NOTE 10. EQUITY, SHARE-BASED COMPENSATION AND WARRANT LIABILITY

The following is a summary of equity activity for the six months ended June 30, 2011 (in thousands, except share data):

	NutraCea Shareholders
	Common Stock						Accumulated			Accumulated Other Comp- rehensive			Non- controlling Interest in			Total
	Shares			Amount			Deficit			Income (Loss)			Rice Science			Equity
Balance, January 1, 2011		195,359,109			207,432			(184,812	)		(74	)		(156	)		22,390
Cancelled shares and options -settlements with former officers		(44,666	)		(267	)		-			-			-			(267	)
Share-based employee and director compensation - options		-			248			-			-			-			248
Share-based consultant compensation - options		-			6			-			-			-			6
Share-based compensation for vendor services		531,356			169			-			-			-			169
Beneficial conversion feature of convertible note		-			165			-			-			-			165
Warrants issued for convertible note		-			162			-			-			-			162
Acquisition of additional interests in Rice Science		-			(254	)		-			-			156			(98	)
Warrants issued to Buyer (Note 6)		-			103			-			-			-			103
Common stock issued to Buyer (Note 6)		2,576,775			618			-			-			-			618
Foreign currency translation		-			-			-			1,054			-			1,054
Net loss		-			-			(4,080	)		-			-			(4,080	)
Balance, June 30, 2011		198,422,574		$	208,382		$	(188,892	)	$	980		$	-		$	20,470

The following is a summary of stock option and warrant activity for the six months ended June 30, 2011:

	Number of Options			Weighted Average Option Exercise Price		Weighted Average Remaining Contractual Option Life (Years)		Number of Warrrants			Weighted Average Warrant Exercise Price		Weighted Average Remaining Contractual Warrant Life (Years)
Outstanding, January 1, 2011		45,485,111		$	0.30		6.9		40,429,577		$	1.27		2.1
Granted		2,287,500			0.25				5,118,627			1.18
Exercised		-			-				-			-
Forfeited, expired or cancelled		(9,392,644	)		0.31				(3,353,761	)		1.00
Outstanding, June 30, 2011		38,379,967		$	0.30		6.8		42,194,443		$	1.15		1.8

Exercisable, June 30, 2011		24,206,881		$	0.33		5.8		42,194,443		$	1.15		1.8

Options

In December 2010, we reached an agreement to settle all potential claims associated with the employment of Mr. Brad Edson, our former chief executive officer. The agreement was subject to the approval of the Bankruptcy Court and became effective upon court approval in January 2011. Mr. Edson agreed to return to NutraCea $0.4 million, representing a bonus earned in 2008. We recorded a receivable for the return of the bonus. The corresponding income reduced selling, general and administrative expenses in the first quarter of 2011. As partial payment of the receivable, Mr. Edson forfeited 6,000,000 options granted in 2004 and returned 35,000 shares of common stock in payment of $0.3 million of his obligation. The options had an exercise price of $0.30 per share and were outstanding and exercisable as of December 31, 2010. We reduced the receivable from Mr. Edson, increased equity by $0.3 million, and cancelled the options in the first quarter of 2011, when the Bankruptcy Court approved the agreement. The remaining $0.1 million remains unpaid and reserved for due to uncertainty with regard to the collectability of the receivable as of June 30, 2011.

In March 2011, we reached an agreement to settle all potential claims associated with the employment of Mr. Todd Crow, our former chief financial officer. As part of the settlement, Mr. Crow was required to forfeit 1,662,942 options and return 9,666 shares of common stock held. The agreement was subject to the approval of the Bankruptcy Court and became effective upon court approval in April 2011. We canceled the stock and options in the second quarter. The options had an average exercise price of $0.37 per share and were outstanding and exercisable as of December 31, 2010. No value was assigned to the cancelled stock or options because we transferred no cash or other assets in exchange. In connection with the settlement, Mr. Crow agreed to withdraw his $0.2 million bankruptcy claim.

On July 15, 2011, we entered into amendments to employment agreements with each of our four executive officers. Twenty percent of each officer's salary for the last six months of 2011 will be paid in stock options instead of in cash. The options will vest and become exercisable in twelve equal installments commencing on July 15, 2011 and ending on December 31, 2011. Under the amendments we issued options to purchase 2,116,726 shares of common stock, at an average exercise price of $0.20, and an average initial term of 1.6 years.

In lieu of paying cash to non-employee board members for board retainer fees for the last three quarters of 2011, we will issue shares of common stock. The number of shares will equal the $0.2 million cash compensation to which the directors are entitled, divided by $0.20. We expect to issue in the third quarter of 2011 a total of 1,207,049 shares for 2011 retainer fees. Directors will continue to be paid cash for meeting attendance fees.

Warrants

The table above includes information for both outstanding warrants classified as equity and outstanding warrants classified as warrant liability. As of June 30, 2011, warrants to purchase 20,893,337 shares, classified as liabilities, expire in August 2012.

We have certain outstanding warrant agreements in effect that contain anti-dilution clauses. Under these clauses, based on future equity issuances we may be required to lower the exercise price on these warrants and issue additional warrants. Equity issuances would include issuances of our common stock, certain awards of options to employees, issuances of warrants, or other convertible instruments below a certain exercise price.

Warrant liability is carried at fair value which is determined at the end of each reporting period. The change in fair value is recorded as warrant liability income or expense.

The issuance of shares of common stock to Buyer in the second quarter of 2011 (see Note 6), in connection with the Herbal Science transaction, triggered the anti-dilution clauses in certain outstanding warrant agreements. We lowered the exercise price of existing warrants to purchase 30,781,993 shares from an average exercise price of $1.68 per share to an average exercise price $1.50 per share. We issued additional warrants to purchase approximately 1,615,224 shares at an average exercise price of $1.76 per share.

As a result of issuing the warrant to purchase 730,000 shares to the holder of the convertible note in the second quarter of 2011 (see Note 9), we issued additional warrants to purchase 1,062,523 shares to the holders of warrants with anti-dilution clauses. The additional warrants have an average exercise price of $1.72 per share. We also lowered the exercise price of outstanding warrants to purchase 19,854,201 shares from $1.83 per share to $1.74 per share.

As a result of issuing the warrant to purchase 270,000 shares to the holder of the convertible note in July 2011 (see Note 9), we will be required, in the third quarter of 2011, to issue additional warrants to the holders of certain warrants with anti-dilution clauses and to lower the exercise price of certain outstanding warrants.

As a result of issuing the warrant to purchase 500,000 shares to the holder of the convertible note in the first quarter of 2011 (see Note 9), we issued additional warrants to purchase 605,149 shares to the holders of warrants with anti-dilution clauses. The additional warrants had an average exercise price of $1.95 per share. We also lowered the exercise price of outstanding warrants to purchase 17,794,023 shares from $2.04 per share to $1.98 per share. The additional warrants issued to the holder of the convertible note were cancelled in the second quarter of 2011.

As discussed further in Note 6, we also issued to Buyer, in the second quarter of 2011, warrants to purchase 605,730 shares.

As of June 30, 2011, we have 1,881,184 of outstanding equity warrants, which do not contain anti-dilution clauses, with an average exercise price of $0.36 and an average remaining term of 3.78 years.