the DSHEA authorizes the
      use of statements of nutritional support or “structure/function claims in the
      labels and labeling of dietary supplements, the FDA is required to be notified
      of such statements. We cannot assure you that the FDA will not consider
      particular labeling statements used by us to be drug claims rather than
      acceptable statements of nutritional support, thereby necessitating approval
      of
      a costly new drug application, or re-labeling to delete such statements. We
      do
      believe, however, that we substantially comply with the regulations promulgated
      under DSHEA with regard to labels and labeling of our dietary
      supplements.




In
      November 1998, the FTC announced new advertising guidelines specifically for
      the
      dietary supplement industry, entitled “Dietary Supplements: An Advertising Guide
      for Industry.” These guidelines reiterate many of the policies the FTC has
      previously announced over the years, including requirements for substantiation
      of claims made in advertising about dietary supplements. We make every effort
      to
      ensure we are in compliance with FTC advertising standards.




The
      FFD&CA also authorizes the FDA to promulgate good manufacturing practices,
      or GMP, standards for dietary supplements, which require special quality
      controls for the manufacture, packaging, storage, and distribution of
      supplements. The final version of FDA’s GMP regulation has not been published.
      We believe however, that we will be in substantial compliance with the
      regulations once they are issued. We contractually require that any independent
      third party manufacturers doing business with us comply with all existing,
      or to
      be promulgated, regulations. The FFD&CA further authorizes the FDA to
      promulgate regulations governing the labeling of dietary supplements, including
      claims for supplements pursuant to recommendations made by the Presidential
      Commission on Dietary Supplement Labels. These rules, which were issued on
      or
      after September 23, 1997, entail specific requirements relative to the labeling
      of our dietary supplements. The rules also require additional record keeping
      and
      claim substantiation, reformulation, or discontinuance of certain products,
      which would be a material expense to us.




The
      sale
      of our products in countries outside the United States is regulated by the
      governments of those countries. We are not currently marketing our products
      outside of the United States, except in Canada and Mexico. Our plans to commence
      or sales in those countries may be prevented or delayed by such regulation.
      While compliance with such regulation will generally be undertaken by
      international distributors, we may assist with such compliance and in certain
      cases may be liable if a distributor fails to comply.




9




We
      cannot
      predict the nature of any future laws, regulations, interpretations, or
      applications, nor can we determine what effect such additional regulation,
      when
      and if it occurs, would have on our business in the future. Such additional
      regulation could require, however, any of the following:




·
            the
                reformulation of certain products to meet new
                standards,




·
            the
                recall or discontinuance of certain
                products,




·
            additional
                record keeping,




·
            expanded
                documentation of the properties of certain
                products,




·
            revised,
                expanded or different labeling, or




·
            additional
                scientific substantiation.




**Employees**




As
      of
      March 30, 2008, we had one full-time employee, all of whom are engaged in
      finance, administration, or management functions. None of our employees is
      subject to any collective bargaining agreements with us, and we believe our
      relationship with our employees is satisfactory. Our future success depends,
      in
      part, on our ability to attract, retain, and motivate highly qualified
      personnel.




**RISK
      FACTORS**




*You
      should consider carefully the following risk factors and all other information
      contained herein in evaluating our company and our business. Our common stock
      involves a high degree of risk. If any of the following risks occur, our
      business, financial condition, and operating results will suffer. Moreover,
      the
      price of our common stock could decline and you could lose all of your
      investment.*




***Our
      financial condition raises substantial doubt about our ability to continue
      as a
      going concern, and our independent auditors have issued a going concern opinion
      on our financial statements.***




Our
      consolidated financial statements have been prepared assuming we will continue
      on a going concern basis, which contemplates the realization of assets and
      the
      satisfaction of liabilities in the normal course of business. We have suffered
      recurring losses from operations, have a working capital deficit, and depend
      on
      funding from sources other than operations. Since inception, we have been
      required to raise additional capital by the issuance of both equity and debt
      instruments. There are no commitments from any funding sources should cash
      flows
      be insufficient to fund ongoing operations and other cash commitments as they
      come due. These factors raise substantial doubt about our ability to continue
      as
      a going concern. We will be required to raise additional capital in the near
      term through offerings of securities to fund operations and will attempt to
      continue raising capital resources if we do not begin to generate revenue
      sufficient to maintain our company as a viable entity. No assurance can be
      given
      that such financing will be available or, if available, that it will be on
      commercially favorable terms. Moreover, available financing may be dilutive
      to
      current investors.




In
      June
      2007 due to business considerations, we made an agreement with one of our
      suppliers to allow them to sell some of our branded products directly to one
      of
      our major distributors. This agreement was necessary as the company did not
      have
      the capacity to service the sales needs of this customer.





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




10




The
      purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
      (ii) cancellation of outstanding indebtednesses of Vital Living, its
      subsidiaries and certain related entities to NutraCea, including all of the
      Notes, and (iii) cancellation of all shares of Series D Preferred Stock of
      Vital
      Living held by NutraCea




**Our
      significant losses and negative cash flow raise questions about our ability
      to
      continue as a going concern.**




We
      have
      only a limited operating history. Our business must be considered in light
      of
      the risks, expenses, and difficulties frequently encountered in establishing
      a
      business in the nutritional supplement and nutraceuticals industries, which
      are
      characterized by a large number of market participants, intense competition,
      and
      a high failure rate. We incurred net losses of approximately $2,460,000 and
      $82,000 in 2007 and 2006, respectively. We cannot assure you that we will be
      able to achieve or sustain revenue growth, profitability, or positive cash
      flow
      on either a quarterly or annual basis or that profitability, if achieved, will
      be sustained. If we are unable to achieve or sustain profitability, we may
      not
      be financially viable in the future and may have to curtail, suspend, or cease
      operations. Because of our recurring operating losses and negative cash flow,
      the audit report of our independent public accountants on our financial
      statements for the fiscal years ended December 31, 2006 and 2005 contains an
      explanatory paragraph stating that the independent auditor has substantial
      doubt
      about our ability to continue as a going concern.




**If
      we are unable to generate cash from operations, we may need to raise additional
      funds in the near future.**




We
      had a
      working capital deficit of $2,076,000 at December 31, 2007. Historically, we
      have been dependent on equity or debt financings to fund our operations and
      working capital needs. We completed offerings of 510,000 shares of our common
      stock raising gross proceeds of $510,000 in the first quarter of 2004; an
      offering of 3.9 million shares of our common stock and 15.6 million warrants,
      which resulted in gross proceeds of $975,000 in June and July of 2004; and
      a
      warrant offering, which began in November 2004 and concluded in January 2005,
      that resulted in the issuance of 7.1 million shares of our common stock and
      6.4
      million warrants that generated $717,000 in gross proceeds. Our net cash
      provided and used in operating activities was $77,000 and ($164,000) during
      the
      years ended December 31, 2007 and 2006, respectively. We may need to raise
      additional capital in the very near future to fund our operations and are
      currently examining various sources of additional financings. However, because
      our Senior Secured Convertible Notes are secured by substantially all of our
      assets, we may have difficulty securing additional debt financing on terms
      favorable to us or at all. Any equity financing that we obtain may be highly
      dilutive to existing stockholders. Our inability to generate cash flow from
      operations or to find sources of funding would have an adverse impact on our
      ability to maintain our operations.




**We
      have substantial indebtedness and interest obligations that we must satisfy
      when
      due.**




We
      have
      substantial indebtedness and interest obligations that we must satisfy in
      accordance with their terms. In connection with the MAF acquisition completed
      during 2002, we have a recorded a related provision of $401,000, which is
      included in our current liabilities. During the third quarter of 2004, we
      entered into an agreement to sell all property, rights, and assets related
      to
      our Boulder Bar product line. The purchaser agreed to assume the debt. However,
      the purchaser has not complied with the terms of the agreement, and we are
      currently seeking legal remedies. In addition, we have outstanding $4.2 million
      aggregate principal amount of Senior Secured Convertible Notes, which are
      secured by substantially all of our assets. In October 2004, we obtained
      majority consent of the holders of the notes to pay the 12% annual interest
      requirement in either cash or shares of our common stock. We cannot assure
      you
      that our operations will generate funds sufficient to repay these debt
      obligations as they come due. Our failure to repay any of our indebtedness
      and
      make required interest payments as required by these debt obligations could
      result in an event of default. In this event, the holders of our debt could
      force us to sell our assets in order to repay obligations owing to
      them.




11




**We
      may record future losses because of an impairment of goodwill and other
      intangibles.**




We
      had
      approximately $2.5 million of goodwill and $600,000 of net intangible assets
      at
      December 31, 2007, cumulatively accounting for approximately 67% of our total
      assets at December 31, 2007. We adopted Statement of Financial Accounting
      Standards No. 142, “Goodwill and Other Intangible Assets,” and are required to
      analyze our goodwill and other intangible assets for impairment issues on an
      annual basis or when events occur that would indicate that a intangible asset
      impairment had occurred. The value of our goodwill and other intangible assets
      is exposed to future impairment if we experience declines in operating results
      or experience significant negative industry or economic trends or if future
      performance is below historical trends. We periodically review goodwill and
      intangible assets for impairment using the guidance of applicable accounting
      literature. We are subject to financial statement risk to the extent that the
      goodwill and other intangible assets become impaired, and any impairment losses
      related to goodwill and other intangible assets may result in a non-cash charge
      to earnings. We may, in the future, determine that certain assets classified
      as
      goodwill or intangible are impaired and record the appropriate non-cash charge
      to earnings.




**Any
      acquisitions that we undertake could be difficult to integrate, disrupt our
      business, dilute our stockholder value, and harm our operating
      results.**




We
      plan
      to continue to review opportunities to buy other businesses that would expand
      our product offerings, enhance our product distribution, expand the geographical
      breadth of our markets, or otherwise offer other growth opportunities. In the
      past two years, we have acquired three businesses, and we may acquire additional
      businesses in the future. If we make any future acquisitions, we may issue
      stock
      that would dilute existing stockholders’ percentage ownership, incur substantial
      debt, or assume contingent liabilities. Acquisitions involve numerous risks,
      including the following:




·
            problems
                integrating the purchased products, operations, personnel, distribution
                channels, and systems with our own;




·
            unanticipated
                costs or undisclosed liabilities associated with the
                acquisition;




·
            diversion
                of management’s attention from our existing
                businesses;




·
            potential
                compliance issues with regard to acquired companies that did not
                have
                adequate internal controls;




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




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




·
            potential
                loss of key employees and customers of purchased
                organizations.




Our
      acquisition strategy entails reviewing and potentially reorganizing acquired
      business operations, corporate infrastructure and systems, and financial
      controls. Unforeseen expenses, difficulties, and delays frequently encountered
      in connection with expansion through acquisitions could inhibit our growth
      and
      negatively impact our profitability. We may be unable to identify suitable
      acquisition candidates or to complete the acquisitions of candidates that we
      identify. Increased competition for acquisition candidates may increase purchase
      prices for acquisitions to levels beyond our financial capability or to levels
      that would not result in the returns required by our acquisition criteria.
      In
      addition, we may encounter difficulties in integrating the operations of
      acquired businesses with our own operations or managing acquired businesses
      profitably without substantial costs, delays, or other operational or financial
      problems.




We
      may
      issue common or preferred stock and incur substantial indebtedness in making
      future acquisitions. The size, timing, and integration of any future
      acquisitions may cause substantial fluctuations in operating results from
      quarter to quarter. Consequently, operating results for any quarter may not
      be
      indicative of the results that may be achieved for any subsequent quarter or
      for
      a full fiscal year. These fluctuations could adversely affect the market price
      of our common stock.




12




Our
      ability to grow through acquisitions will depend upon various factors, including
      the following:




·
            the
                availability of suitable acquisition candidates at attractive purchase
                prices;




·
            the
                ability to compete effectively for available acquisition opportunities;
                and




·
            the
                availability of funds or common stock with a sufficient market price
                to
                complete the acquisitions.




As
      a part
      of our acquisition strategy, we frequently engage in discussions with various
      companies regarding their potential acquisition by us. In connection with these
      discussions, we and each potential acquisition candidate exchange confidential
      operational and financial information, conduct due diligence inquiries, and
      consider the structure, terms, and conditions of the potential acquisition.
      In
      certain cases, the prospective acquisition candidate may agree not to discuss
      a
      potential acquisition with any other party for a specific period of time, grant
      us an option to purchase the prospective business for a designated price during
      a specific time, and agree to take other actions designed to enhance the
      possibility of the acquisition, such as preparing audited financial information.
      Potential acquisition discussions frequently take place over a long period
      of
      time and involve difficult business integration and other issues, including
      in
      some cases, management succession and related matters. As a result of these
      and
      other factors, a number of potential acquisitions that from time to time appear
      likely to occur do not result in binding legal agreements and are not
      consummated.




**We
      rely on others for our production, and any interruptions of these arrangements
      could disrupt our ability to fill our customers’ orders.**




We
      outsource through contract manufacturers for all of our production requirements.
      Competitors that manufacture their own products may have an advantage over
      us
      with respect to pricing, availability of products, and other areas through
      their
      control of the manufacturing processes. Any increase in labor, equipment, or
      other manufacturing costs could adversely affect our cost of sales. Qualifying
      new manufacturers is time-consuming and might result in unforeseen manufacturing
      and operations problems. The loss of our relationships with our manufacturers
      or
      their inability to conduct their manufacturing services for us as anticipated
      in
      terms of cost, quality, and timeliness could adversely affect our ability to
      fill customer orders in accordance with required delivery, quality, and
      performance requirements. If this were to occur, the resulting decline in
      revenue would harm our business.




**We
      depend on third parties to maintain satisfactory manufacturing and delivery
      schedules, and their inability to do so could increase our costs, disrupt our
      supply chain, and result in our inability to deliver our products, which would
      adversely affect our results of operations.**




We
      depend
      on our manufacturers to maintain high levels of productivity and satisfactory
      delivery schedules. Although we a have long-term contract with one of our
      manufacturers, the contract does not guarantee adequate production capacity,
      prices, lead times, or delivery schedules. Our manufacturers serve many other
      customers, a number of which may have greater production requirements than
      we
      do. As a result, our manufacturers could determine to prioritize production
      capacity for other customers or reduce or eliminate deliveries to us on short
      notice. At times, we have experienced lower than anticipated manufacturing
      turnarounds and lengthening of delivery schedules. We may encounter
      manufacturing delays and longer delivery schedules in commencing volume
      production of our new products. Any of these problems could result in our
      inability to deliver our products in a timely manner and adversely affect our
      operating results. We depend to a great extent on our manufacturers for the
      safety, purity, and potency of our products.




**We
      depend on a limited number of wholesale distributors to sell a significant
      portion of our products.**




We
      currently market our products on a wholesale basis through our distributors
      operating primarily in the United States. We depend on these distributors to
      sell our products to healthcare practitioners throughout the United States.
      If a
      significant distributor discontinues selling our products, performs poorly,
      does
      not pay for purchased products, reorganizes, or liquidates and is unable to
      continue selling our products, our business, financial condition, and operating
      results could be adversely affected. Our failure or inability to replace poorly
      performing distributors could have a material adverse effect on our business.
      Our sales and receivables is heavily concentrated on one distributor in which
      Stuart Benson, our CEO has a 50% interest (see “Certain Relationships and
      Related Transactions.”.




13




Any
      material increase in the cost of the raw materials used to manufacture our
      products could have a material adverse effect on our cost of sales.




We
      do not
      have contracts with all of the suppliers of the raw materials used in the
      production of our products. Historically, we have not experienced any
      difficulties obtaining the raw ingredients for our products on customary terms.
      We are, however, subject to variations in the prices of the raw materials used
      in the manufacture of our products. We may not be able to pass along any cost
      increases to our customers. As a result, any material increase in the cost
      of
      raw materials used in the manufacture of our products could have a material
      adverse effect on our cost of sales.




**If
      we are unable to compete effectively with existing or new competitors, our
      existing business will decline and our anticipated business plan will not be
      successfully implemented.**




We
      believe the market for nutritional supplements and nutraceuticals products
      is
      continually evolving and is highly dependent upon changes in the demographic
      and
      social trends. We compete with numerous competitors, many of which have
      significantly greater financial, technical, marketing, and other resources
      than
      we do. In making decisions regarding the development of new products and the
      enhancement and extension of our current products, we encounter competition
      in
      attempting to anticipate the needs and preferences of healthcare practitioners,
      consumers, and nutritionists. Consumer preferences, particularly in the
      nutritional supplements and nutraceuticals market, are continuously changing
      and
      are difficult to predict. We believe we can compete effectively by reacting
      quickly to expected and perceived customer requirements and desires by
      maintaining relationships with our existing strategic partners, and identifying
      and reaching agreements with new partners. However, we cannot assure you that
      our assessment of the market place is correct, or that our products will be
      accepted now or in the future.




**Our
      failure to comply with current or future governmental regulations could
      adversely affect our business.**




The
      formulation, manufacturing, packaging, labeling, advertising, distribution,
      and
      sale of dietary supplements, such as those sold by us, are subject to regulation
      by a number of federal, state and local agencies, principally, the FDA, and
      the
      FTC, as well as foreign agencies in areas where we may operate. Among other
      matters, this regulation is concerned with product safety and claims made with
      respect to a product’s ability to provide health-related benefits. These
      agencies have a variety of procedures and enforcement remedies available to
      them, including the following:




·
            initiating
                investigations;




·
            issuing
                warning letters and cease and desist
                orders;




·
            requiring
                corrective labeling or advertising;




·
            requiring
                consumer redress, such as requiring that a company offer to repurchase
                products previously sold to
                consumers;




·
            seeking
                injunctive relief or product seizures;
                and




·
            imposing
                civil penalties or commencing criminal
                prosecution.




Federal
      and state agencies have in the past used these remedies in regulating
      participants in the dietary supplements industry, including the imposition
      by
      federal agencies of civil penalties in the millions of dollars against a few
      industry participants. In addition, publicity related to dietary supplements
      may
      result in increased regulatory scrutiny of the nutritional supplements
      industry.




14




Our
      failure to comply with applicable laws could subject us to severe legal
      sanctions, which could have a material adverse effect on our business and
      results of operations. The regulatory environment in which we operate could
      change and such regulatory environment, or any specific action taken against
      us,
      could result in a material adverse effect on our business and operations. A
      state could interpret claims presumptively valid under federal law as illegal
      under that state’s regulations, and future FDA regulations or FTC decisions
      could restrict the permissible scope of such claims. Any such proceedings or
      investigations or any future proceedings or investigations could have a material
      adverse effect on our business or operations.




**If
      we are deemed to be subject to the federal Medicare Anti-Kickback statutes
      or
      similar state statutes, it could have a material adverse effect on our business
      and operations.**




The
      healthcare industry is subject to extensive federal and state regulation
      relating to licensure, conduct of operations, ownership of facilities, addition
      of facilities and services, and payment for services. As Essentum® is not
      subject to Medicare or Medicaid reimbursement, we do not believe that our
      activities are subject to regulation under the federal Anti-Kickback statutes.
      The Anti-Kickback statutes generally prohibit persons from knowingly and
      willfully soliciting, receiving, offering or providing remuneration, directly
      or
      indirectly, to induce either the referral of an individual, or the furnishing,
      recommending, or arranging for a good or service, for which payment may be
      made
      under a federal healthcare program such as the Medicare and Medicaid programs.
      However, the statute was drafted broadly and it has resulted in many
      arrangements and practices that are lawful in businesses outside of the
      healthcare industry to be deemed unlawful. As a result, there has been a lack
      of
      uniform interpretation of the Anti-Kickback statutes, which make compliance
      even
      more difficult. The penalties for violating these statutes can be severe and
      include criminal penalties and civil sanctions, fines, imprisonment, and
      possible exclusion from the Medicare and Medicaid programs. Many states have
      adopted laws similar to the federal Anti-Kickback statutes. Some of these state
      prohibitions apply to referral of patients for healthcare services reimbursed
      by
      any source, not only the Medicare and Medicaid programs. Although we believe
      that we comply with both federal and state anti-kickback laws, any finding
      of a
      violation of these laws could subject us to criminal and civil penalties or
      possible exclusion from federal or state healthcare programs. Such penalties
      would adversely affect our financial performance and our ability to operate
      our
      business.




**Our
      insurance may be inadequate to cover us against product liability claims that
      may be brought against us.**




We
      maintain liability insurance with policy limits generally of $1.0 million per
      occurrence and $2.0 million in the aggregate. Our insurance coverage includes
      property, casualty, comprehensive general liability, and products liability
      insurance. We believe that our insurance coverage is adequate. The testing,
      marketing, and sale of health care products, however, entail an inherent risk
      of
      product liability. Product liability claims relating to dietary supplement
      products could be asserted against us, our licensees, or third parties with
      whom
      we operate. Many claims related to dietary supplements have already been brought
      against businesses in our industry. Further, our insurance may not provide
      adequate coverage against any potential claims. A product liability claim or
      product recall could have a material adverse effect on our business, financial
      condition, and results of operations.




**We
      depend on key employees and the loss of either of their services could harm
      our
      business.**




We
      are
      heavily dependent upon Stuart A. Benson, our President, Chief Executive Officer
      and acting Chief Financial Officer. We have entered into employment agreements
      with Mr. Benson and Mr. Linn that provide for him to be employed by us through
      December 2008. The agreements, however, cannot assure us of their continued
      service. The loss of Mr. Benson could have a material adverse effect on us.
      Under the terms of Mr. Benson’s employment agreement, we obtained “key-man”
insurance policy for Mr. Benson in the amount of $500,000. We are the
      beneficiary of this policy.




15




**We
      have modified the terms of our Senior Secured Notes in a manner that may result
      in significant dilution to our existing stockholders, and our stockholders
      will
      experience significant dilution if we issue additional
      securities.**




In
      October 2006, our Board of Directors approved a modification to Senior Secured
      Convertible Notes (“Notes”) and Series D Preferred Stock that allows for both of
      these securities to be converted into our common stock at current market price
      of the stock as defined in the Senior Secured Convertible Note agreement. In
      April 2007, all of the outstanding Notes and Preferred Stock were acquired
      by
      NutraCea, Inc. As of March 30, 2008, we have not offered this opportunity to
      the
      holders of either the notes or the Series D Preferred Stock. As of December
      31,
      2007, we had outstanding 164,559,000 shares of common stock, 1,000,000 shares
      of
      Series D Preferred Stock currently convertible into 1,000,000 shares of common
      stock, options to purchase 6,501,000 shares of common stock, warrants to
      purchase 31,680,000 shares of common stock, and Senior Secured Convertible
      Notes
      convertible into 17,610,000 shares of common stock. If we issue additional
      shares, or if our existing stockholders exercise or convert their outstanding
      options, warrants, or notes, our other stockholders may find their holdings
      drastically diluted, which if it occurs, means that they will own a smaller
      percentage of our company. Further, any issuance of additional securities to
      various persons or entities in lieu of cash payments will lead to further
      dilution. If all convertible instruments were converted and all outstanding
      warrants and options were exercised, notwithstanding the effect of the
      modification of the notes or the Series D Preferred Stock, we would have
      220,435,000 shares of common stock outstanding. In the event the holders of
      the
      notes and Series D Preferred Stock converted those securities into shares of
      common stock pursuant to the terms contained in the modifications approved
      by
      our Board, those holders would obtain voting control of our
      company.




**We
      have a limited trading market for our stock.**




Our
      common stock has been traded on the OTCBB since March 28, 2002. The market
      price
      of our common stock has been highly volatile and may continue to be volatile
      in
      the future. Many factors could affect the trading price of our common stock,
      including the following:




·
            the
                low price, thin trading volume, and relatively small public float
                of our
                common stock;




·
            variations
                in our quarterly operating results;




·
            introduction
                of new products and customer acceptance of
                products;




·
            general
                trends in the nutritional supplement and nutraceuticals
                markets;




·
            the
                number of holders of our common stock;
                and




·
            the
                interest of securities dealers in maintaining a market for our common
                stock.




As
      long
      as there is only a limited public market for our common stock, the sale of
      a
      significant number of shares of our common stock at any particular time could
      be
      difficult to achieve at the market prices prevailing immediately before such
      shares are offered and could cause a severe decline in the price of our common
      stock.




**Because
      our common stock is subject to the SEC’s penny stock rules, broker-dealers may
      experience difficulty in completing customer transactions and trading activity
      in our securities may be adversely affected.**




Because
      we currently have less than $5,000,000 of net tangible assets and the market
      price of our common stock is less than $5.00 per share, transactions in our
      common stock are subject to the “penny stock” rules promulgated under the
      Securities Exchange Act of 1934. These rules require broker-dealers that
      recommend our securities to persons other than institutional accredited
      investors to do each of the following:




·
            make
                a special written suitability determination for the
                purchaser;




·
            receive
                the purchaser’s written agreement to a transaction prior to
                sale;




·
            provide
                the purchaser with risk disclosure documents which identify certain
                risks
                associated with investing in “penny stocks” and which describe the market
                for these “penny stocks” as well as a purchaser’s legal remedies;
                and




16




·
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in a “penny stock” can be
                completed.




As
      a
      result, broker-dealers may find it difficult to effectuate customer transactions
      and trading activity in our securities may be adversely affected. Therefore,
      the
      market price of our securities may be depressed, and you may find it more
      difficult to sell our securities.




**We
      have never paid any cash dividends on our common stock.**




We
      have
      never paid any cash dividends on our common stock, and we do not expect to
      pay
      cash dividends on our common stock in the foreseeable future. In addition,
      the
      terms of our outstanding preferred stock and Senior Secured Convertible Notes
      restrict our ability to pay cash dividends.




**Item
      2.**  **Description
      of Property**




At
      the
      end of April 2007, we closed our Phoenix, AZ corporate office. Our corporate
      office is now located at 1289 Clint Moore Road, Boca Raton, FL, 33487. These
      offices are in the same building with Wellness Watchers Global (“WWG”), our
      largest distributor, in which our CEO Stuart Benson has a 50% interest (see
      Note
      10). We are paying $1,500 per month of WWG’s rent in return for our office space
      there.




**Item
      3.**  **Legal
      Proceedings**




We
      are
      involved in various legal proceedings arising out of our operations in the
      ordinary course of business. We do not believe that any such proceedings will
      have a material adverse effect on our business, operating results, or financial
      condition.




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




Not
      applicable.




**PART
      II.**




**Item 5.**
              **Market
                  for Common Equity, Related Stockholder Matters, and Small Business
                  Issuer
                  Purchases of Equity
                  Securities**




Our
      common stock has been traded in the OTC Bulletin Board under the symbol VTLV.OB
      since March 28, 2002. The following table sets forth the high and low sales
      prices of our common stock for each calendar quarter indicated.




**High**
            
            **Low****Year
                ended December 31, 2006:**First
                quarter
            
            $
            0.05
            
            $
            0.036Second
                quarter
            
            $
            0.05
            
            $
            0.05Third
                quarter
            
            $
            0.005
            
            $
            0.005Fourth
                quarter
            
            $
            0.005
            
            $
            0.005**Year
                ended December 31, 2007:**First
                quarter
            
            $
            0.015
            
            $
            0.008Second
                quarter
            
            $
            0.010
            
            $
            0.005Third
                quarter
            
            $
            0.008
            
            $
            0..003Fourth
                quarter
            
            $
            0.005
            
            $
            0.003**Year
                ended December 31, 2008:**First
                quarter (through March 30, 2008)
            
            $
            0.015
            
            $
            0.003




17




On
      March
      30, 2008, the closing price of our stock was $0.003 and we had 460 record
      holders of our common stock.




**Item
      6.**  **Management’s
      Discussion and Analysis**




*Overview*




We
      develop and market fruit and vegetable supplements, protein supplements, and
      nutraceutical products that are marketed for distribution through physicians,
      medical groups, chiropractic offices, and retail outlets. Nutraceuticals are
      products that are isolated or purified from foods and generally sold in
      medicinal forms not usually associated with foods, including tablets, capsules,
      or drops. These nutraceuticals may have physiological benefits or have the
      ability to reduce the risk of chronic disease beyond basic nutritional products.
      We develop and test our nutraceuticals in collaboration with leading medical
      experts in the nutraceuticals field. We have designed them to be incorporated
      by
      healthcare practitioners into a standard patient system where healthcare
      practitioners recommend and sell our whole food and nutraceuticals products
      to
      their patients. Our focus has been with our GreensFIRST®, Red AlertTM, Dream
      ProteinTM, ReliefFIRST® and Complete EssentialsTM products.




Our
      business strategy is to capitalize on the growing complimentary and alternative
      medicine market by creating condition-specific formulations that offer a broad
      range of benefits. Our products focus on general health by utilizing nutritional
      supplements and nutraceuticals as a means to gain the confidence and support
      of
      healthcare practitioners. We plan to focus on certain target conditions,
      providing the market with high quality, relevant products through our healthcare
      practitioner distribution channels.




**Results
      of Operations**




Year
      Ended December 31, 2007 Compared With Year Ended December 31, 2006




The
      following sets forth selected financial data and its percentage of net sales
      for
      the years ended December 31, 2007 and 2006:




**2007**
            
            **2006**
            
            **Increase****Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%**
            ****
            **(Decrease)**Revenue
            
            $
            2,224,000
            
            
            100.0
            %
            $
            4,941,000
            
            
            100.0
            %
            $
            (2,717,000
            )Cost
                of goods sold
            
            
            1,170,000
            
            
            52.6
            %
            
            2,255,000
            
            
            45.6
            %
            
            (1,085,000
            )Gross
                profit
            
            
            1,054,000
            
            
            47.4
            %
            
            2,686,000
            
            
            54.4
            %
            
            (1,632,000
            )Administrative
                expensesSalaries
                and benefits
            
            
            704,000
            
            
            31.7
            %
            
            816,000
            
            
            16.5
            %
            
            (112,000
            )Professional
                and consulting fees
            
            
            730,000
            
            
            32.8
            %
            
            492,000
            
            
            10.0
            %
            
            238,000Selling,
                general and administrative
            
            
            672,000
            
            
            30.2
            %
            
            1,014,000
            
            
            20.5
            %
            
            (342,000
            )Research
                and development
            
            
            -
            
            
            -
            
            
            151,000
            
            
            3.1
            %
            
            (151,000
            )Depreciation
                and amortization
            
            
            155,000
            
            
            7.0
            %
            
            11,000
            
            
            0.2
            %
            
            144,000Total
            
            
            2,261,000
            
            
            101.7
            %
            
            2,484,000
            
            
            50.3
            %
            
            (223,000
            )Net
                income (loss) from operations
            
            
            (1,207,000
            )
            
            (54.3
            )%
            
            202,000
            
            
            4.1
            %
            
            (1,409,000
            )Other
                income (expense)Interest
                expense, net
            
            
            (1,239,000
            )
            
            (55.7
            )%
            
            (1,192,000
            )
            
            (4.1
            )%
            
            (47,000
            )Gain
                on issuance of common stock for accrued research and
                development
            
            
            -
            
            
            -
            %
            
            500,000
            
            
            10.1-
            %
            
            (500,000
            )Gain
                on settlement of accounts payable, trade
            
            
            -
            
            
            -
            %
            
            402,000
            
            
            8.1
            %
            
            (402,000
            )Other
                income (expense), net
            
            
            (14,000
            )
            
            (0.6-
            )%
            
            6,000
            
            
            0.1
            %
            
            (20,000
            )Net
                loss from continuing operations
            
            $
            (2,460,000
            )
            
            (110.6
            )%
            $
            (82,000
            )
            
            (1.7
            )%
            $
            (2,378,000
            )




18




*Revenue*




Total
      revenue for the year ended December 31, 2007 was $2,224,000 compared with
      $4,491,000 for the year ended December 31, 2006, a decrease of $2,717,000.
      This
      decrease is primarily due to an arrangement with NutraCea. Beginning in June
      2007, we permitted NutraCea to directly service certain of the Company’s
      customers to facilitate a potential transaction with NutraCea and to avoid
      product shortages and service interruptions while the Company was short on
      cash
      and unable to service our customers or purchase goods for resale. We estimate
      the lost gross profit to us as a result of this arrangement was approximately
      $1,167,000 during the twelve months ended December 31, 2007.




*Cost
      of goods sold and gross profit*




Cost
      of
      goods sold for the year ended December 31, 2007 was $1,170,000 compared with
      $2,255.000 for the year ended December 31, 2006, a decrease of $1,085,000.
      This
      decrease corresponds to the decrease in sales. The gross profit percentage
      for
      the year ended December 31, 2007 was 47.4%, compared with 54.4% for the year
      ended December 31, 2006, The decrease in our gross margins is the result of
      increased cost of materials which could not be passed on to our
      customers.




*Administrative
      expenses*




*Salaries
      and benefits*




Salary
      and benefits for the year ended December 31, 2007 was $704,000 compared with
      $816,000 for the year ended December 31, 2006, a decrease of $112,000. This
      decrease was the result of effect of the departure of all our full-time
      employees except our CEO, Stuart Benson.




*Professional
      and consulting*




Professional
      and consulting fees were $730,000 during the year ended December 31, 2007
      compared with $492,000 for the year ended December 31, 2006, an increase of
      $238,000. This increase is due to a charge of $400,000 for investment advisory
      services offset by the reduction of other professional fees..




*Selling,
      general, and administrative*




Selling,
      general, and administrative expenses for the year ended December 31, 2007 were
      $672,000 compared with $1,014,000 for the year ended December 31, 2006, a
      decrease of $342,000. The decrease resulted from reduced marketing efforts
      during the year.




*Research
      and development*




Research
      and development is expensed as incurred and totaled $0 for the year ended
      December 31, 2007 compared with $151,000 for the year ended December 31, 2006,
      a
      decrease of $151,000. This decrease was the result of the termination of new
      product development efforts during the year.




*Depreciation
      and amortization*




Depreciation
      and amortization for the year ended December 31, 2007 was $155,000 compared
      with
      $11,000 for the year ended December 31, 2006, an increase of $144,000. The
      increase is the result of the amortization of licensing rights.




19




*Other
      Income (Expense):*




Interest
      expense, net for the year ended December 31, 2007 was $1,239,000 compared with
      $1,192,000 for the year ended December 31, 2006, an increase of $47,000. The
      increase Is the result of the accrual of interest due on notes payable related
      to the licensing agreements entered into in 2006.




The
      gain
      on the exchange of common stock for accrued research and development was
      $500,000 for 2006. This gain resulted from the issuance of 12,500,000 shares
      of
      our common stock valued at $250,000 as payment of the $750,000 obligation to
      SkyePharma for research and development.




Gain
      on
      the settlement of accounts payable, trade was $0 and $402,000 for the years
      ended December 31, 2007 and 2006, respectively. This gain is the result of
      settling certain accounts payable for less than the original amount due. Other
      expense was $14,000 and $6,000 for the years ended December 31, 2007 and 2006
      respectively. The $20,000 in increase resulted from the 2007 charge of $14,000
      for the loss on disposal of fixed assets compared to the 2006 gain from the
      sale
      of marketable equity securities..




*Net
      loss from continuing operations*




Our
      net
      loss for the year ended December 31, 2007 was $2,460,000 compared with $82,000
      net profit for the year ended December 31, 2006, an increase of $2,378,000.
      This
      increse resulted from the combination of a $1,632,000 decrease in gross profit
      from our DFN subsidiary; a decrease of $500,000 from the exchange of common
      stock for the research and development liability; a decrease of $402,000 for
      the
      gain on settlement of accounts payable; an increase in depreciation and
      amortization of $144,000; and an increase of $238,000 in professional fees,
      offset by a decrease of $112,000 in salaries and benefits; a $342,000 decrease
      in Selling, General, and Administrative costs, and a $151,000 decrease in
      research and development costs;




***Liquidity
      and Capital Resources***




At
      December 31, 2007, we had $14,000 in cash.




Cash
      flows used in continuing operating activities were $329,000 and $164,000 in
      2007
      and 2006, respectively. This $165,000 increase in the amount of cash used in
      operations was primarily due to our $2,378,000 increased net loss offset by
      a
      $242,000 net increase in adjustments to reconcile net loss to cash used in
      operations and a $1,971,000 net increase in cash provided by the change in
      operating assets and liabilities.




Cash
      flows provided by financing activities was $316,000 in 2007, the result of
      issuing a note payable of $407,000 to our CEO offset by making a $100,000
      payment ($91,000 principle plus accrued interest) on a note payable related
      to
      licensing agreements entered into in 2006.




To
      date,
      we have funded our operations and acquisition activity primarily from cash
      generated from private placements and with funds from borrowings under various
      debt instruments, as summarized in the table below, generating an aggregate
      in
      net cash proceeds of $8.0 million during the period 2003 through
      2004.




20




The
      following summarizes private placement offerings completed during 2004 and
      2003:




**Date**
            
            **Description**
            
            **Shares or**
              **Principal**
            
            **Price**
              **Per Share**
            
            **Net Cash**
              **Proceeds**
            
            **Options and**
              **Warrants**
            
            **Exercise**
              **Price**April, 2003
            
            
            Series B Preferred
            
            
            1,000,000
            
            $
            1.00
            
            $
            875,000
            
            
            1,000,000 Series E
            
            $
            1.60500,000 Series D
            
            $
            1.30July, 2003
            
            
            Series C Preferred
            
            
            500,000
            
            $
            1.00
            
            $
            438,000
            
            
            500,000 Series E
            
            $
            1.60August, 2003
            
            
            Series D Preferred
            
            
            1,000,000
            
            $
            1.00
            
            $
            815,000
            
            
            N/A
            
            
            N/A3,060,000 No Series
            
            $
            1.00Oct. - Dec. 2003
            
            
            Bridge Notes
            
            
            1,530,000
            
            $
            1.00
            
            $
            1,316,000
            
            
            1,530,000 No Series
            
            $
            1.50December, 2003
            
            
            Senior Secured Notes
            
            
            4,587,738
            
            $
            1.00
            
            $
            2,502,000
            
            
            4,587,738 No Series
            
            $
            1.00March-April, 2004
            
            
            Common Stock
            
            
            510,000
            
            $
            1.00
            
            $
            469,000
            
            
            N/A
            
            
            N/AJune-July, 2004
            
            
            Common Stock
            
            
            3,900,000
            
            $
            0.25
            
            $
            897,000
            
            
            11,700,000 Series G
            
            $
            0.253,900,000 Series H
            
            $
            0.25Nov 2004-Dec 2004
            
            
            Warrant Offering
            
            
            7,056,706
            
            $
            0.10
            
            $
            631,000
            
            
            6,560,000 No Series
            
            $
            0.10$
            7,943,000




***Going
      concern***




The
      accompanying consolidated financial statements have been prepared assuming
      we
      will continue on a going concern basis, which contemplates the realization
      of
      assets and the satisfaction of liabilities in the normal course of business.
      We
      have suffered recurring losses from operations, have a working capital deficit,
      and depend on funding from sources other than operations. Since inception,
      we
      have been required to raise additional capital by the issuance of both equity
      and debt instruments. There are no commitments from any funding sources should
      cash flows be insufficient to fund ongoing operations and other cash commitments
      as they come due. These factors raise substantial doubt about our ability to
      continue as a going concern. We will be required to raise additional capital
      in
      the near term through offerings of securities to fund operations and will
      attempt to continue raising capital resources if we do not begin to generate
      revenue sufficient to maintain our company as a viable entity. No assurance
      can
      be given that such financing will be available or, if available, that it will
      be
      on commercially favorable terms. Moreover, available financing may be dilutive
      to current investors.




In
      June
      2007 due to business considerations, we made an agreement with one of our
      suppliers to allow them to sell some of our branded products directly to one
      of
      our major distributors. This agreement was necessary as the company did not
      have
      the capacity to service the sales needs of this customer.





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





The
      purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
      (ii) cancellation of outstanding indebtednesses of Vital Living, its
      subsidiaries and certain related entities to NutraCea, including all of the
      Notes, and (iii) cancellation of all shares of Series D Preferred Stock of
      Vital
      Living held by NutraCea




***Critical
      Accounting Policies***




**Acquisitions**




We
      account for acquisitions in accordance with Statement of Financial Accounting
      Standards, (“SFAS”) No. 141 “Business Combinations” and accordingly apply the
      purchase method of accounting for all business combinations initiated after
      June
      30, 2001 and separately identify recognized intangible assets that meet the
      criteria and amortizes these assets over their determinable useful
      lives.




21




**Goodwill**




Goodwill
      represents the excess of the aggregate price paid by us over the value of the
      net equity acquired in an acquisition. In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets,” we are no longer required to amortize
      goodwill, but are required to review goodwill for impairment at least annually
      or whenever events indicate that the carrying amount of the asset may not be
      recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets.” As of December 31, 2006 and 2005, no events had
      occurred that would indicate goodwill had been impaired.




**Intangible
      assets**




Our
      other
      intangible assets include trademarks, patents, formulations, customer lists,
      and
      various marketing and license agreements. We amortize intangible assets on
      a
      straight-line basis over the lesser of the correlating agreements or estimated
      useful lives ranging from two to 14 years.




**Long-lived
      assets**




We
      review
      long-lived assets and identifiable other intangible assets to be held and used
      for impairment at least annually or whenever events or changes in circumstances
      indicate that the carrying amount may not be recoverable. We evaluate goodwill
      and other intangible assets arising from various acquisitions for impairment
      on
      at least an annual basis or when events occur that would indicate that
      impairment had occurred. We measure impairment by comparing the carrying value
      of the long-lived assets to the estimated undiscounted future cash flows
      expected to result from use of the assets and their eventual disposition.




**Stock-based
      compensation**




We
      account for our stock option plans in accordance with the provisions of SFAS
      No.
      123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148
“Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No.
      123 permits entities to recognize as expense over the vesting period the fair
      value of all stock-based awards on the date of grant. Alternatively, SFAS No.
      123 also allows entities to apply the provisions of Accounting Principles Board
      (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations and provide pro forma net income or loss and pro forma earnings
      per share disclosures for employee stock option grants as if the
      fair-value-based method defined in SFAS No. 123 had been applied.




We
      are
      subject to reporting requirements of FASB Financial Interpretation No. (“FIN”)
      44, “Accounting for Certain Transactions Involving Stock Compensation,” which
      requires a non-cash charge to compensation expense if the price of our common
      stock on the last trading day of each reporting period is greater than the
      exercise price of certain stock options. After the first such adjustment is
      made, each subsequent period is adjusted upward or downward to the extent that
      the trading price exceeds the exercise price of the options.




We
      adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
      Share-Based Payment (“SFAS 123R”), effective January 1, 2006. SFAS 123R requires
      the recognition of the fair value of stock-based compensation in net income.
      SFAS 123R supersedes Statement of Financial Accounting Standards No. 123,
      Accounting for Stock-Based Compensations (“SFAS 123”) and Accounting Principles
      Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). We
      have adopted SFAS 123R using the modified prospective method. Accordingly,
      prior
      period amounts have not been restated. Under the modified prospective method,
      stock options awards that are granted, modified or settled after December 31,
      2005 will be valued at fair value in accordance with provisions of SFAS 123R
      and
      recognized on a straight line basis over the service period of the entire
      award.




We
      account for our incentive plans under the recognition and measurement principles
      of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
      issued to Employees,” and related Interpretations. No stock-based employee
      compensation (except that related to re-priced warrants in accordance with
      FIN
      No. 44) is reflected in net loss, as all options and warrants granted had an
      exercise price equal to or below the market value of the underlying common
      stock
      at the date of grant.




22




***Recent
      accounting pronouncements***




FIN
      48 In
      June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No.
      109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 requires that the Company recognize in its financial statements, the impact
      of a tax position, if that position is more likely than not of being sustained
      on audit, based on the technical merits of the position. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods and disclosure. The provisions of FIN 48 are effective beginning
      January 1, 2007 with the cumulative effect of the change in accounting principle
      recorded as an adjustment to the opening balance of retained earnings, goodwill,
      deferred income taxes and income taxes payable in the Consolidated Balance
      Sheets. The Company does not expect that the adoption of FIN 48 will have a
      significant impact on the financial statements of the Company.





The
      Company has reviewed other current outstanding statements from the Financial
      Accounting Standards Board and does not believe that any of those statements
      will have a material adverse affect on the financial statements of the Company
      when adopted.




**Item
      7.**  **Financial
      Statements**




See
      the
      Financial Statements and Financial Statements Schedules beginning on page F-1
      of
      this Form 10-KSB.




**Item
      8.**  **Changes
      and Disagreements with Accountants on Accounting and Financial
      Disclosure**




Not
      applicable.




**Item
      8A(T). Controls and Procedures**





***Disclosure
      Controls and Procedures***





We
      have
      evaluated, with the participation of our Chief Executive Officer, who is also
      our Acting Chief Financial Officer, the effectiveness of our disclosure controls
      and procedures as of December 31, 2007, pursuant to Rule 13a-15(b) of the
      Exchange Act. The term “disclosure controls and procedures,” as defined in Rules
      13a-15(e) and 15d-15(e) of the Exchange Act, means controls and other procedures
      of a company that are designed to ensure that information required to be
      disclosed by the issuer in the reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Commission’s rules and forms. Disclosure controls and
      procedures, include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by a company in the reports
      that it files or submits under the Exchange Act is accumulated and communicated
      to the company’s management, including its principal executive and principal
      financial officers, as appropriate, to allow timely decisions regarding required
      disclosure.





Based
      upon that evaluation, our Chief Executive Officer and Acting Chief Financial
      Officer concluded that, as of the end of the period covered by this Annual
      Report, our disclosure controls and procedures were not effective at a
      reasonable assurance level. In reaching this conclusion, the Chief Executive
      Officer and Acting Chief Financial Officer noted that we failed to include
      in
      our Annual Report a report by management on the Company’s internal control over
      financial reporting and that the certification contained in Exhibit 31.1 of
      the
      Annual Report did not include the required certification relating to the
      Company’s internal controls over financial reporting as required by applicable
      SEC regulations. We are currently reviewing our disclosure controls and
      procedures to correct the deficiency that led to this omission and expect to
      implement changes in the near term.




23




***Management’s
      Annual Report on Internal Control Over Financial
      Reporting***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Exchange Act. Our internal control over financial reporting is
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with generally accepted accounting principles. Our internal control
      over financial reporting includes those policies and procedures that are
      intended to:





(1)
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our
                assets;





(2)
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                reparation of financial statements in accordance with generally accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and





(3)
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use, or disposition of our assets that
                could
                have a material effect on our financial
                statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      connection with the preparation of this Annual Report on Form 10-KSB for the
      year ended December 31, 2007, our Chief Executive Officer and Acting Chief
      Financial Officer, has evaluated the effectiveness of our internal control
      over
      financial reporting, based on the framework in Internal Control-Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Our Chief Executive Officer and Acting Chief Financial Officer
      concluded that the design and operation of our internal controls and procedures
      are ineffective as of December 31, 2007. The Company's limited resources has
      caused the Company to reduce significantly its staff and is unable to adequately
      segregate duties. There were no significant changes in our internal controls
      over financial reporting that occurred during the fourth fiscal quarter that
      have materially affected, or are reasonably likely to materially affect, our
      internal controls over financial reporting.





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Commission that permit us
      to
      provide only management's report in this annual report.





**Item
      8B.**  **Other
      Information**




Not
      applicable.




**PART
      III.**




**Item
              9.**
            **Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act**




The
      following table sets forth certain information regarding our directors and
      executive officers.




**Name**
            
            **Age**
            
            **Position**Stuart A. Benson
            
            54
            
            Chairman of the Board, Chief Executive Officer,
              President, Acting Chief Financial Officer, and
              DirectorMichael Cardamone
            
            58
            
            Director





24




*Stuart
      A. Benson* has
      served as our Chairman of the Board since November, 2005 and as our Chief
      Executive Officer since January 2004 and our President since March 2002. Mr.
      Benson also served as our Vice Chairman of the Board of Directors from March
      2002 through January 2004 and our Executive Vice President from June 2001 until
      March 2002. From March 1997 until June 2001, Mr. Benson served as Chairman
      of
      the Board and Chief Executive Officer of Custom Food Concepts, Inc., a privately
      held company that operated a chain of restaurants in southern California. He
      has
      also served in both public and private companies as Chief Executive Officer
      and
      Chairman of the Board, including such companies as The Great Earth Vitamin
      Store
      chain and Nathan’s Famous Inc., where he served as their Chairman of the
      Executive Committee, Chairman of the Board, President, and Chief Executive
      Officer. He is a member of UJA and ADL, sponsor of CBA (Caring for Babies with
      Aids), past Chairman of the 5 Towns United Fund Red Feather Ball, and has
      successfully organized numerous functions for the Reno, Nevada chapter of the
      Make A Wish Foundation. In May 2002, Mr. Benson filed for personal bankruptcy,
      primarily as a result of federal tax liens relating to certain real estate
      syndication activities in the 1980’s. These liens relate to approximately $900
      million of recaptured phantom income attributable to Mr. Benson and his
      affiliates, as the general partner of various real estate syndication programs
      and partnerships, as well as $900,000 of other claims and judgments. In 1995,
      other IRS liens, relating to similar real estate syndication activities, were
      discharged by Mr. Benson in a prior personal filing under Chapter 7. The current
      bankruptcy filing is unrelated to Mr. Benson’s activities with us, and we do not
      believe that this filing will impact Mr. Benson’s ability to perform his duties
      as an officer and director in any material fashion.




*Michael
      Cardamone* has
      served as a member of our Board of Directors since September 2004.
      Mr. Cardamone has served as a private financial advisor since 1974. He has
      also served as a director of Accommodations Plus Inc., a company that provides
      and arranges for hotel reservations, since June 1996. In 1978, Mr. Cardamone
      founded M.J. Originals Dresses, a clothing producer, and served as its Chief
      Financial Officer until 1995. In January 2007, Michael Cardamone, a director,
      also became an employee of Wellness Watchers Global, LLC, our major distributor,
      an entity 50% owned by Stuart Benson our CEO.




**Information
      Relating to Corporate Governance and the Board of
      Directors**




Our
      bylaws authorize our Board of Directors to appoint among its members one or
      more
      committees, each consisting of one or more directors. Our Board of Directors
      has
      established four standing committees: an Executive Committee, an Audit
      Committee, a Compensation Committee, and a Nominations and Corporate Governance
      Committee.




Our
      Board
      of Directors has adopted charters for the Audit, Compensation, and Nominations
      and Corporate Governance Committees describing the authority and
      responsibilities delegated to each committee by the board. Our Board of
      Directors has also adopted Corporate Governance Guidelines, a Code of Conduct,
      and a Code of Ethics for the CEO and Senior Financial Officers. We post on
      our
      website at *wwwvitalliving.com* ,
      the
      charters of our Audit, Compensation, and Nominations and Corporate Governance
      Committees; our Corporate Governance Guidelines, Code of Conduct, and Code
      of
      Ethics for the CEO and Senior Financial Officers, and any amendments or waivers
      thereto; and any other corporate governance materials contemplated by SEC or
      NASDAQ regulations. These documents are also available in print to any
      stockholder requesting a copy in writing from our corporate secretary at our
      executive offices set forth in this prospectus.




Interested
      parties may communicate with our Board of Directors or specific members of
      our
      Board of Directors by submitting a letter addressed to the Board of Directors
      of
      Vital Living, Inc. c/o any specified individual director or directors at the
      address listed herein. Any such letters are sent to the indicated
      directors.




*The
      Audit Committee*




The
      purpose of the Audit Committee is to oversee the financial and reporting
      processes of our company and the audits of the financial statements of our
      company and to provide assistance to our Board of Directors with respect to
      the
      oversight of the integrity of the financial statements of our company, our
      company’s compliance with legal and regulatory matters, the independent
      auditor’s qualifications and independence, and the performance of our company’s
      independent auditor. The primary responsibilities of the Audit Committee are
      set
      forth in its charter and include various matters with respect to the oversight
      of our company’s accounting and financial reporting process and audits of the
      financial statements of our company on behalf of our Board of Directors. The
      Audit Committee also selects the independent auditor to conduct the annual
      audit
      of the financial statements of our company; reviews the proposed scope of such
      audit; reviews accounting and financial controls of our company with the
      independent auditor and our financial accounting staff; and reviews and approves
      transactions between us and our directors, officers, and their affiliates.




25




The
      Audit
      Committee currently consists of Mr. Cardamone. Who is not deemed an independent
      director of our company under Nasdaq rules as well as under rules adopted by
      the
      SEC pursuant to the Sarbanes-Oxley Act of 2002. The Board of Directors has
      determined that each of Mr. Cardamone (whose background are detailed above)
      qualifies as an “audit committee financial expert” in accordance with applicable
      rules and regulations of the SEC.




*The
      Compensation Committee*




The
      purpose of the Compensation Committee includes determining, or recommending
      to
      our Board of Directors for determination, the compensation of the Chief
      Executive Officer and other executive officers of our company and discharging
      the responsibilities of our Board of Directors relating to compensation programs
      of our company. The Compensation Committee currently consists of Mr.
      Cardamone,.




*The
      Nominations and Corporate Governance Committee*




The
      purposes of the Nominations and Corporate Governance Committee include the
      selection or recommendation to the Board of Directors of nominees to stand
      for
      election as directors at each election of directors, the oversight of the
      selection and composition of committees of the Board of Directors, the oversight
      of the evaluations of the Board of Directors and management, and the development
      and recommendation to the Board of Directors of a set of corporate governance
      principles applicable to our company. The Nominations and Corporate Governance
      Committee will consider persons recommended by stockholders for inclusion as
      nominees for election to our Board of Directors if the names, biographical
      data,
      and qualifications of such persons are submitted in writing in a timely manner
      addressed and delivered to our company’s corporate secretary at the address
      listed herein. The Nominations and Corporate Governance Committee identifies
      and
      evaluates nominees for our Board of Directors, including nominees recommended
      by
      stockholders, based on numerous factors it considers appropriate, some of which
      may include strength of character, mature judgment, career specialization,
      relevant technical skills, diversity, and the extent to which the nominee would
      fill a present need on our Board of Directors. *The
      Executive Committee*




The
      Executive Committee has all powers of the Board of Directors between meetings
      of
      the board, subject to applicable law. The members of the Executive Committee
      are
      Messrs., Cardamone, Linn, and Benson, with Mr. Cardamone serving as
      Chairman.




**Director
      Compensation**




In
      addition, for each year of service as a director of our company, we grant to
      each of our directors options to purchase 250,000 shares of common stock. In
      addition to such options, we grant (a) to our Chairman of the Board of
      Directors options to purchase 250,000 shares of common stock annually, and
      (b) to each committee chairman options to purchase 150,000 shares of common
      stock annually. We also pay our non-employee directors $1,400 per day for those
      days that they assist us in activities that are beyond their board-related
      responsibilities. During fiscal 2006, we paid Mr. Hannah, our former chairman,
      approximately $12,000 for such services. During 2006, we paid Michael Cardamone,
      a director, $10,000 for services deemed outside the scope of his role as a
      director.




**Item
      10.**  **Executive
      Compensation**




**Summary
      of Cash and Other Compensation**




The
      following table sets forth, for the periods indicated, the total compensation
      earned for services provided to us in all capacities by our Chief Executive
      Officer and our only other executive officer whose aggregate compensation
      exceeded $100,000 during fiscal 2007.




26




**SUMMARY
      COMPENSATION TABLE**


**Annual Compensation (1)****Name and Principal**
                **Position**
              
              **Year**
              
              **Salary ($)**
              
              **Bonus ($)**
              
              **Options (#)**
              
              **Other Compensation($)**Stuart
                  A. Benson
                Chief
                  Executive Officer,President,
                  and Director
              
              
              2007
                2006
              
              $
              280,000
                250,000
              
              
              -
                $100,000
              (2)
              
              –
              
              $
              12,000
                13,000Gregg
                  A. Linn
                Chief
                  Operating Officer and Chief Financial Officer
              
              
              2007
                2006
              
              $
              254,000
                220,000
              
              $
              50,0000
              (3)
              
              –
              
              $
              3,000
                11,000


__________________




(1)
            The
                officers also received certain perquisites, the value of which did
                not
                exceed the lesser of $50,000 or 10% of the officer’s compensation during
                fiscal 2005.




(2)
            Represents
                performance bonus for 2006.




(3)
            Represents
                performance bonus for 2006.




**Option
      Values and Holdings**




The
      following table sets forth, for the officers listed, the exercisable and
      un-exercisable options held by them as of December 31, 2007. None of the
      officers exercised options during fiscal 2007.




**FISCAL
      YEAR-END OPTION VALUES**




**Number of Securities**
              **Underlying Unexercised**
              **Options at Fiscal Year-End (#)**
            
            **Value of Unexercised**
              **In-The-Money Options at**
              **Fiscal Year-End ($) (1)****Exercisable**
            
            **Un-exercisable**
            
            **Exercisable**
            
            **Un-exercisable**Stuart A. Benson
            
            
            6,000,000
            
            
            –
            
            
            –
            
            
            –


______________


(1)
            None
                of the options had value as of December 31, 2007, as the exercise
                price
                per share of the options were greater than $0.03, which was the closing
                price of our common stock quoted on the OTCBB on December 31,
                2007.




**Employment
      Agreements**




On
      February 15, 2005, we entered into an employment agreement dated as of January
      1, 2005 with Stuart Benson providing for the employment of Mr. Benson as the
      President and Chief Executive Officer of our company. On February 15, 2005,
      we
      entered into an employment agreement dated as of January 1, 2005 with Gregg
      A.
      Linn providing for the employment of Mr. Linn as the Chief Financial Officer
      of
      our company. We amended Mr. Linn’s agreement during January 2006 in connection
      with his appointment as our Chief Operating Officer and Chief Financial Officer.
      The employment agreements have initial terms of three years each, and both
      are
      subject to automatic renewal for successive one-year periods. Mr. Linn resigned
      his positions in April 2007.




Mr.
      Benson’s employment agreement provides for Mr. Benson to receive an annual base
      salary of $220,000 from January 1, 2005 through December 31, 2005; $250,000
      from
      January 1, 2005 through December 31, 2006; and $280,000 commencing on January
      1,
      2007. Mr. Linn’s employment agreement provides for Mr. Linn to receive an annual
      base salary of $230,000 during 2006 and $260,000 during 2007. Both executives
      will also be eligible to receive annual bonuses pursuant to the employment
      agreements in amounts to be determined by the Board of Directors of our company.
      Mr. Linn resigned his positions in April 2007.




For
      the
      year ended 2006, the Board of Directors approved bonuses to Mr. Benson and
      Mr.
      Linn of $100,000 and $50,000, respectively.




27




As
      part
      of the compensation packages, we granted to Mr. Benson options to purchase
      3,000,000 shares of our common stock at an exercise price equal to the closing
      price of our common stock on the date of execution of the agreements. The
      options were fully vested during December 2005.




Under
      the
      employment agreement, we provide Messrs. Benson (1) car allowances of $1,200
      and
      $3,000 per month; (ii) reimbursement for travel and entertainment expenses
      incurred in connection with the business of our company; and (iii) the right
      to
      participate in any group insurance, hospital, medical, dental, accident,
      disability pension, retirement, vacation, expense reimbursement, and other
      plans, programs, or benefits as may from time to time be provided to other
      executive employees of our company. Pursuant to the employment agreements,
      we
      will reimburse the executive for premium on disability policies providing for
      coverage at a rate equal to 50% of his base salary in effect from time to time
      under the employment agreement.




In
      addition, during the term of his employment, we will pay premium for two life
      insurance policies of the life of Mr. Benson, one of which policies will have
      a
      face amount of $1,000,000 and will name our company as beneficiary, and one
      will
      have a face amount of $500,000 and will name as beneficiary a person or entity
      designated by Mr. Benson. The employment agreements contain provisions that
      prohibit the executives from competing with us or soliciting our personnel
      or
      employees for a period of 18 months following the termination of their
      employment with us.




The
      employment agreements each provide that either we or the executive may terminate
      the agreement at any time. If the executive’s employment is terminated
      unilaterally by us without cause or by us for good reason (as defined in the
      agreement), the executive will receive his base salary for the remainder of
      the
      term of the employment agreement. If the executive is terminated for reason
      of
      death or disability, he or his estate, as the case may be, will receive his
      fixed salary for 90 days after such termination. If the executive’s employment
      is terminated by him voluntarily or by us for cause as a result of certain
      acts
      committed by the executive (as set forth in the agreement), he will receive
      no
      further compensation under the employment agreement.




In
      the
      event of a change of control of our company, the executive may, at his option
      and upon notice to us, terminate his employment. If the executive terminates
      his
      employment due to a change of control, he will receive his base salary for
      the
      longer of the remainder of the employment term or a period of 18 months after
      such termination, as well as any unpaid fringe benefits, and such bonus as
      may
      have been earned prior to the change in control, all within 10 days after the
      termination.




**Indemnification
      Under our Certificate of Incorporation and Bylaws**




Our
      certificate of incorporation provides that no director will be personally liable
      to our company or its stockholders for monetary damages for breach of a
      fiduciary duty as a director, except to the extent such exemption or limitation
      of liability is not permitted under the Nevada General Corporation Law. The
      effect of this provision in the certificate of incorporation is to eliminate
      the
      rights of our company and its stockholders, either directly or through
      stockholders’ derivative suits brought on behalf of our company, to recover
      monetary damages from a director for breach of the fiduciary duty of care as
      a
      director except in those instances described under the Nevada General
      Corporation Law. In addition, we have adopted provisions in our bylaws and
      entered into indemnification agreements that require us to indemnify our
      directors, officers, and certain other representatives of our company against
      expenses and certain other liabilities arising out of their conduct on behalf
      of
      our company to the maximum extent and under all circumstances permitted by
      law.
      Indemnification may not apply in certain circumstances to actions arising under
      the federal securities laws.




28




**Equity
      Compensation Plan Information**




The
      following table sets forth information with respect to our common stock that
      may
      be issued upon the exercise of stock options under our incentive stock option
      plans as of December 31, 2006.




**Plan Category**
            
            **(a) Number of**
              **Securities to be**
              **Issued Upon Exercise**
              **of Outstanding**
              **Options, Warrants,**
              **and Rights**
            
            **(b) Weighted-**
              **Average Exercise**
              **Price of Outstanding**
              **Options, Warrants,**
              **and Rights**
            
            **(c) Number of Securities**
              **Remaining Available for**
              **Future Issuance Under**
              **Equity Compensation**
              **Plans (Excluding**
              **Securities Reflected in**
              **Column(a))**Equity
                Compensation
              Plans
                Approved by
              Stockholders
            
            
            10,251,390
            
            $
            0.08
            
            
            6,712,500Equity
                Compensation
              Plans
                Not Approved
              By
                Stockholders
            
            
            30,579,859
            
            $
            0.34
            
            
            ―Total
            
            
            40,830,979
            
            $
            0.26
            
            
            6,712,500




**Item
      11.**  **Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters**




The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of December 31, 2007 by




·
            each
                of our directors and executive
                officers,




·
            all
                of our directors and executive officers as a group,
                and




·
            each
                person or entity known by us to own more than 5% of our common
                stock.




**Shares Beneficially**
              **Owned****Name of Beneficial Owner (1)**
            
            **Number (2)**
            
            **Percent (3)****Directors
                and Executive Officers:**Stuart
                A. Benson
            
            
            10,980,000
            (5)
            
            8.9
            %Michael
                Cardamone
            
            
            265,000
            (6)
            
            
            *VTLV
                LLC
            
            
            9,430,562
            (4)
            
            4.0
            %All
                directors and executive officers
              as
                a group (three persons)
            
            
            20,842,229
            
            
            7.7
            %**Non-management
                5% stockholders:**Periscope
                Partners, L.P.
            
            
            23,267,106
            (7)
            
            10.4
            %SkyePharma
                PLC
            
            
            30,546,231
            (8)
            
            13.6
            %


___________________


*Less
      than 1%.




(1)
            Unless
                otherwise noted, the address of each person is care of Vital Living,
                Inc.,
                1289 Clint Moore Road, Boca Raton, FL,
                33487.




(2)
            Includes,
                when applicable, shares owned of record by such person’s minor children
                and spouse and by other related individuals and entities over whose
                shares
                of common stock such person has custody, voting control, or power
                of
                disposition. Also includes shares of common stock that the identified
                person had the right to acquire within 60 days of December 31, 2007
                by the
                exercise of vested stock options or warrants or the conversion of
                other
                securities.




29




(3)
            The
                percentages shown include the shares of common stock that the person
                will
                have the right to acquire within 60 days of December 31, 2007. In
                calculating the percentage of ownership, all shares of common stock
                which
                the identified person will have the right to acquire within 60 days
                of
                December 31, 2007 upon the exercise of vested stock options or warrants
                or
                the conversion of other securities are deemed to be outstanding for
                the
                purpose of computing the percentage of shares of common stock owned
                by
                such person, but are not deemed to be outstanding for the purpose
                of
                computing the percentage of shares of common stock owned by any other
                person.




(4)
            VTLV
                LLC, an entity which is owned by Stuart Benson. Includes 9,430,562
                shares
                of common stock..




(5)
            Includes
                4,950,000 shares of common stock issuable upon exercise of immediately
                exercisable warrants and unvested options to purchase 6,000,000 shares
                of
                common stock.




(6)
            Represents
                shares of restricted stock received upon becoming a director and
                member of
                certain of the committees of our board of directors, which are subject
                to
                vesting. This Includes 100,000 shares of common stock issuable upon
                exercise of stock options.




(7)
            Leon
                Frenkel, the general partner of Periscope Partners, exercises voting
                and
                dispositive power over these shares. Represents (a) 4,228,113 shares
                of
                common stock issuable upon exercise of warrants, (b) 4,222,221 shares
                of
                common stock issuable upon conversion of senior secured convertible
                notes,
                and (c) 14,816,772 shares of common stock. Does not include shares
                of
                common stock that may be issued if we determine to pay a portion
                of the
                interest owed on the senior secured convertible notes in shares of
                our
                common stock. The business address of Periscope Partners is 1600
                Flatrock
                Road, Penn Valley, PA 19072.




(8)
            Represents
                (a) 29,493,599 shares of common stock, , and (b) 1,052,632 shares
                of
                common stock currently issuable upon exercise of warrants issued
                in
                connection with the issuance of the notes. Does not include shares
                of
                common stock that may be issued if we determine to pay a portion
                of the
                interest owed on the senior secured convertible notes in shares of
                our
                common stock. The foregoing information was derived from an Amendment
                to
                Schedule 13D/A filed with the SEC on December 19, 2003. The business
                address of SkyePharma is 105 Piccadilly, London, England W1J
                7NJ.




**Item
      12.**  **Certain
      Relationships and Related Transactions**




From
      time
      to time, we engage our directors, shareholders, or other related parties for
      consulting services related to investment, acquisition, or other activities
      in
      the normal course of business. We believe that all of these transactions are
      conducted at an “arms-length” basis. Fair market value of securities issued in
      these transactions, including stock, options, and warrants, is listed below
      where applicable and calculated using the Black-Scholes Pricing Model as of
      the
      date of issuance or grant.




Officers
      and Directors




During
      2005 a partnership owned 50% each by Stuart Benson, CEO and Gregg Linn COO/CFO
      acquired a $40,000 Senior Secured Note from the original holder. In April,
      2007,
      this security was sold to NutraCea, Inc.




In
      June,
      2006, VTLV LLC, an entity owned 50% each by Stuart Benson, our President and
      CEO
      and Gregg Linn, our former COO and CFO acquired the $1,000,000 Series D
      Preferred Stock and $1,000,000 of the Senior Secured Convertible Note from
      the
      original holder. Prior to purchasing these securities, Mr. Benson and Linn
      offered us the ability to purchase these securities. At such time, our Board
      of
      Director determined that we did not have adequate financial resources to
      purchase these securities and approved the purchase by Mr. Benson and Linn.
      In
      April 2007, VTLV LLC sold these securities to NutraCea, Inc. Subsequent to
      this
      sale Mr. Linn’s remaining interest in VTLV LLC was transferred to Mr. Benson.




During
      2006, we paid Michael Cardamone, a director, $10,000 for services deemed outside
      the scope of his role as a director.




30




During
      2006, $12,000 was either paid directly or amounts paid on behalf of Mr. Hannah,
      our former Chairman. These amounts were paid for services requested us that
      were
      deemed outside the scope of his role as Chairman.




In
      November 2006, effective January 2007, our President and CEO, Stuart Benson,
      became a 50% shareholder in our largest distributor Wellness Watchers Global
      LLC
      (“WWG”), which is the successor entity to Wellness Watchers, LLC (“WW”).
      Wellness Watchers, LLC accounted for 82.6% of our sales during 2006 and 90.8%
      of
      our trade receivables at December 31, 2006. Wellness Watchers Global, LLC
      acquired all of the assets and liabilities of Wellness Watchers, LLC. WWG was
      responsible for 68% of our sales during 2007 and accounted for 98% of our trade
      accounts receivable at December 31, 2007. At December 31, 2007 WWG owed us
      $539,000. In January 2006, we entered into a service agreement with Red Rock
      Advisors, LLC, an entity controlled by Gregg Linn, our COO and CFO for outside
      services related to the creation, development and management of an infomercial
      that utilizes our product line. These services were deemed outside his role
      as
      COO and CFO. Pursuant to the agreement, Red Rock Advisors, LLC was paid $7,500
      per month for six months, beginning in January 2007.. In January 2007, Michael
      Cardamone, a director, also became an employee of Wellness Watchers Global,
      LLC,
      our major distributor, an entity 50% owned by Stuart Benson our
      CEO.




During
      2007, our CEO, Stuart Benson, or entities controlled by him, have made $407,000
      in non-interest bearing advances to the company.




During
      2007, we made rent payments totaling $36,000 for office space for our President
      and CEO in Boca Raton, FL. This office is the same office of Wellness Watchers
      Global, LLC, our major distributor, an entity 50% owned by Stuart Benson, our
      President and CEO.




**Item
      13.**  **Exhibits.**




*(a)*  *Financial
      Statements and Financial Statement Schedules*




(1)  Financial
      Statements are listed in the Index to Consolidated Financial Statements on
      page
      F-1 of this report.




(2)  No
      financial statement schedules are included because such schedules are not
      applicable, are not required, or because required information is included in
      the
      consolidated financial statements or notes thereto.




31




*(b)*  *Exhibits*




**Exhibit**
              **No.**
            
            **Description**3.1
            
            Amended
                and Restated Articles of Incorporation for Vital Living, Inc.
                (1)3.2
            
            Amended
                and Restated Bylaws for Vital Living, Inc. (1)4.1
            
            Form
                of Series A Warrant (2)4.2
            
            Form
                of Series B Warrant (3)4.3
            
            Form
                of Series C Warrant (3)4.4
            
            Form
                of Series D Warrant (4)4.5
            
            Form
                of Series E Warrant (5)4.6
            
            Form
                of Series F Warrant (2)4.10
            
            Certificate
                of Designation, Preferences and Relative, Participating, Optional
                or Other
                Special Rights of Series D Convertible Preferred Stock
                (5)4.16
            
            Registration
                Rights Agreement, dated as of November 20, 2002, between Vital Living,
                Inc. and those persons listed on Exhibit A attached thereto
                (3)4.17
            
            Stockholders’
                Agreement, dated, by and among Vital Living, Inc., Bradley D. Edson,
                Stuart A. Benson, Martin Gerst, Donald Hannah, William Coppel, Kenneth
                Martin, Phil Maffetone, Leslie C. Quick, III, and Thomas C. Quick
                (3)4.18
            
            Stockholders’
                Agreement, dated August 20, 2003, by and between Vital Living, Inc.,
                Bradley D. Edson, Stuart A. Benson, Donald Hannah, SkyePharma PLC,
                Fifth
                Avenue Capital, Inc. and Stephen Morris (5)4.19
            
            Registration
                Rights Agreement, dated as of August 20, 2003, by and between Vital
                Living, Inc. and SkyePharma PLC (5)4.22
            
            Form
                of Securities Purchase Agreement for December 2003 private offering
                (6)4.23
            
            Form
                of Senior Secured Convertible Note issued in December 2003 private
                offering (6)4.24
            
            Form
                of Warrant issued in December 2003 private offering (6)4.25
            
            Form
                of Warrant issued in 2003 offering of senior convertible promissory
                notes
                (6)4.26
            
            Form
                of Security Agreement for December 2003 private offering
                (6)4.27
            
            Form
                of Registration Rights Agreement for December 2003 private offering
                (6)4.28
            
            Form
                of Escrow Agreement for December 2003 private offering
                (6)4.29
            
            Form
                of Purchase Agreement for March 2004 private offering
                (11)4.30
            
            Form
                of Securities Purchase Agreement for June 2004 private offering
                (11)4.31
            
            Form
                of Series G Warrant (11)4.32
            
            Form
                Series H Warrant (11)4.33
            
            Form
                of Registration Rights Agreement for June 2004 private offering
                (11)4.34
            
            Asset
                Purchase Agreement, dated September 30, 2004, among Vital Living,
                Inc.,
                MAF BioNutritional, LLC and Radha Krishna Heartly Blessings, Inc.
                (12)10.1
            
            2001
                Stock Option Plan (1)10.17
            
            Warrant
                Agreement, dated November 20, 2002, between Vital Living, Inc. and
                Stuart
                A. Benson (7)10.18
            
            Amendment
                No. 1 to Warrant Agreement between Vital Living, Inc. and Stuart
                A. Benson
                (4)10.19
            
            Amendment
                No. 2 to Warrant Agreement between Vital Living, Inc. and Stuart
                A. Benson
                (10)





32




**Exhibit**
              **No.**
            
            **Description**10.26
            
            Warrant
                Agreement, dated April 16, 2003, between Vital Living, Inc. and Stephen
                Songsheng Chen (4)10.33
            
            Asset
                Purchase Agreement, dated as of June 20, 2003, among Vital Living,
                Inc.,
                Nature’s Systems, Inc., Christopher’s Original Formulas, Inc., Robert C.
                Scott and James R. Jeppson (8)10.34
            
            Form
                of Escrow Agreement, dated August 20, 2003, between Vital Living,
                Inc.,
                E-Nutraceuticals, Inc., Stephen Morris and Mercantile National Bank
–
                California, as escrow agent (5)10.35
            
            Development
                and License Agreement, dated as of December 28, 2001, between
                E-Nutraceuticals, Inc. and SkyePharma PLC (5)10.36
            
            Amendment
                No. 1, dated as of August 20, 2003, to Development and License Agreement
                by and among Vital Living, Inc., E-Nutraceuticals, Inc., Jagotec
                AG and
                SkyePharma PLC (5)10.37
            
            Stock
                Purchase Agreement, dated as of October 14, 2003, among Vital Living,
                Inc.
                and the stockholders set forth on the signature page attached thereto
                (9)10.42
            
            Form
                of Indemnification Agreement between the Company and each of Stuart
                A.
                Benson, Donald C. Hannah, Carson E. Beadle, and Michael Ashton
                (2)10.42.1
            
            Schedule
                of Indemnification Agreements in the form of Exhibit 10.42, including
                material detail in which such documents differ from Exhibit 10.42
                (2)10.43
            
            Amendment
                No. 1, dated as of January 13, 2004, to Stockholders’ Agreement, dated as
                of August 14, 2003, between each of the Company, Bradley D. Edson,
                Stuart
                Benson, Donald Hannah, Stephen Morris, SkyePharma PLC and Fifth Avenue
                Capital, Inc. (10)10.44
            
            Warrant
                Agreement, dated as of April 19, 2004, between the Company and Nest
                Ventures, LLC (13)10.45
            
            Settlement
                and Release Agreement, dated July 9, 2004, between the Company, Natures
                Systems, Inc., Christopher’s Original Formulas, Inc., Christopher
                Enterprises, Inc., Robert Scott, James Jeppson,, Norman Barala, Ruth
                Christopher and Stuart Benson (11)10.46
            
            Employment
                Agreement between Vital Living, Inc. and Stuart Benson, dated January
                1,
                2005 effective as of February 15, 2005 (14)10.47
            
            Employment
                Agreement between Vital Living, Inc. and Gregg Linn, dated January
                1, 2005
                effective as of February 15, 2005 (14)10.48
            
            2005
                Incentive Compensation Plan (15)10.49
            
            Warrant
                issued to Howard Wernick (15)10.50
            
            Amendment
                No. 1 to Employment Agreement, effective January 1, 2006, between
                the
                Company and Gregg A. Linn (15)21
            
            List
                of Subsidiaries (15)31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


_____________________________________




(1)
            Incorporated
                by reference to Current Report on Form 8-K dated August 17, 2001
                and filed
                with the SEC on October 1, 2001


(2)
            Incorporated
                by reference to Registration Statement on Form SB-2 (333-111921)
                filed
                with the SEC on January 14, 2004


(3)
            Incorporated
                by reference to Current Report on Form 8-K/A dated November 20, 2002
                and
                filed with the SEC on December 5,
                2002






33




(4)
            Incorporated
                by reference to Amendment No. 2 to Registration Statement on Form
                SB-2
                (333-102106) filed on April 28,
                2003


(5)
            Incorporated
                by reference to Current Report on Form 8-K dated August 21, 2003
                and filed
                with the SEC on September 8, 2003


(6)
            Incorporated
                by reference to Current Report on Form 8-K dated December 15, 2003
                and
                filed with the SEC on December 19,
                2003


(7)
            Incorporated
                by reference to Current Report on Form 8-K dated April 1, 2002 and
                filed
                with the SEC on April 16, 2002


(8)
            Incorporated
                by reference to Current Report on Form 8-K dated July 2, 2003 and
                filed
                with the SEC on July 16, 2003


(9)
            Incorporated
                by reference to Current Report on Form 8-K/A dated October 14, 2003
                and
                filed with the SEC on December 5,
                2003


(10)
            Incorporated
                by reference to Annual Report on Form 10-KSB for the fiscal year
                ended
                December 31, 2003


(11)
            Incorporated
                by reference to the Registration Statement on Form SB-2 (Reg. No.
                333-102106) filed on August 3, 2004


(12)
            Incorporated
                by reference to Current Report on Form 8-K dated September 30, 2004
                and
                filed with the SEC on October 20,
                2004


(13)
            Amendment
                No. 1 to Registration Statement on Form SB-2 filed on May 12,
                2004


(14)
            Incorporated
                by reference to Current Report on Form 8-K dated February 15, 2005
                and
                filed with the SEC on February 18,
                2005


(15)
            Incorporated
                by reference to the Registrant’s Registration Statement on Form SB-2 (Reg.
                No. 333-131839) filed with the SEC on February 14,
                2006.




**Item
      14.**  **Principal
      Accountants Fees and Services**




Our
      auditor for the year ended December 31, 2007 and 2006 is Moore & Associates,
      Chtd **.** and
      Epstein, Weber & Conover, PLC, respectively. The aggregate fees billed to
      our company for the fiscal years ended December 31, 2007 and 2006 are as
      follows:




**2007
                (2)**
            
            **2006
                (1)**Audit
                Fees
            
            $
            49,000
            
            $
            36,000Audit-Related
                Fees
            
            
            -
            
            
            19,000Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            2,000
            
            
            5,000Total
            
            $
            51,000
            
            $
            60,000




(1)
            All
                fees in 2006 from Epstein, Weber, & Conover,
                PLC


(2)
            $37,000
                from Epstein, Weber, & Conover, PLC and $14,000 from Shelley
                International.




**Audit
      Committee Pre-Approval Policies**




The
      charter of our Audit Committee provides that the duties and responsibilities
      of
      our Audit Committee include the pre-approval of all audit, audit-related, tax,
      and other services permitted by law or applicable SEC regulations (including
      fee
      and cost ranges) to be performed by our independent auditor. Any pre-approved
      services that will involve fees or costs exceeding pre-approved levels will
      also
      require specific pre-approval by the Audit Committee. Unless otherwise specified
      by the Audit Committee in pre-approving a service, the pre-approval will be
      effective for the 12-month period following pre-approval. The Audit Committee
      will not approve any non-audit services prohibited by applicable SEC regulations
      or any services in connection with a transaction initially recommended by the
      independent auditor, the purpose of which may be tax avoidance and the tax
      treatment of which may not be supported by the Internal Revenue Code and related
      regulations.




34




To
      the
      extent deemed appropriate, the Audit Committee may delegate pre-approval
      authority to the Chairman of the Audit Committee or any one or more other
      members of the Audit Committee provided that any member of the Audit Committee
      who has exercised any such delegation must report any such pre-approval decision
      to the Audit Committee at its next scheduled meeting. The Audit Committee will
      not delegate to management the pre-approval of services to be performed by
      the
      independent auditor.




Our
      Audit
      Committee requires that our independent auditor, in conjunction with our Chief
      Financial Officer, be responsible for seeking pre-approval for providing
      services to us and that any request for pre-approval must inform the Audit
      Committee about each service to be provided and must provide detail as to the
      particular service to be provided


35


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized.




VITAL
                LIVING, INC./s/
                STUART A. BENSONStuart
                A. Benson*President
                and Chief Executive Officer, acting Chief*
              *Financial
                Officer*




Date:
      November 26, 2008




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed by the following persons on behalf of the registrant
      and in the capacities and on the dates indicated.




**Signature**
            
            **Capacity**
            
            **Date**/s/ Stuart A. Benson
            
            President, Chief Executive Officer, acting
            
            November 26, 2008Stuart
                A. Benson
            
            Chief Financial Officer, and Director
              (Principal Executive Officer)/s/ Michael Cardamone
            
            Director
            
            November 26, 2008Michael
                Cardamone


36





**MOORE
        & ASSOCIATES, CHARTERED**
 ** *ACCOUNTANTS
        AND ADVISORS*
 *PCAOB
        REGISTERED*
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 **To
        the Board of Directors**
 **Vital
        Living, Inc. and Subsidiaries**
 
 We
        have
        audited the accompanying consolidated balance sheet of Vital Living, Inc
        and
        Subsidiaries as of December 31, 2007 (re-stated), and the related statements
        of
        operations, stockholders’ 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 audits. The financial statements of Vital Living, Inc. as of December
        31,
        2006 were audited by other auditors, whose report dated March 27, 2007 expressed
        an unqualified opinion on those statements.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits 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
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Vital Living, Inc and Subsidiaries
        as of December 31, 2007 (re-stated), and the related statements of operations,
        stockholders’ equity and cash flows for the year then ended, in conformity with
        accounting principles generally accepted in the United States of
        America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        financial statements, the Company has suffered recurring losses from operations,
        has a working capital deficit, and is dependent on funding sources from other
        than operations. Since inception, the Company has been required to raise
        additional capital by the issuance of both equity and debt instruments. There
        are no commitments from funding sources, debt or equity, in the event that
        cash
        flows are not sufficient to fund ongoing operation or other cash commitments
        when they come due. These factors raise substantial doubt about the Company’s
        ability to continue as a going concern. Management’s plans concerning these
        matters are also described in Note 1. The financial statements do not include
        any adjustments that might result from the outcome of this
        uncertainty.
 
 ***/s/
        Moore & Associates, Chartered***
 
 Moore
        & Associates Chartered
 Las
        Vegas, Nevada
 May
        23,
        2008
 
 *2675
        S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7499 Fax (702)
        253-7501*


F-1




**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and




Stockholders
      of Vital Living, Inc.




We
      have
      audited the accompanying consolidated statements of operations, stockholder’s
      equity (deficit), and cash flows of Vital Living, Inc. and subsidiaries for
      the
      year ended December 31, 2006. 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 audits 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
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the results of operations and cash flows for the year ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations, has
      a
      working capital deficit, and is dependent on funding sources from other than
      operations. Since inception, the Company has been required to raise additional
      capital by the issuance of both equity and debt instruments. There are no
      commitments from funding sources, debt or equity, in the event that cash flows
      are not sufficient to fund ongoing operations or other cash commitments when
      they come due. These factors raise substantial doubt about the Company’s ability
      to continue as a going concern. Management’s plans regarding these matters are
      also described in Note 1. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




/s/ Epstein
      Weber & Conover, PLC




Scottsdale,
      Arizona




March
      27,
      2007





F-2





**VITAL
      LIVING, INC. AND SUBSIDIARIES**


**Consolidated
      Balance Sheet**




December 31,2007(re-stated)AssetsCurrent
                AssetsCash
                and cash equivalents
            
            $
            14,336Accounts
                receivable, trade; net of allowance for doubtful accounts of $3,000
            
            
            557,474Inventory
            
            
            -Prepaid
                expenses and other current assets
            
            
            2,176Total
                Current Assets
            
            
            573,986Other
                AssetsProperty
                and equipment, net
            
            
            66Goodwill
            
            
            2,491,416License
                agreement
            
            
            600,000Other
                intangibles, net
            
            
            11,040Total
                other assets
            
            
            3,102,522Total
                assets
            
            $
            3,676,508Liabilities
                and Stockholders EquityCurrent
                liabilitiesAccounts
                payable, trade, net of $230,000 allowance for estimated savings
            
            $
            499,278Accrued
                and other currrent liabilities
            
            
            1,176,057Due
                to officer
            
            
            407,000Notes
                payable
            
            
            401,244Long-term
                notes payable - net of current portion
            
            
            166,500Total
                current liabilities
            
            
            2,650,079Long-term
                debt, net of un-amortized debt discount of $453,467 and deferred
                debt
                issuance costs of $169,291
            
            
            3,603,688Long-term
                notes payable - net of current portion
            
            
            492,171Total
                liabilities
            
            
            6,745,938Commitments
                and contingenciesStockholders'
                equityPreferred
                Stock, $0.001 par value, 50,000,000 shares authorized:Preferred
                stock, Series D, $0.001 par value, 1,000,000 shares
                authorized:1,000,000 shares issued and outstanding
            
            
            1,000Common
                  stock, $0.001 par value, 500,000,000 shares authorized:164,983,000
                  issued and 164,559,000 shares issued and outstanding
            
            
            164,558Additional
                paid-in capital - common
            
            
            88,619,246Stock,
                options, and warrants - unamortized
            
            
            (609,016
            )Treasury
                stock, 424,000 shares at cost
            
            
            (72,280
            )Accumulated
                other comprehensive income
            
            
            (48,912
            )Retained
                deficit
            
            
            (91,124,026
            )Total
                stockholders' deficit
            
            
            (3,069,430
            )Total
                liabilities and stockholders' deficit
            
            $
            3,676,508





See
      accompanying notes to financial statements





F-3





VITAL
      LIVING, INC. AND SUBSIDIARIES


Consolidated
      Statements of Operations




Twelve Months Ended December 31,2007
            
            2006Revenue,
                net
            
            $
            2,224,021
            
            $
            4,941,120Cost
                of goods sold
            
            
            1,169,732
            
            
            2,255,522Gross
                profit
            
            
            1,054,289
            
            
            2,685,598Administrative
                expensesSalaries
                and benefits
            
            
            704,481
            
            
            815,837Professional
                and consulting fees
            
            
            729,601
            
            
            491,720Selling,
                general and administrative
            
            
            672,543
            
            
            1,013,995Research
                and development
            
            
            -
            
            
            151,000Depreciation
                and amortization
            
            
            154,643
            
            
            11,286Total
                administrative expenses
            
            
            2,261,268
            
            
            2,483,838Net
                (loss) income from operations
            
            
            (1,206,979
            )
            
            201,760Other
                expense (net)Interest
                expense (net)
            
            
            (1,238,975
            )
            
            (1,191,622
            )Gain
                on resolution of accrued research and develoopemnt
            
            
            -
            
            
            500,000Gain
                on settlement of accounts payable, trade
            
            
            -
            
            
            402,076Other
                (expense) income, net
            
            
            (13,857
            )
            
            5,670Net
                loss available to common stockholders
            
            $
            (2,459,811
            )
            $
            (82,116
            )Basic
                and diluted loss per share available to common stockholders
            
            $
            (0.01
            )
            $
            (0.00
            )Weighted
                average basic and diluted common stock outstanding
            
            
            164,559,000
            
            
            147,048,000




See
      accompanying notes to financial statements.





F-4





**VITAL
      LIVING, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Cash Flows**


**Year Ended December 31,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,459,811
              )
              $
              (82,116
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              154,643
              
              
              11,287Interest
                  and amortization of costs associated with senior convertible notes
              
              
              679,372
              
              
              679,372Gain
                  on issuance of common stock for accrued research and
                  development
              
              
              -
              
              
              (500,000
              )Amortization
                  of restricted common stock, options and warrants issued for
              
              
              -
              
              
              6,179Loss
                  on sale of marketable securities
              
              
              -
              
              
              -Loss
                  on disposal of marketable securities
              
              
              -
              
              
              -Loss
                  on disposal of assets
              
              
              13,857
              
              
              -Allowance
                  for doubtful accounts
              
              
              (50,000
              )
              
              -Inventory
                  reserve
              
              
              (360,363
              )
              
              -Change
                  in operating assets and liabilities:Accounts
                  receivable, trade
              
              
              517,092
              
              
              (536,526
              )Inventory
              
              
              392,097
              
              
              78,848Prepaid
                  expenses and other current assets
              
              
              34,941
              
              
              60,945Accounts
                  payable, trade
              
              
              (225,114
              )
              
              (379,046
              )Accrued
                  liabilities
              
              
              974,282
              
              
              497,133Net
                  cash provided /(use)d in operating activities
              
              
              (329,004
              )
              
              (163,924
              )Cash
                  flows from investing activities:Cash
                  provided by (used in) investing activities
              
              
              -
              
              
              -Cash
                  flows from financing activities:Issuance
                  of note payable to officer
              
              
              407,000
              
              
              -Payment
                  on notes payable
              
              
              (91,329
              )
              
              -Cash
                  used by financing activities
              
              
              315,671
              
              
              -Net
                  decrease in cash
              
              
              (13,333
              )
              
              (163,924
              )Cash
                  at beginning of period
              
              
              27,669
              
              
              191,593Cash
                  at end of period
              
              $
              14,336
              
              $
              27,669





See
      accompanying notes to consolidated financial statements.





F-5





**Vital
      Living, Inc.**


**Consolidated
      Statements of Cash Flows**


**(continued)**


**Year Ended December 31,****2007**
              
              **2006****Supplemental
                  cash flow information**Interest
                  paid
              
              $
              1,912
              
              $
              2,289**Non
                  cash investing activities**Issuance
                  of common stock for interest
              
              $
              -
              
              $
              512,168




See
      accompanying notes to consolidated financial statements.





F-6





**VITAL
      LIVING, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Stockholders’ Equity (Deficit)**




Additional Paid-in-
            
            Stock, Options
            
            
            
            Accumulated Other------------ Preferred Stock
            
            -------- Common Stock -----
            
            Capital, Common and
            
            and Warrants
            
            Treasury
            
            Comprehensive
            
            Accumulated
            
            Total StockholdersShares
            
            Par Value
            
            Shares
            
            Par Value
            
            Preferred
            
            Unamortized
            
            Stock
            
            Income (Loss)
            
            Deficit
            
            Equity (Deficit)Balance December 31, 2005
            
            
            1,000,000
            
            $
            1,000
            
            
            112,125,000
            
            $
            112,124
            
            $
            87,899,617
            
            $
            (609,016
            )
            $
            (72,280
            )
            $
            (48,912
            )
            $
            (88,582,099
            )
            $
            (1,299,566
            )Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            95,000
            
            
            25
            
            
            2,105
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,130Common
                stock issued for payment of interest on SR Secured Notes
            
            
            —
            
            
            —
            
            
            39,964,000
            
            
            40,271
            
            
            477,114
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            517,385for
                research and developemnent
            
            
            —
            
            
            —
            
            
            12,500,000
            
            
            12,500
            
            
            237,500
            
            
            -
            
            
            —
            
            
            —
            
            
            -
            
            
            250,000penalty
                due on timely registration of stock in 2004
            
            
            —
            
            
            —
            
            
            307,000
            
            
            70
            
            
            2,910
            
            
            -
            
            
            —
            
            
            —
            
            
            -
            
            
            2,980Recovery
                of stock issued in 2004 private placement
            
            
            
            
            
            
            
            
            (432,000
            )
            
            (432
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (432
            )Net
                loss
            
            
            —
            
            
            -
            
            
            —
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (82,116
            )
            
            (82,116
            )Balance
                December 31, 2006
            
            
            1,000,000
            
            $
            1,000
            
            
            164,559,000
            
            $
            164,558
            
            $
            88,619,246
            
            $
            (609,016
            )
            $
            (72,280
            )
            $
            (48,912
            )
            $
            (88,664,215
            )
            $
            (609,619
            )-
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss
            
            
            —
            
            
            -
            
            
            —
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,459,811
            )
            
            (2,459,811
            )Balance
                December 31, 2007
            
            
            1,000,000
            
            $
            1,000
            
            
            164,559,000
            
            $
            164,558
            
            $
            88,619,246
            
            $
            (609,016
            )
            $
            (72,280
            )
            $
            (48,912
            )
            $
            (91,124,026
            )
            $
            (3,069,430
            )





See
      accompanying notes to consolidated financial statements.




F-7





**Vital
      Living, Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**




**Note
      1 - Organization and Description of Business**




We
      were
      incorporated in the state of Nevada on January 22, 2001 under the name
      Nutritional Systems, Inc. We acquired substantially all of the assets of Vital
      Living, Inc. effective May 7, 2001 and changed our name to Vital Living, Inc.
      on
      May 20, 2001. We then merged with VCM Technology Limited, a company reporting
      under the Securities Exchange Act of 1934, on August 16, 2001. As set forth
      in
      the terms of the merger agreement, we acquired all of the outstanding shares
      of
      common stock of VCM from its sole stockholder in exchange for 5,062 shares
      of
      restricted common stock. Following the merger, we continued as the surviving
      corporation and commenced reporting under the Securities Exchange Act of 1934
      by
      assuming the reporting status of VCM, which in turn provided us with the ability
      to file for quotation on the Over-the- Counter Bulleting Board under the symbol
      “VTLV”.




Through
      a
      series of various acquisition and divestiture activities, as described further
      below, we develop and market nutritional supplements and nutraceuticals products
      for distribution primarily through healthcare practitioners. Our principal
      products currently are GreensFIRST®, Dream ProteinTM, Red AlertTM, ReliefFIRSTTM,
      and Complete EssentialsTM.




Nutritional
      supplements represent a convenient and cost-effective way for an individual
      to
      obtain the nutritional benefits of whole foods. Nutritional supplements are
      formulated from whole foods and are intended to provide for improved health,
      reduced risk of diseases, and the delay onset of age related indicators while
      resulting in little added caloric and fat intake. Nutritional supplements come
      in powder, capsule, cracker, and other forms. Nutraceuticals, consisting of
      vitamins, minerals, herbs, and supplements, are products that are isolated
      or
      purified from foods and generally sold in medicinal forms not usually associated
      with foods, including tablets, capsules, and drops. Nutraceuticals are intended
      to have physiological benefits or have the ability to reduce the risk of chronic
      disease beyond basic nutritional products. We develop and test our
      nutraceuticals in collaboration with leading medical experts in the
      nutraceuticals field. We have designed our products to be incorporated by
      healthcare practitioners into standard patient routines in which healthcare
      practitioners recommend and sell our nutritional supplements and nutraceuticals
      products to their patients. Use of vitamins, minerals, herbs, and nutritional
      supplements continues to rise as consumers seek nutritional products to improve
      general health, increase longevity, and enhance the overall quality of life.




In
      October 2003, we completed the acquisition of Doctors For Nutrition, Inc.,
      or
“DFN”. DFN’s product line includes GreensFIRST®, a highly concentrated
      formulation of fruits and vegetables. One serving of the product has the
      antioxidant power of over 10 servings of fruits and vegetables. We currently
      distribute GreensFIRST® through health practitioner offices throughout the
      United States. DFN introduced Red AlertTM, a complementary product in June
      2005.




In
      August
      2004, we consummated a joint venture with Wellness Watchers International,
      Inc.,
      or WWI, and together formed Wellness Watchers Systems, LLC, or WWS. We and
      WWI
      originally each owned 50% of WWS. The operating agreement gave us overall
      operating responsibility. WWS manufactures a proprietary brand of dietary
      protein powder called Dream ProteinTM, which is directly marketed to the health
      practitioners together with our GreensFIRST® product. WWS plans to introduce
      complementary products that will be marketed as part of WWS’ Healthy Living
      Program®. Part of WWI’s contribution to WWS was the exclusive licensing of
      certain products, client lists and marketing strategies, which included Dream
      ProteinTM. WWS has developed a unique marketing strategy that channels products
      directly to health practitioners. Prior to forming WWS, WWI had no prior
      operating history. During February 2005, we purchased WWI’s 50% interest in WWS.
      In conjunction with our acquisition of the remainder of WWS and certain other
      marketing and operation strategic productivity decisions, during the first
      quarter of 2005, we consolidated the operations of WWS into DFN.




At
      the
      end of April 2007, we closed our Phoenix, Arizona corporate office. Our
      corporate office is now located at 1289 Clint Moore Road, Boca Raton, FL, 33847.
      Our phone number is 561-300-9022. Our toll free number remains 866-409-6262.
      These offices are in the same building with Wellness Watchers Global (“WWG”),
      our largest distributor, in which our CEO, Stuart Benson, has a 50% interest
      (see Note 11). We are paying $1,500 per month of WWG’s rent in return for our
      office space there. In April 2007 our COO/CFO Gregg Linn resigned his positions.
      We have one full-time employee.




F-8




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




In
      June
      2007 due to business considerations, we made an agreement with one of our
      suppliers to allow them to sell some of our branded products directly to one
      of
      our major distributors. This agreement ws necessary as the company did not
      have
      the capacity to service the sales needs of this customer.




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




The
      purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
      (ii) cancellation of outstanding indebtednesses of Vital Living, its
      subsidiaries and certain related entities to NutraCea, including all of the
      Senior Secured Convertible Notes, and (iii) cancellation of all shares of Series
      D Preferred Stock of Vital Living held by NutraCea.




Re-statement
      of financial statements




In
      the
      second quarter of 2008 we amended our 2005 10K to reflect an impairment of
      the
      goodwill associated with our Wellness Watchers Systems LLC (“WWS”) acquisition
      in 2004 and 2005. In August 2004, we formed WWS with Wellness Watchers Systems,
      Inc. (“WWI”) (a CA corporation), giving 3,000,000 shares of our common stock
      valued then at $805,000 and $25,000 in cash to the principles of WWI. This
      resulted in a 50% interest in WWS. In connection with the allocation of the
      purchase price in accordance with purchase accounting $805,000 was recorded
      as
      goodwill. In February 2005, we acquired the remaining 50% interest from the
      principles of WWI giving 1,000,000 shares of our common valued then at $70,000.
      As of result of the second transaction we determined that the entity value
      of
      WWS as of December 31, 2005, was approximately $140,000 based on the amount
      of
      the consideration given in February 2005 for the 50% interest in WWS purchased
      from the principles of WWI. Therefore we should have recorded an impairment
      charge of $805,000 as the year ended December 31, 2005. The effect of our
      re-statement for 2005 was to reduce net income by $805,000 in 2005 and reduce
      goodwill by that amount. We also re-stated our 2006 and 2007 10K to reduce
      goodwill by $805,000 and increase the retained deficit by the same amount.




Going
      concern




The
      accompanying consolidated financial statements have been prepared assuming
      we
      will continue on a going concern basis, which contemplates the realization
      of
      assets and the satisfaction of liabilities in the normal course of business.
      We
      have suffered recurring losses from operations, have a working capital deficit,
      and have depended on funding from sources other than operations. Since
      inception, we have been required to raise additional capital by the issuance
      of
      both equity and debt securities. There are no commitments from funding sources,
      debt or equity, in the event that cash flows are not sufficient to fund ongoing
      operations or other cash commitments as they come due. These factors raise
      substantial doubt about our ability to continue as a going concern. We may
      be
      required to raise additional capital in the near term through offerings of
      securities to fund our operations and will attempt to continue raising capital
      resources if we do not begin to generate revenue sufficient to maintain
      ourselves as a viable entity. No assurance can be given that such financing
      will
      be available or, if available, that it will be available on commercially
      favorable terms. Moreover, available financing may be dilutive to current
      investors.




F-9




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




**Note
      2 - Summary of Significant Accounting Policies**




Principles
      of consolidations




The
      consolidated financial statements include Vital Living, Inc. and its wholly
      owned domestic subsidiaries (collectively, “We”, “Vital Living”, or the
“Company”). Consolidated financial statements are financial statements of a
      parent company and its subsidiaries presented as if the entities were a single
      economic unit. Although the assets, liabilities, revenues, and expenses of
      all
      entities are combined to provide a single set of financial statements, certain
      eliminations and adjustments are made. These eliminations are necessary to
      ensure that only arm’s-length transactions between independent parties are
      reflected in the consolidated statements; transactions between the parent and
      its’ subsidiaries are eliminated.




Accounts
      receivable, trade





The
      company extends unsecured credit to it’s customers under normal trade agreements
      which generally require payment within 30-90 days. We determine any required
      allowance by considering numerous factors, including the length of time trade
      accounts receivable are past due and our loss history. Receivables are
      considered past due when they are unpaid greater than 30 days from the due
      date.
      We record an allowance for accounts when they become uncollectible, and payments
      subsequently received on such accounts are reflected as a reduction of that
      allowance. The allowance for doubtful accounts was $3,000 at December 31, 2007.
      Bad debt expense amounted to $0 in 2007 and 2006, respectively.




Inventory




Inventory
      is stated at the lower of cost (first-in, first-out method) or market, and
      consist of products available for sale and raw materials. At December 31, 2007,
      inventory amounted to $0.




Property
      and equipment




Property
      and equipment consists of office furniture, fixtures, and equipment, including
      computer hardware and software and various leasehold improvements. We record
      Property and equipment at cost. We provide for depreciation and amortization
      on
      a straight-line basis over the estimated useful lives ranging from three to
      ten years.




Goodwill




Goodwill
      represents the excess of the aggregate price paid by us over the value of the
      net equity acquired in an acquisition. In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets,” we are no longer required to amortize
      goodwill, but are required to review goodwill for impairment at least annually
      or whenever events indicate that the carrying amount of the asset may not be
      recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets.” In the second quarter of 2008 we amended our
      2005 10K to impair the goodwill associated with the WWS transaction by $805,000
      (see Note 5). Fore the years ended December 31, 2007 and 2006, no events had
      occurred that would indicate goodwill had been impaired.




License
      agreement and other Intangible assets




These
      assets include trademarks, patents, formulations, customer lists, and various
      marketing and license agreements. We amortize intangible assets on a
      straight-line basis over the lesser of the correlating agreements or estimated
      useful lives ranging from two to 14 years. As of December 31, 2007, no events
      had occurred that would indicate any of these assets were impaired.




F-10




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




During
      2006, we entered into two licensing agreements for $300,000 and $450,000. The
      agreements give us the right to market two products, Relief First Capsules
      and
      Relief First Cream. Payments on these agreements will begin in September 2007
      and continue for three (3) and five (5) years. We began to amortize the cost
      of
      these licensing agreements during 2007 evenly over 5 years at $150,000 per
      year
      (See Note 5). During 2007 we made one payment of $100,000 ($91,000 principle
      plus accrued interest) against these notes.




Long-lived
      assets




We
      review
      long-lived assets and identifiable other intangible assets to be held and used
      for impairment at least annually or whenever events or changes in circumstances
      indicate that the carrying amount may not be recoverable. We evaluate goodwill
      and other intangible assets arising from various acquisitions for impairment
      on
      at least an annual basis or when events occur that would indicate that
      impairment had occurred. We measure impairment by comparing the carrying value
      of the long-lived assets to the estimated undiscounted future cash flows
      expected to result from use of the assets and their eventual disposition.




Deferred
      charges




We
      capitalize costs associated with the issuance of debt instruments. We amortize
      these costs on a straight-line basis over the term of the debt instruments.
      Amortization expense was $679,372 each period for years ended December 31,
      2007
      and 2006, respectively. These amounts are recorded as a component of interest
      expense on the accompanying consolidated statement of operations.





Accounts
      Payable





During
      2006, we recognized a net gain of $402,077 related to the settlement of certain
      accounts payable. Included in that gain was $253,000 that was derived from
      estimated settlement of amounts for payables deemed under statute as no longer
      our liability. The balance of the gain represents an original $217,000 payable
      that we settled for $68,000. During 2007 we settled an additional $52,000 of
      accounts payable for $29,000. The savings of $23,000 reduced the allowance
      account from $253,000 to $230,000. We believe that our net accounts payable
      is
      adequate stated and that all amounts written off were proper.




Financial
      instruments




Our
      financial instruments consist of cash, receivables, payables, and long-term
      debt. The carrying amount of cash, receivables, and payables approximates fair
      value because of the short-term nature of these items. The carrying amount
      of
      long-term debt as of December 31, 2007 approximates fair value because interest
      rates and debt discounts are reflective of market rates.




Concentrations
      of credit risk




Financial
      instruments that potentially subject us to concentrations of credit risk consist
      principally of cash. At various times during the year, our cash balances may
      be
      in excess of federally insured limits. We maintain our cash, which consists
      primarily of demand deposits, with high-quality financial institutions, which
      we
      believe limits this risk.




Acquisitions




We
      account for acquisitions in accordance with Statement of Financial Accounting
      Standards, (“SFAS”) No. 141 “Business Combinations” and accordingly apply the
      purchase method of accounting for all business combinations initiated after
      June
      30, 2001 and separately identify recognized intangible assets that meet the
      criteria and amortize these assets over their determinable useful lives.




F-11




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Accounting
      estimates




The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires us to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Some of the more significant
      estimates required to be made include the valuation of inventory, intangible
      assets, and equity based transactions. Actual results could differ from such
      estimates.




Income
      taxes




We
      account for income taxes in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” Under the asset and liability approach specified by SFAS No. 109, a
      deferred tax asset or liability is determined based on the difference between
      the financial statement and tax basis of assets and liabilities as measured
      by
      the enacted rates that will be in effect when these differences reverse.
      Deferred tax assets are recorded at their likely realizable
      amounts.




Revenue
      recognition




We
      recognize revenue when products are shipped to customers. Our return policy
      provides for an unconditional guarantee to our customers for a full refund
      of
      any unused product, including product that has exceeded its expiration date.
      All
      returns are subject to quality assurance reviews before acceptance. When
      necessary, we provide an allowance for returned product as a reduction of
      revenue based on estimates and historical experience with individual customers.
      We offer, from time to time, volume and promotional discounts on the products
      we
      sell. We record these discounts as a reduction of revenue.




Comprehensive
      income




SFAS
      No.
      130, “Reporting Comprehensive Income,” establishes standards for the reporting
      and display of comprehensive income and its components within the financial
      statements. Other comprehensive income consists of charges to stockholders’
equity, other than contributions from or distributions to stockholders, excluded
      from the determination of net income. Our other comprehensive income consists
      of
      unrealized gains and losses on available for sale securities and foreign
      currency translations. We do not provide for U.S. income taxes on foreign
      currency translation adjustments since we do not provide for such taxes on
      undistributed earnings of foreign subsidiaries.




Research
      and development




We
      expense research and development costs relating to both present and future
      products when incurred. Research and development costs amounted to $0 and
      $151,000 for the years ended December 31, 2007 and 2006,
      respectively.




Net
      earnings per share




We
      account for earnings per share (“EPS”) in accordance with SFAS No. 128,
“Earnings Per Share,” which establishes the requirements for presenting EPS.
      SFAS No. 128 requires the presentation of “basic” and “diluted” EPS on the face
      of the income statement. Basic earnings per share begins with income (loss)
      applicable to common stockholders (net income (loss) less preferred stock
      dividends) and is based on the weighted average number of common shares
      outstanding during each period presented. Diluted EPS assumes the exercise
      of
      all stock options and warrants having exercise prices less than the average
      market price of the common stock using the treasury stock method. For the
      purpose of diluted earnings per common share, and only if such calculation
      results in dilution, preferred stock dividends will not reduce earnings;
      however, the weighted average common shares outstanding would increase
      representing the amount of common shares into which such preferred stock is
      currently convertible. During the years ended December 31, 2006 and 2005, we
      reported a net loss from operations; thus, the effects of dilutive securities
      were anti-dilutive, rendering basic and diluted loss per share the same.
      Convertible preferred stock, warrants, and options to purchase common stock
      are
      included as common stock equivalents only when dilutive. Potentially dilutive
      securities excluded from the loss per share calculation for the years ended
      December 31, 2007 and 2006 are as follows:




F-12




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**


2007
            
            2006Convertible
                preferred stock
            
            
            1,000,000
            
            
            1,000,000Convertible
                debt
            
            
            17,610,000
            
            
            17,610,000Warrants
            
            
            31,580,000
            
            
            30,580,000Employee
                options
            
            
            6,501,000
            
            
            10,251,00056,691,000
            
            
            59,441,000





Stock
      based compensation







We
      account for our stock option plans in accordance with the provisions of SFAS
      No.
      123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148
“Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No.
      123 permits entities to recognize as expense over the vesting period the fair
      value of all stock-based awards on the date of grant. Alternatively, SFAS No.
      123 also allows entities to apply the provisions of Accounting Principles Board
      (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations and provide pro forma net income or loss and pro forma earnings
      per share disclosures for employee stock option grants as if the
      fair-value-based method defined in SFAS No. 123 had been applied.




We
      are
      subject to reporting requirements of FASB Financial Interpretation No. (“FIN”)
      44, “Accounting for Certain Transactions Involving Stock Compensation,” which
      requires a non-cash charge to compensation expense if the price of our common
      stock on the last trading day of each reporting period is greater than the
      exercise price of certain stock options. After the first such adjustment is
      made, each subsequent period is adjusted upward or downward to the extent that
      the trading price exceeds the exercise price of the options.




We
      adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
      Share-Based Payment (“SFAS 123R”), effective January 1, 2006. SFAS 123R requires
      the recognition of the fair value of stock-based compensation in net income.
      SFAS 123R supersedes Statement of Financial Accounting Standards No. 123,
      Accounting for Stock-Based Compensations (“SFAS 123”) and Accounting Principles
      Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). The
      Company has adopted SFAS 123R using the modified prospective method.
      Accordingly, prior period amounts have not been restated. Under the modified
      prospective method, stock options awards that are granted, modified or settled
      after December 31, 2005 will be valued at fair value in accordance with
      provisions of SFAS 123R and recognized on a straight line basis over the service
      period of the entire award. As there were no option awards granted during 2006
      and all prior option awards were fully vested prior to January 1, 2007 there
      was
      no effect due to the implementation of SFAS 123R in the year ended December
      31,
      2007.




F-13




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




The
      fair
      value of our stock-based awards to employees was estimated using the
      Black-Scholes option-pricing model. The Black-Scholes model was developed for
      use in estimating the fair value of traded options that 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 our stock-based awards have characteristics
      significantly different from those of traded options and because changes in
      the
      subjective input can materially affect the fair value estimate, in our opinion,
      the existing models do not necessarily provide a reliable single measure of
      the
      fair value of our stock-based awards to employees. The fair value of our
      stock-based awards (including re-priced warrants discussed above) was estimated
      assuming no expected dividends and the following weighted average assumptions
      for the years ended December 31, 2005:





Expected
                life in years
            
            
            3.00Expected
                stock price volatility
            
            
            180.00
            %Risk-free
                interest rate
            
            
            4.00
            %Average
                fair value per option/warrant
            
            $
            0.05




There
      were no stock-based awards in 2007 or 2006.




Recent
      accounting pronouncements




FIN
      48 In
      June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No.
      109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return. FIN
      48 requires that the Company recognize in its financial statements, the impact
      of a tax position, if that position is more likely than not of being sustained
      on audit, based on the technical merits of the position. FIN 48 also provides
      guidance on de-recognition, classification, interest and penalties, accounting
      in interim periods and disclosure. The provisions of FIN 48 are effective
      beginning January 1, 2007 with the cumulative effect of the change in accounting
      principle recorded as an adjustment to the opening balance of retained earnings,
      goodwill, deferred income taxes and income taxes payable in the Consolidated
      Balance Sheets. The Company does not expect that the adoption of FIN 48 will
      have a significant impact on the financial statements of the Company.




The
      Company has reviewed other current outstanding statements from the Financial
      Accounting Standards Board and does not believe that any of those statements
      will have a material adverse affect on the financial statements of the Company
      when adopted.




**Note
      4 - Property and equipment**




**** Property
      and equipment consists of the following at December 31:





F-14


**Vital
          Living, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 2007Computer
                  hardware and software
              
              $
              14,187Gross
                  property and equipment
              
              
              14,187Less
                  accumulated depreciation
              
              
              (14,121
              )Net
                  property and equipment
              
              $
              66




Depreciation
      expense was $3,276 and $9,920 for the years ended December 31, 2007 and 2006,
      respectively.




**Note
      5 - Intangible assets**




Intangible
      assets consisted of the following at December 31, 2007:




Un-Amortizable intangible assetsGoodwill
            
            $
            2,491,416




Gross Carrying
            
            Accumulated Amortization
            
            Net CarryingAmortizable intangible assets
            
            Amount
            
            and Impairment
            
            AmountLicense
                agreements
            
            
            750,000
            
            
            (150,000
            )
            
            600,000Trademarks
                and patents
            
            
            20,491
            
            
            (9,452
            )
            
            11,039Total
                amortizable intangible assets
            
            $
            770,491
            
            $
            (159,452
            )
            $
            611,039


Estimated
              
              AccumulatedAmortization
              
              AmortizationExpense
              
              ExpenseFor
                  the year ended December 31, 2008
              
              $
              151,380
              
              $
              310,832For
                  the year ended December 31, 2009
              
              $
              151,380
              
              $
              462,212For
                  the year ended December 31, 2010
              
              
              151,380
              
              
              613,592For
                  the year ended December 31, 2011
              
              
              151,380
              
              
              764,972For
                  the year ended December 31, 2012
              
              
              1,380
              
              
              766,352For
                  the year ended December 31, 2013
              
              
              1,380
              
              
              767,732For
                  the year ended December 31, 2014
              
              
              1,380
              
              
              769,112For
                  the year ended December 31, 2015
              
              
              1,379
              
              
              770,491For
                  the year ended December 31, 2016
              
              
              -
              
              
              770,491For
                  the year ended December 31, 2017
              
              
              -
              
              
              770,491Totals
              
              $
              611,039
              
              $
              770,491




Amortization
      expense was $151,367 and $1,367 for the years ended December 31, 2007 and 2006,
      respectively.




F-15




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Impairment
      Analysis




As
      required by SFAS No. 142, we continually test goodwill or other intangibles
      created by each acquisition for impairment. These assets are tested for
      impairment at least annually, or upon occurrence of such events that may
      indicate impairment exists. We revised the earnings forecast for the next five
      years and evaluated the change in fair value of each component of goodwill
      using
      the expected present value of future cash flows. Impairment may be due to a
      combination of factors, including acquisition price, increased market
      competition, and operating performance.




In
      the
      second quarter of 2008 we amended our 2005 10K to reflect an impairment of
      the
      goodwill associated with our Wellness Watchers Systems LLC (“WWS”) acquisition
      in 2004 and 2005. In August 2004, we formed WWS with Wellness Watchers Systems,
      Inc. (“WWI”) (a CA corporation), giving 3,000,000 shares of our common stock
      valued then at $805,000 and $25,000 in cash to the principles of WWI. This
      resulted in a 50% interest in WWS. In connection with the allocation of the
      purchase price in accordance with purchase accounting $805,000 was recorded
      as
      goodwill. In February 2005, we acquired the remaining 50% interest from the
      principles of WWI giving 1,000,000 shares of our common valued then at $70,000.
      As of result of the second transaction we determined that the entity value
      of
      WWS as of December 31, 2005, was approximately $140,000 based on the amount
      of
      the consideration given in February 2005 for the 50% interest in WWS purchased
      from the principles of WWI. Therefore we should have recorded an impairment
      charge of $805,000 as the year ended December 31, 2005. The effect of our
      re-statement for 2005 was to reduce net income by $805,000 in 2005 and reduce
      goodwill by that amount. We also re-stated our 2006 and 2007 10K to reduce
      goodwill by $805,000 and increase the retained deficit by the same amount.




As
      a
      result of our review for the twelve months ended December 31, 2007, goodwill
      and
      all other intangible assets were deemed to be fairly stated at December 31,
      2007. Our review does assume that the pending asset purchase by NutraCea will
      be
      consummated. The proxy for this transaction is currently in review by the SEC
      and we expect approval for it and to present the proposal to our shareholders
      during the second quarter of 2008.




The
      goodwill of $2,491,416 is attributable to previous acquisitions as
      follows:




DFN
            
            $
            2,421,416WWS
            
            
            70,000Total
            
            $
            2,491,416




**Note
      6 - Long-Term Debt**




*Senior
      Convertible Notes*




In
      December 2003, we borrowed an aggregate principal amount of approximately $4.58
      million in the form of Senior Secured Convertible Notes (the “Secured Notes”),
      due December 17, 2008, in a private placement, subject to certain registration
      rights, generating cash proceeds of $2.5 million, net of cash debt issue costs
      of $538,000. At time of issuance the Secured Notes bore interest at a rate
      of
      12% per annum, 8% of which was payable semi-annually in cash each June and
      December, while 4% per annum could be paid, at our discretion, in cash or our
      common stock at a price equal to the ten-day average trading price of our common
      stock five business days prior to the relevant interest payment date. In October
      2004, we agreed with the holders of the Secured Notes and warrants to reduce
      the
      conversion price and exercise price of those securities to $0.24 per share.
      There was no expense recorded relative to the reduction in the conversion price.
      The reduction of the conversion price is permanent and there was no time limit
      placed on the reduced conversion price, therefore it was determined not to
      be a
      an inducement to convert as that term is defined in Statement of Financial
      Accounting Standards No. 84 Induced Conversions of Convertible Debt . In
      exchange for this reduction:




We
      agreed
      to include the additional shares of common stock that are now issuable upon
      conversion of the outstanding Secured Notes as a result of the reduction in
      the
      conversion price in the next registration statement we file with the Securities
      and Exchange Commission (“New Registration Statement”). The shares of common
      stock originally convertible under the Secured Notes are registered for resale
      under our Registration Statement on Form SB-2 (SEC File No. 333-111921)
      (“Registration Statement”), which was declared effective by the SEC on August
      13, 2004. We are now entitled to pay all 12% interest due on the Secured Notes
      in either cash or shares of our common stock, at our sole option, commencing
      with the interest payment due in December 2004. We were originally required
      to
      pay the 12% interest on the senior convertible promissory notes at the rate
      of
      8% per annum in cash and had the option to pay the remaining interest at the
      rate of 4% per annum in cash or shares of common stock. The shares of common
      stock representing the 4% interest payments are registered for resale under
      the
      Registration Statement. We have agreed to include the additional shares of
      common stock representing the 8% interest payments in the New Registration
      Statement; and all penalties that we were required to pay as a result of our
      failure to have the Registration Statement declared effective by April 15,
      2004
      will be payable by our in shares of common stock (“Penalty Stock”) at a price
      equal to $0.258. Such shares will be included on the New Registration Statement.




F-16




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




In
      2005
      certain note holders converted $60,000 of their note into common
      stock.




We
      may
      redeem the Secured Notes commencing December 15, 2004, provided the ten-day
      average trading price of our common stock prior to the redemption is at least
      $3.00 per share. The Secured Notes are collateralized by our assets, have
      priority in right of payment over all our indebtedness, and include certain
      provisions related to change in control, reorganization, recapitalization,
      and
      other adjustments. In addition, the Secured Note holders received 4,588,000
      warrants to purchase shares of common stock at an exercise price of $1.00 per
      share. The fair value of these warrants of $1,084,000 was recorded and charged
      immediately to interest expense during 2003 as the warrants were fully vested
      and the related notes fully convertible at the date of issuance.




In
      April
      2007, NutraCea, Inc acquired the Senior Secured Convertible Notes from the
      holders of those Notes. On September 11, 2007, NutraCea and VLI entered into
      a
      letter agreement confirming their agreement to eliminate the conversion rights
      of the Notes.  In addition, the parties agreed that until such time,
      if any, as NutraCea gives 30 days prior written notice to VLI, VLI may not
      pay
      accrued interest under the Notes in shares of VLI Common Stock, without
      NutraCea’s consent, and that during such time VLI will not be deemed to be in
      default under the Notes as a result of not paying accrued interest in such
      shares. At December 31, 2007, the company owed approximately $525,000 in
      interest for the June 15, 2007 and December 15, 2007 interest payments on the
      Notes. The company has not issued stock in payment of the interest.




*Other
      notes payable*




In
      connection with our 2002 acquisition of M.A.F Group LLC (“MAF”), we began making
      payments on a pre-existing SBA loan. We have made no payments of principal
      or
      interest against this loan since September 2004 (see Note 7). We entered into
      an
      agreement to sell the Boulder Bar product line and the purchaser assumed this
      debt (operations of MAF were discontinued in 2004). However, the purchaser
      has
      not complied with the terms of the agreement and we are seeking legal remedies.
      The principal balance of the loan is approximately $398,000 at December 31,
      2007
      and accrues interest at 8.25%. We have $401,244included in our current
      liabilities related to this obligation.




In
      September and December 2006, we entered into supply and licensing agreements
      that grants us trademark rights. The agreements require us to pay $750,000
      over
      five years beginning in the fourth quarter of 2007. These agreements include
      un-secured notes payable of $300,000 and $450,000 at 5% and 8% respectively,
      with payments beginning in September, 2007 through August 2011 as summarized
      in
      the table below.




F-17




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Long-term
      debt consists of the following at December 31, 2007:




Notes$4,226,446
                Secured Notes; maturity December 2008; interest at 12% per annum
                (may be
                paid in cash or common stock); principal due at December 17, 2008
            
            $
            4,226,446Long-term
                notes payable - License agreement
            
            
            658,671Total
            
            
            4,885,117Lees
                - current portion long-term notes payable
            
            
            (166,500
            )Less
                unamortized debt discount
            
            
            (622,758
            )Net
                long-term debt
            
            $
            4,095,859




Aggregate
      maturities of long-term debt for the subsequent five years ending December
      31
      are as follows:




Senior
            
            Un-securedSecured Notes
            
            Notes Payable
            
            Total2008
            
            $
            4,226,446
            
            $
            216,220
            
            $
            4,442,6662009
            
            
            -
            
            
            216,220
            
            
            216,2202010
            
            
            -
            
            
            186,190
            
            
            186,1902011
            
            
            -
            
            
            40,041
            
            
            40,0412012
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            4,226,446
            
            $
            658,671
            
            $
            4,885,117




**Note
      7 - Commitments and contingencies**




From
      time
      to time, we are party to a variety of legal proceedings arising out of the
      normal course of business, including cases in which damages may be sought.
      We
      believe we have a valid defense and are vigorously defending any pending
      litigation. While the results of litigation cannot be predicted with certainty,
      we do not believe that the outcome of these proceedings will have a material
      adverse effect on our consolidated financial position, results of operations,
      or
      cash flows.




We
      are in
      legal proceedings with the previous owners of Christophers’ Original Formulas
      (“COF”) over the re-purchase by them of the COF operations, which the company
      originally purchased from the owners of COF in 2003. On May 6 th ,
      2005
      Christophers’ Original Formulas, SFMB, Inc., Robert C Scott, Norman Bacala, and
      Ruth Christopher filed a complaint against Vital Living, Inc., Natures Systems,
      Inc., James R Jeppson, Stuart Benson, and Donald Hannah in the Third Judicial
      District Court for Salt Lake County, State of Utah. The Complaint alleges
      damages in excess of $400,000 relating to alleged breaches of a Settlement
      and a
      Release Agreement dated July 9, 2004. Vital Living and the other defendants
      have
      filed a Motion to Dismiss the action based on a variety of legal theories.
      The
      Company and related defendants also intend to vigorously defend against the
      claims of the plaintiffs. No evaluation presently can be made as to the final
      outcome of this case or the likelihood or range of potential recovery loss,
      if
      any, to the company.




F-18




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




In
      October 2006, Timekeeping systems, Inc. (“TKI”) filed suit against us alleging
      that the Company conspired with Mitch Feinglass, a former COO, to hide certain
      assets for the purpose of frustrating TKI’s efforts to collect on TKI’s judgment
      against Mr. Feinglass in Ohio. Specifically TKI alleges that the Company paid
      certain consulting fees to two companies that Mr. Feinglass allegedly
      controlled, which TKI claims were offshore operations. TKI alleges that these
      funds should have been paid to Mr. Feinglass directly, and that paying them
      to
      the purported offshore entities amounted to a “conspiracy to commit a fraudulent
      conveyance.” TKI seeks damages against the company in an amount equal to TKI’s
      Ohio judgment of $105,000 plus interest for 6 years at 10%, attorneys’ fees, and
      costs. This suit is still in the initial pleading stage. The Company has filed
      an answer that denies all material allegations of the complaint, and intends
      to
      vigorously defend this suit.




In
      connection with the Company’s purchase of MAF in late 2002 (the operations of
      which were discontinued in 2004), the Company signed a document title “Unlimited
      Continuing Guaranty” (“Guaranty”) under which we agreed to unconditionally
      perform all of M.A.F.’s obligations under an SBA loan. This document was
      prepared by M.A.F.s counsel for the purpose of inducing the Commerce Bank
      (“Commerce”) to approve the sale of MAF to Vital Living, Inc. which required
      Commerces’ express approval under the terms of the SBA loan. Ultimately, MAF
      never sought Commerces’ approval, this document was never delivered to Commerce,
      and we assumed that the Guaranty had been discarded. In September 2004 we ceased
      making payments against the SBA loan (see Note 6 and 9) and eventually Commerce
      began pursuing William Coppel (former owner of MAF, and an officer of VLI for
      a
      time after the acquisition of MAF before leaving the Company). We have an
      accrual of $401,000 included in our current liabilities relating to this
      obligation. In July 2006, Coppel, through counsel, wrote a letter to the Company
      demanding that the Company honor the Guaranty and satisfy his indebtedness
      under
      the SBA loan. The Company responded to the demand, outlining the reasons why
      the
      Guaranty is unenforceable and noting that the Company has a potential
      counterclaim against Mr. Coppel based upon his breaches of the separation
      agreement in connection with his resignation. Since the Company’s response in
      August 2006, Mr. Coppel has not made any further efforts to enforce the
      purported Guaranty against the company. The Company intends to vigorously defend
      a lawsuit to enforce the Guaranty, should one ever be filed.




We
      lease
      office space under month-to-month operating leases (see note 11). Total rent
      expense was $49,000 and $135,000 for the years ended December 31, 2007 and
      2006,
      respectively.




In
      connection with the ENI acquisition, we acquired certain rights to SkyePharma,
      PLC’s (“Skye”) GEOMATRIX® drug-delivery technology. In conjunction with that
      agreement we incurred $1.0 million in research and development liabilities,
      of
      which $750,000 remained un-paid at December 31, 2005. In June 2006 we exchanged
      12,500,000 shares of our common stock valued at $250,000 for the $750,000
      liability resulting in a gain of $500,000.




In
      September and December 2006, we entered into supply and licensing agreements
      that grants us trademark rights. The agreements require us to pay $750,000
      over
      five years beginning in the fourth quarter of 2007 (see note 5).




**Note
      8 - Capital Stock**




In
      July
      2006, the board of directors and our stockholders approved an amendment to
      our
      Articles of Incorporation to increase the number of authorized shares of common
      stock from 150,000,000 to 500,000,000, par value $.001 per share. We are
      currently authorized to issue up to 50,000,000 shares of preferred stock, par
      value $.001 per share. At December 31, 2007, our capital stock consisted of
      the
      following:





F-19




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Capital Stock
            
            Par Value
            
            Authorized
            
            Issued & OutstandingCommon
                Stock
            
            $
            0.001
            
            
            500,000,000
            
            
            164,559,000Preferred
                Stock
            
            $
            0.001
            
            
            50,000,000
            
            
            1,000,000




Common
      Stock




Each
      holder of common stock is entitled to one vote per share on all matters
      submitted to a vote of our stockholders. Holders of our common stock have no
      preemptive rights and have no rights to convert their common stock into any
      other securities. In the event of dissolution or liquidation or the winding-up
      of our company, holders of our common stock will be entitled to share ratably
      in
      all assets remaining after payment of all liabilities, subject to any
      preferential payments to the holders of any Secured Notes and preferred stock
      then outstanding. Although we are restricted from paying cash dividends under
      the terms of the Secured Notes, holders of common stock are entitled to receive
      ratably such dividends as may be declared by our board of directors out of
      funds
      legally available therefore. All of our outstanding common shares are fully
      paid
      and non-assessable.




Common
      Stock Issued for interest




During
      January 2006, we issued 70,000 shares of our common stock in payment of $3,000
      of interest due for the December 2005 semi-annual interest on our Senior Secured
      Convertible Notes.




During
      June 2006, we issued 13,424,322 shares of our common stock in payment of
      $256,404 of interest due for the June 2006 semi-annual interest on our Senior
      Secured Notes.




During
      December 2006, we issued 26,469,450 shares of our common stock in payment of
      $256,404 of interest due for the December 2006 semi-annual interest on our
      Senior Secured Notes.




During
      December 2006, we issued 307,493 shares of our common stock with a value of
      $3,000 in interest due to shareholders as a penalty due to our failure to timely
      file and have declared effective a registration statement for common stock
      issued during our November 2002 private placement and interest charges related
      to a penalty due to our failure to timely file and have declare effective a
      registration statement to register the shares of common stock issued in the
      December 20003 offering.




Common
      Stock Issued in Exchange for Research and Development Liability




During
      June 2006, we issued 12,500,000 shares of our common stock valued at $250,000
      as
      payment for the $750,000 liability for research and development due to
      SkyePharma resulting in a gain of $500,000.





Common
      Stock Issued for Services and
      Settlements




In
      order
      to fund operating activities, we, from time to time, issue common stock in
      lieu
      of cash in exchange for goods or services.




During
      the year ended December 31, 2006, 95,000 shares of common stock with a value
      of
      $12,000 were issued to directors for director services and to various
      consultants for various consultations and advisory services to be provided
      over
      a period ranging from 12 months to two years. These shares were originally
      capitalized as a component of equity and amortized to expense over the vesting
      periods. For the year ended December 31, 2006, $12,000 was amortized to expense.
      The value of unamortized restricted common stock issued for services as of
      December 31, 2007 and 2006 was $0.




F-20




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Preferred
      Stock




Preferred
      stock may be issued in one or more series, the terms of which may be determined
      at the time of issuance by our board of directors, without further action by
      stockholders, and may include voting rights (including the right to vote as
      a
      series on particular matters), preferences as to dividends and liquidation,
      conversion rights, redemption rights and sinking fund provisions. The issuance
      of shares of preferred stock could adversely affect the rights of the holders
      of
      common stock and therefore, reduce the value of the common stock. In June 2006
      the Series D Preferred Stock was acquired by a partnership controlled by the
      CEO
      and COO/CFO (see Note 11). In April 2007 that partnership in turn sold the
      preferred stock to NutraCea, Inc.




Series
      D Preferred Stock




On
      August
      20, 2003, concurrent with the ENI Acquisition, we sold to a single investor
      1,000,000 shares of Series D Preferred Stock at $1.00 per share, generating
      cash
      proceeds of $815,000, net of cash offering costs of $185,000. Each share of
      Series D Preferred Stock is convertible into one share of common stock at the
      option of the holder at any time.




The
      market value of our common stock on the date the Series D Preferred Stock was
      sold was $1.37 per common share. In accordance with EITF 98-5, as amended by
      EITF 00-27, because the Series D Preferred Stock was sold at a price less than
      market value of the underlying components of the security, a beneficial
      conversion to holders of the Series D Preferred Stock occurred. Accordingly,
      during 2003 we recorded a discount of $370,000 within stockholders’ equity and a
      corresponding amount to preferred stock additional paid-in-capital. The Series
      D
      Preferred Stock is convertible into common stock at the option of the holder
      at
      any time, thus the beneficial conversion was recorded as a dividend upon
      issuance.




In
      June
      2006 the Series D Preferred Stock was acquired by a partnership owned 50% each
      by Stuart Benson and Gregg Linn (see Note 11).




The
      holder of the Series D Preferred Stock is entitled to various rights,
      preferences, and restrictions that include the following:




1.
            Voting.
                The Series D Preferred Stock votes on an as-converted basis with
                the
                common stock.




2.
            Dividends.
                The holders of the Series D Preferred Stock are entitled to a like
                dividend or distribution, pro rata, should there be a cash or property
                dividend or distribution to any class of common stock or preferred
                stock
                other than the Series A Preferred Stock, determined on an as converted
                basis. This does not include any dividends paid in shares of common
                stock
                to the holders of Series B Preferred Stock and Series C Preferred
                Stock
                outstanding as of the date of
                issuance.




3.
            Liquidation
                Preference.
                The Series D Preferred Stock is senior to the Series B Preferred
                Stock and
                Series C Preferred Stock and the common stock upon liquidation and
                is
                entitled to an amount equal to the original $1.00 per share issue
                price
                plus any declared and unpaid dividends (as adjusted for stock dividends,
                combinations, splits, recapitalization, and the like with respect
                to such
                shares).




4.
            Redemption.
                We have no rights to redeem the Series D Preferred
                Stock.




5.
            Conversion.
                The holders of Series D Preferred Stock have the right to convert
                into
                common stock, at any time. Each share of Series D Preferred Stock
                is
                convertible into one share of common stock subject to adjustment
                fordeclaredand unpaid dividends, stock dividends, combinations, splits,
                recapitalization, and the like with respect to such shares. The conversion
                price is initially set at $1.00. The conversion price may be decreased
                at
                the end of two years if the common stock is trading at a price below
                the
                conversion price then in effect. The floor for such adjustment is
                $0.25
                per share. The conversion price of the Series D Preferred Stock may
                also
                be reduced in certain situations if we issue additional options,
                warrants,
                or rights to purchase common stock at a price below the conversion
                price
                of the Series D Preferred Stock. In such event, the conversion price
                will
                be decreased by multiplying the conversion price then in effect by
                a
                fraction of which (i) the numerator will be the number of outstanding
                shares of common stock on the date of issuance of the rights plus
                the
                number of shares of common stock which could be purchased at the
                then
                conversion price from the aggregate offering price of the rights
                and (ii)
                the denominator will be the shares of common stock outstanding on
                the date
                of issuance of the rights plus the number of shares of common stock
                so
                offered for subscription or purchase pursuant to such
                rights.




F-21




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




6.
            Protective
                Provisions.
                So long as any shares of Series D Preferred Stock are outstanding,
                we may
                not, without the prior affirmative consent or vote of the holders
                of at
                least two thirds of the outstanding shares of the Series D Preferred
                Stock:




a.
            authorize,
                create, designate, establish, or issue shares of any class or series
                of
                capital stock ranking senior to or on parity with the Series D Preferred
                Stock or reclassify any shares of common stock into shares having
                any
                preference or priority as to dividends or assets superior to any
                such
                preference or priority of Series D Preferred Stock; or




b.
            amend,
                alter, or repeal, whether by merger, consolidation, or otherwise,
                our
                amended and restated articles of incorporation or bylaws or the
                resolutions contained in the certificate of designation of the Series
                D
                Preferred Stock and the powers, preferences, privileges, relative,
                participating, optional and other special rights and qualifications,
                limitations, and restrictions thereof, which would adversely affect
                any
                right, preference, privilege, or voting power of the Series D Preferred
                Stock, or which would increase the amount of authorized shares of
                the
                Series D Preferred Stock or of any other series of preferred stock
                ranking
                senior to the Series D Preferred Stock, with respect to the payment
                of
                dividends (whether or not such series of preferred stock is cumulative
                or
                non-cumulative as to payment of dividends) or
                liquidation.




**Note
      9 - Stock Options and Warrants**




Series
      A Warrants




Series
      A
      Warrants were issued in connection with the June 2002 Series A Preferred Stock
      private placement. Upon conversion of every five shares of Series A Preferred
      Stock into common stock, we will grant one Series A Warrant to purchase one
      share of our common stock, exercisable after one year from the date of grant
      at
      an exercise price of $2.00 per share and expiring on the second anniversary
      of
      the date of grant. The exercise price of the warrants is subject to adjustment
      for stock splits, dividends, reclassifications, and other adjustments.




Upon
      conversion of the 3,712,000 shares of Series A Preferred Stock and corresponding
      stock dividends, we will ultimately issue 859,422 Series A Warrants. During
      2004, pursuant to the warrant offering in November and December 2004, one holder
      of the Series A warrants exercised 277,831 warrants at $0.10 per warrant
      resulting in gross proceeds of approximately $28,000. As of December 31, 2007,
      there were 581,591 Series A Warrants outstanding.




Series
      B and Series C Warrants




Series
      B
      and Series C Warrants were issued in connection with the November 2002 common
      stock private placement, concurrent with the MAF Acquisition. The Series B
      and
      Series C Warrants have exercise prices of $0.214 and may be exercised at the
      option of the holder at any time for a period of five years from the date of
      issuance. The exercise prices are subject to adjustment for stock splits,
      dividends, reclassifications, and other typical corporate actions. If we issue
      additional shares of common stock at a price less than $1.00 per share, the
      exercise prices of the warrants upon each such issuance will be adjusted and
      reset to such issuance price; however, this reset feature does not apply to
      the
      following:




1.
            any
                stock splits, dividends, reclassifications, or similar actions, or


2.
            any
                issuance of shares of common stock (or shares of common stock issuable
                upon the exercise of securities convertible into shares of common
                stock
                with an exercise price or a conversion price less than $1.00) if
                such
                securities were issued to consultants, employees, service providers,
                or to
                a third party to satisfy amounts owed; provided that we may not issue
                to
                such individuals, in any rolling 12-month period, more than 1,600,000
                shares of common stock or 10% of the actual number of shares of common
                stock issued and outstanding (assuming the conversion of the Series
                A
                Preferred Stock) and may not issue to any one individual more than
                500,000
                shares of common stock.





F-22




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




As
      long
      as a registration statement covering the shares underlying the warrants is
      effective, we may redeem any or all of the warrants, at any time, at $0.05
      per
      warrant if:




1.
            the
                closing price for our common stock on any 20 trading days within
                a period
                of 30 consecutive trading days ending on the date of the notice of
                the
                call has been in excess of 150% of the then effective exercise price,
                and


2.
            no
                less than four of such 20 days occur during the last five trading
                days
                ending on the date of the notice of the redemption.




As
      of
      December 31, 2007, there were 1,367,500 Series B Warrants and 1,367,500 Series
      C
      Warrants outstanding.




Series
      D and Series E Warrants




Series
      D
      and Series E Warrants were issued in connection with the April 2003 Series
      B
      Preferred Stock and July 2003 Series C Preferred Stock private placements.
      The
      Series D and Series E Warrants have exercise prices of $1.30 and $1.60,
      respectively, and may be exercised at the option of the holder at any time
      for a
      period of five years from the date of issuance. The exercise prices are subject
      to adjustment for stock splits, dividends, reclassifications, and other typical
      corporate actions. As of December 31, 2007, there were 1,950,000 Series D
      Warrants and 1,500,000 Series E Warrants outstanding.




Series
      F Warrants




Series
      F
      Warrants were issued in connection with the July 2003 amendment of one of our
      strategic consulting agreements. The Series F Warrants have an exercise price
      of
      $1.00 per share and may be exercised at the option of the holder at any time
      for
      a period of five years from the date of issuance. The exercise price is subject
      to adjustment for stock splits, dividends, reclassifications, and other typical
      corporate actions. As of December 31, 2007, there were 125,000 Series F Warrants
      outstanding.




Series
      G and H Warrants




Series
      G
      and H Warrants were issued in connection with the sale of
      our common stock in June and July 2004. We sold units, each unit consisting
      of
      one share of common stock, three Series G Warrants, and one Series H Warrant,
      aggregating 3,900,000 shares of common stock at $0.25 per share, 11,700,000
      Series G Warrants at an exercise price of $0.25 per share, and 3,900,000 Series
      H Warrants at an exercise price of $0.24 per share, generating cash proceeds
      of
      $772,000, net of cash offering costs of $125,000. In addition, during 2004,
      265,000 shares of common stock and 1,950,000 warrants, with a combined fair
      market value at the date of issuance of $549,000 were issued to financial
      advisors to facilitate the transaction, thus increasing the total offering
      costs
      to $599,000.




In
      December 2004, the holders of the G warrants exercised their right to convert
      the warrant in 5.8 million shares of our common stock. As of December 31, 2006,
      no G warrants and 3.9 million H warrants were outstanding. We received no
      consideration related to the G warrant conversion into our common stock. There
      were no transactions involving G or H warrants during 2007 and
      2006.




Other
      Warrants




In
      connection with the Bridge Notes and Senior Secured Notes (see Note 6) during
      2003, we granted note holders an aggregate of 9,516,000 warrants at original
      exercise prices that ranged from $1.00 to $1.50 per share. The warrants may
      be
      exercised immediately, expire on the fifth anniversary of the date of issuance,
      and the exercise price is subject to adjustment for stock splits, dividends,
      reclassifications, and other typical corporate actions, and as of December
      31,
      2005 is set at $0.24.




F-23




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Additionally,
      during 2003, we granted 214,000 warrants to financial advisors associated with
      the issuance of the Bridge Notes. Financial advisors associated with the Secured
      Notes were granted 558,000 warrants.




In
      conjunction with warrant exercises in November and December of 2004, 6,560,000
      of these warrants were exercised at $0.10 per warrant generating gross cash
      proceeds of $695,000. Certain holders of these exercised warrants will receive
      a
      new warrant with an exercise price of $0.10. In conjunction with this offering,
      we paid to financial advisors to help facilitate the transaction $68,000 in
      cash
      consideration and will issue 656,000 new warrants with an exercise price of
      $0.10. Effectively, we sold common stock for $0.10 per share and extend the
      terms and reduced the price of the warrants.




In
      August
      2004 we issued 125,000 warrants with an exercise price of $0.26 to one of our
      employees in connection with our joint venture with Wellness Watchers Systems
      LLC.




In
      January 2006 we granted 1,000,000 warrants to purchase common stock at $0.001
      per share to Atlas Capital as part of our agreement with them to provide
      investment banking services to us.




In
      aggregate, as of December 31, 2007, there were 20,888,269 of these warrants
      outstanding.




Stock
      Option Plans




On
      August 1, 2001, the Board of Directors adopted our 2001 Stock Option Plan
      pursuant to which incentive stock options or non-statutory stock options to
      purchase up to 2,500,000 shares of common stock can be granted to employees,
      officers, directors, consultants, and independent contractors and other service
      providers.




On
      May 3, 2002, the Board of Directors adopted our 2002 Stock Option Plan
      pursuant to which incentive stock options or non-statutory stock options to
      purchase up to 2,000,000 shares of common stock can be granted to employees,
      officers, directors, consultants, independent contractors, and other service
      providers.




On
      July 15, 2005, the Board of Directors adopted our 2005 Stock Option Plan
      pursuant to which incentive stock options or non-statutory stock options to
      purchase up 16,819,000 shares of common stock can be granted to employees,
      officers, directors, consultants, independent contractors, and other service
      providers.




The
      combined plans had 6,501,000 and 10,251,000 options outstanding at December
      31,
      2007 and 2006, respectively, with exercise prices ranging from $0.04 to $1.00.
      At December 31, 2007, there were an aggregate of 14,145,000 options available
      under the plans for future grant.




Options
      and Warrants Issued for Services




In
      order
      to fund operating activities, we, from time to time, grant options or warrants
      to purchase common stock in lieu of cash in consideration for consulting,
      investment banking, or other services rendered, compensation, release of debt,
      and various other claims that parties may have against us. We granted options
      and warrants to purchase common stock during the years ended December 31, as
      follows:




F-24




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




**2007**
            
            **2006**Number
            
            
            
            Exercise
            
            Number
            
            
            
            ExerciseGranted
            
            Fair Value
            
            Price
            
            Granted
            
            Fair Value
            
            PriceOptions
            
            
            -
            
            $
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            $
            0.00-
            
            $
            -
            
            
            
            
            
            -
            
            $
            0




The
      fair
      value of certain of these options and warrants are being amortized over their
      respective vesting periods, which range from zero to 36 months. The fair value
      of unamortized options and warrants issued for services at December 31, 2007
      and
      2006 was $0.00.




Options
      and Warrants Issued to Employees





In
      accordance with FIN No. 44, we adjust expense upward or downward on a monthly
      basis based on the trading price at the end of each period. As a result, we
      recorded a net credit to salaries and benefits expense of approximately $648,000
      during the year ended December 31, 2005. We adopted Statement of Financial
      Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS
      123R”), effective January 1, 2006. SFAS 123R requires the recognition of the
      fair value of stock-based compensation in net income. SFAS 123R supersedes
      Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
      Compensations (“SFAS 123”) and Accounting Principles Board Opinion No. 25,
      Accounting for Stock Issued to Employees (“APB 25”). The Company has adopted
      SFAS 123R using the modified prospective method. Accordingly, prior period
      amounts have not been restated. Under the modified prospective method, stock
      options awards that are granted, modified or settled after December 31, 2005
      will be valued at fair value in accordance with provisions of SFAS 123R and
      recognized on a straight line basis over the service period of the entire
      award.. As there were no option awards granted in the twelve months ended
      December 31, 2007 and 2006 and all prior option awards were fully vested prior
      to January 1, 2006 there was no effect due to the implementation of SFAS 123R
      in
      twelve months ended December 30, 2006.




Summary
      of Options and Warrants




A
      summary
      of stock option activity for employees and directors for the years ended
      December 31 is as follows:




**2007**
            
            **2006****Weighted**
            
            
            
            **Weighted****Average**
            
            
            
            **Average****Shares**
            
            **Exercise**
            
            **Shares**
            
            **Exercise Price**Outstanding at beginning of
            
            
            10,251,000
            
            $
            0.09
            
            
            13,801,000
            
            $
            0.09Granted
            
            
            -
            
            
            
            
            
            -Cancelled
            
            
            (3,750,000
            )
            
            
            
            
            (3,550,000
            )Exercised
            
            
            -
            
            
            
            
            
            -Outstanding
                at end of period
            
            
            6,501,000
            
            $
            0.09
            
            
            10,251,000
            
            $
            0.09Exercisable
                at end of period
            
            
            6,501,000
            
            $
            0.09
            
            
            10,251,000
            
            $
            0.09





F-25




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




During
      the years ended December 31, 2007 and 2006, 3,750,000 and 3,550,000 options,
      respectively, were cancelled as a result of employees leaving the company
      resulting in the subsequent expiration of their options.




Information
      about stock options outstanding at December 31, 2007 is as follows:


Options Outstanding
              
              Options ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedRemaining
              
              Average
              
              
              
              AverageRange of Exercise
              
              Shares
              
              Contractual
              
              Exercise
              
              
              
              ExercisePrices
              
              Outstanding
              
              Life
              
              Price
              
              Shares Exercisable
              
              Price$0.65 - $1.00
              
              
              401,000
              
              
              0.75
              
              $
              0.87
              
              
              401,000
              
              $
              0.91$0.04
                  - $0.08
              
              
              6,100,000
              
              
              -
              
              $
              0.06
              
              
              6,100,000
              
              $
              0.066,501,000
              
              
              
              
              
              
              
              
              6,501,000




A
      summary
      of warrant activity for non-employees for the years ended December 31 is as
      follows:





**2007**
            
            **2006****Weighted**
            
            
            
            **Weighted****Average**
            
            
            
            **Average****Shares**
            
            **Exercise Price**
            
            **Shares**
            
            **Exercise Price**Outstanding at beginning of period
            
            
            31,580,000
            
            $
            0.46
            
            
            30,580,000
            
            $
            0.46Granted
            
            
            -
            
            
            0.001
            
            
            1,000,000
            
            
            -Cancelled
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at end of period
            
            
            31,580,000
            
            $
            0.46
            
            
            31,580,000
            
            $
            0.46Exercisable
                at end of period
            
            
            31,580,000
            
            $
            0.46
            
            
            31,580,000
            
            $
            0.46





Information
      about warrants outstanding at December 31, 2006 is as follows:




F-26




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




Warrants Outstanding
                & ExercisableWeightedAverage
            
            WeightedRange of
            
            
            
            Remaining
            
            AverageExercise
            
            Shares
            
            Contractual
            
            ExercisePrices
            
            Outstanding
            
            Life
            
            Price$0.01
                - $0.35
            
            
            27,423,000
            
            
            3.10
            
            $
            0.13$0.54
                - $1.00
            
            
            125,000
            
            
            1.98
            
            $
            -$1.30
                - $1.65
            
            
            3,450,000
            
            
            2.52
            
            $
            0.16$2.00
            
            
            582,000
            
            
            1.42
            
            $
            0.0431,580,000
            
            
            3.00
            
            $
            0.34




**Note
      10 - Income Taxes**




Components
      of the deferred tax asset (liabilities) as of December 31 are as
      follows:





**2007**
            
            **2006**Net
                operating loss carryforwards
            
            $
            13,316,000
            
            $
            12,496,000Marketable
                securities
            
            
            -
            
            
            214,000Accounts
                receivable
            
            
            141,000
            
            
            161,000Deferred
                compensation
            
            
            3,038,000
            
            
            3,038,000Inventories
            
            
            144,000
            
            
            0Amortizable
                intangibles
            
            
            14,799,000
            
            
            14,861,000Other
                temporary differences
            
            
            20,000
            
            
            20,00031,458,000
            
            
            30,790,000(31,458,000
            )
            
            (30,790,000
            )Less
                valuation allowance
            
            $
            -
            
            $
            -




Net
      operating loss carry forwards are available to reduce future taxable income.
      However, a change in ownership, as defined by federal income tax regulations,
      could significantly limit our ability to utilize our U.S. net operating loss
      carry forwards. Additionally, because federal tax laws limit the time during
      which the net operating loss carry forwards may be applied against future taxes,
      if we fail to generate taxable income prior to the expiration dates, we may
      not
      be able to fully utilize the net operating loss carry forwards to reduce future
      income taxes.




As
      we
      have had cumulative losses and there is no assurance of future taxable income,
      valuation allowances have been recorded to fully offset the deferred tax asset
      at December 31, 2007 and 2006. The valuation allowance increased $668,000 and
      $20,000 during 2007 and 2006, respectively. Due to this increase in the
      valuation allowance, the effective tax rate has been reduced to 0% for the
      years
      ended December 31, 2007 and 2006. As of December 31, 2007, we had net
      operating loss carry forwards for federal income tax reporting purposes of
      approximately $36,150,000 which expire at varies periods through 2026. The
      utilization of such operating losses may be limited.




F-27




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




A
      reconciliation of statutory to effective income tax rates is as follows for
      years ended December 31:




2007
            
            2006Federal
                statutory rates
            
            
            -34
            %
            $
            (836,000
            )
            
            -34
            %
            $
            (28,000
            )State
            
            
            -6
            %
            
            (148,000
            )
            
            -6
            %
            
            (5,000
            )Valuation
                allowance
            
            
            40
            %
            
            668,000
            
            
            40
            %
            
            21,000True
                up
            
            
            -
            
            
            316,000
            
            
            
            
            
            -Other
            
            
            -
            
            
            -
            
            
            -
            
            
            12,000Effective
                rate
            
            
            0
            %
            $
            -
            
            
            0
            %
            $
            -




**Note
      11 - Related Party Transactions**




From
      time
      to time, we engage our directors, shareholders, or other related parties for
      consulting services related to investment, acquisition, or other activities
      in
      the normal course of business. We believe that all of these transactions are
      conducted at an “arms-length.” Fair market value of securities issued in these
      transactions, including stock, options, and warrants, is listed below where
      applicable and calculated using the Black-Scholes Pricing Model as of the date
      of issuance or grant.




Officers
      and Directors




During
      the first quarter of 2006, Mr. Benson and Gregg Linn, a former officer of our
      company, became aware of an opportunity for us to repurchase the notes from
      the
      holders of our Secured Notes and Series D Preferred Stock at a discount. Messrs.
      Benson and Linn made the opportunity available to our Board of Directors at
      a
      meeting held during June 2006. The Board of Directors confirmed with the
      officers that based on the limited cash resources of our company, that our
      company was unable to take advantage of the opportunity, but approved the
      officers of taking advantage of the opportunity to repurchase the Secured Notes
      and Series D Preferred Stock. In providing such approval, the Board of Directors
      considered various factors in permitting such purchase, including our company’s
      financial performance, cash deficiency, working capital deficit, and the
      approaching maturity of the Secured Notes. The Board of Directors also
      considered our company’s business outlook, and believed that if the officers
      were able to purchase the Secured Notes and Series D Preferred Stock, it would
      be more likely that our stockholders would receive a return on their investment
      through a change of control transaction rather than our company facing a
      foreclosure or other proceeding by the holders of the Secured Notes. Following
      such approval, Messrs. Benson and Linn formed VTLV LLC as the acquisition
      vehicle to purchase the Secured Notes and Series D Preferred Stock and discussed
      with Nutracea the possibility of borrowing money to consummate such purchase.
      Following such discussions, during June 2006 for an aggregate of $416,667,
      VTLV
      LLC purchased from SkyePharma an aggregate of $1,000,000 in principal amount
      of
      the Secured Notes and 1,000,000 shares of Series D Preferred Stock. The funds
      were provided to VTLV LLC as follows: NutraCea ($300,000 loan), Mr. Benson
      ($46,000), Mr. Linn ($46,000), and Scott Wilkinson, the former controller of
      the
      company ($25,000).




During
      November 2006, Mr. Benson formed VTLV II LLC to purchase additional Secured
      Notes. The funds were provided to VTLV II LLC as follows: NutraCea ($250,000
      loan), and Mr. Benson ($827,000). During April 2007, for an aggregate of
      $1,076,988, VTLV II LLC purchased from nine holders of Secured Notes an
      aggregate of $1,942,755 in principal amount of the Secured Notes.




During
      2006, $12,000 was either paid directly or amounts paid on behalf of Mr. Hannah,
      our former Chairman. These amounts were paid for services requested by
      management that were deemed outside the scope of his role as
      Chairman.




F-28




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




During
      2006, we paid Michael Cardamone, a director, $10,000 for services deemed outside
      the scope of his role as a director.




During
      2007, Michael Cardamone, a director, was also employed by the company, being
      paid $17,000 for such services.




In
      November 2006, effective January 2007, our President and CEO, Stuart Benson,
      became a 50% shareholder in our largest distributor Wellness Watchers Global
      LLC
      (“WWG”), which is a new entity, after we terminated our distributor agreement
      with Wellness Watchers, LLC (“WW”). WW accounted for 82.6% of our sales during
      2006 and 90.8% of our trade receivables at December 31, 2006. WWG acquired
      all
      of the assets and liabilities of WW. Our Board of Directors acknowledged both
      the related party nature of the transaction as well as the potential conflict
      of
      interest and approved Mr. Benson entering into this transaction with us. Note
      that Mr. Benson abstained from voting on this transaction. WWG accounted for
      68%
      of our sales during 2007 and 96% of our trade receivables at December 31,
      2007.




In
      January 2006, we entered into a service agreement with Red Rock Advisors, LLC,
      an entity controlled by Gregg Linn, our COO and CFO for outside services related
      to the creation, development and management of an infomercial that utilizes
      our
      product line. These services were deemed outside his role as COO and CFO.
      Pursuant to the agreement, Red Rock Advisors, LLC was paid $7,500 per month
      for
      six months, beginning in January 2007. Our Board of Directors acknowledged
      both
      the related party nature of this transaction as well as the potential conflict
      of interest and approved Mr. Benson entering into this transaction. Note that
      Mr. Linn abstained from voting on this transaction.




In
      January 2007, Michael Cardamone, a director, also became an employee of Wellness
      Watchers Global, LLC, our major distributor, an entity 50% owned by Stuart
      Benson our President and CEO.




In
      February 2007, VTLV II LLC, an entity controlled by Stuart Benson, made a
      payment of $25,000 on our behalf to one of our suppliers. The $25,000 is
      recorded as a liability to VTLV II LLC.




During
      2007, we made rent payments totaling $15,000 for office space for our President
      and CEO in Boca Raton, FL. This office is the same office of Wellness Watchers
      Global, LLC, our major distributor, an entity 50% owned by Stuart Benson, our
      President and CEO.




During
      the twelve months ended December 31, 2007 Stuart Benson our CEO, or entities
      controlled by him have made short-term, non-interest bearing advances to the
      company in the amount of $407,000, which total is included in consolidated
      condensed financial statements.




During
      the twelve months ended December 31, 2007 the Company purchased approximately
      $195,000 of inventory at wholesale cost from WWG, which was in turn sold by
      us
      to other customers at gross margin of $0. In return for the inventory Vital
      Living issued a credit memo to WWG which was applied to the outstanding accounts
      receivable of WWG.




Shareholders




During
      the 4 th quarter
      of 2007 we secured the services of Pericope Partners LP, an approximately 9%
      shareholder, for work related to the asset purchase agreement with NutraCea,
      Inc. The company signed a promissory note to Periscope in the amount of $400,000
      at 8% interest due in full on December 1, 2008.




In
      2006
      we granted Atlas Capital Services LLC 1,000,000 warrants at an exercise price
      of
      $0.001 in conjunction with an agreement with them to provide consulting,
      investment and financial services. During 2007 and 2006 we paid Atlas $92,500
      and $67,500, respectively for such services.




F-29




**Vital
        Living, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**




**Note
      12 -** **Concentrations**




During
      2006 one customer, Wellness Watchers Global, was responsible for 82.6% of our
      sales and accounted for 90.8% of our trade accounts receivable as of December
      31, 2006. In January 2006 Stuart Benson, CEO acquired a 50% interest in this
      customer (see Note 11).




During
      2007 one customer, WWG, was responsible for 68% of our sales and accounted
      for
      98% of our trade accounts receivable as of December 31, 2007.




During
      2006 four vendors supplied all of our products for sale. One of these vendors
      one accounted for 69.7% of our product purchases.




During
      2007 four vendors supplied all of our products for sale. One of these vendors
      accounted for 56% or our product purchases.




F-30