UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





(Mark
One)




x
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the Quarterly Period
EndedOctober
31, 2008




or




o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT




For the Transition
Period from 
to




Commission File Number001-31756




Argan, Inc.(Exact
      Name of Registrant as Specified in Its
Charter)





Delaware
                    
                    13-1947195(State
      or Other Jurisdiction of Incorporation
                      or
      Organization)
                    
                    (I.R.S.
      Employer Identification
No.)




One Church Street, Suite 401, Rockville Maryland
      20850(Address
      of Principal Executive Offices) (Zip
Code)





(301) 315-0027(Registrant’s
      Telephone Number, Including Area
Code)





____________________________________(Former
      Name, Former Address and Former Fiscal Year,
              if
      Changed since Last Report)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes þ No o





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one):





Large
accelerated filer  o    Accelerated
filer  o    Non-accelerated
filer  o    Smaller
reporting company  þ





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ





Indicate
the number of shares outstanding of each of the Registrant’s classes of common
stock, as of the latest practicable date: Common Stock, $0.15 par value,
13,434,451 shares at December 10, 2008.







ARGAN, INC. AND
SUBSIDIARIES


INDEX




Page
      No.PART
      I.
                                              
                                              FINANCIAL
      INFORMATION
                                              
                                              3Item
      1.
                                              
                                              Financial
      Statements (unaudited)
                                              
                                              3Condensed
      Consolidated Balance Sheets – October 31, 2008 and January 31,
      2008
                                              
                                              3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      October 31, 2008 and 2007
                                              
                                              4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended October
      31, 2008 and 2007
                                              
                                              5Notes
      to Condensed Consolidated Financial Statements
                                              
                                              6Item
      2.
                                              
                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                                              
                                              18Item
      3.
                                              
                                              Quantitative
      and Qualitative Disclosures about Market Risk
                                              
                                              28Item
      4.
                                              
                                              Controls
      and Procedures
                                              
                                              28PART
      II.
                                              
                                              OTHER
      INFORMATION
                                              
                                              29Item
      1.
                                              
                                              Legal
      Proceedings
                                              
                                              29Item
      1A.
                                              
                                              Risk
      Factors
                                              
                                              30Item
      2.
                                              
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                                              
                                              31Item
      3.
                                              
                                              Defaults
      upon Senior Securities
                                              
                                              31Item
      4.
                                              
                                              Submission
      of Matters to a Vote of Security Holders
                                              
                                              31Item
      5.
                                              
                                              Other
      Information
                                              
                                              31Item
      6.
                                              
                                              Exhibits
                                              
                                              31SIGNATURES
                                              
                                              
                                              
                                              31





CERTIFICATIONS


- 2
-


ARGAN,
INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets




October 31,
              
              
              January 31,2008
                (unaudited)
              
              
              2008
                (audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              93,143,000
              
              
              $
              66,827,000Escrowed
      cash
              
              
              10,324,000
              
              
              
              14,398,000Accounts
      receivable, net of allowance for doubtful accounts
              
              
              3,420,000
              
              
              
              30,481,000Inventories,
      net of reserve for obsolescence
              
              
              2,533,000
              
              
              
              2,808,000Current
      deferred tax assets
              
              
              882,000
              
              
              
              406,000Prepaid
      expenses and other current assets
              
              
              1,383,000
              
              
              
              1,330,000TOTAL
      CURRENT ASSETS
              
              
              111,685,000
              
              
              
              116,250,000Property
      and equipment, net of accumulated depreciation
              
              
              1,331,000
              
              
              
              2,892,000Goodwill
              
              
              19,416,000
              
              
              
              20,337,000Other
      intangible assets, net of accumulated amortization
              
              
              3,921,000
              
              
              
              5,296,000Investment
      in unconsolidated subsidiary
              
              
              1,241,000
              
              
              
              —Deferred
      tax assets
              
              
              2,321,000
              
              
              
              828,000Other
      assets
              
              
              153,000
              
              
              
              260,000TOTAL
      ASSETS
              
              $
              140,068,000
              
              
              $
              145,863,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              29,853,000
              
              
              $
              35,483,000Accrued
      expenses
              
              
              9,142,000
              
              
              
              9,370,000Billings
      in excess of cost and earnings
              
              
              22,557,000
              
              
              
              52,313,000Current
      portion of long-term debt
              
              
              2,526,000
              
              
              
              2,581,000TOTAL
      CURRENT LIABILITIES
              
              
              64,078,000
              
              
              
              99,747,000Long-term
      debt
              
              
              2,250,000
              
              
              
              4,134,000Other
      liabilities
              
              
              77,000
              
              
              
              116,000TOTAL
      LIABILITIES
              
              
              66,405,000
              
              
              
              103,997,000COMMITMENTS AND CONTINGENCIES(Note 14)STOCKHOLDERS'
      EQUITYPreferred
      stock, par value $0.10 per share; 500,000 shares
    authorized;no
      shares issued and outstanding
              
              
              —
              
              
              
              —Common
      stock, par value $0.15 per share;30,000,000
      shares authorized; 13,433,684 and 11,113,534 shares issued
    and13,430,451
      and 11,110,301 shares outstanding at 10/31/08 and 1/31/08,
      respectively
              
              
              2,014,000
              
              
              
              1,667,000Warrants
      outstanding
              
              
              753,000
              
              
              
              834,000Additional
      paid-in capital
              
              
              84,359,000
              
              
              
              57,861,000Accumulated
      other comprehensive loss
              
              
              (59,000
              )
              
              
              (107,000
              )Accumulated
      deficit
              
              
              (13,371,000
              )
              
              
              (18,356,000
              )Treasury
      stock, at cost; 3,233 shares at 10/31/08 and 1/31/08
              
              
              (33,000
              )
              
              
              (33,000
              )TOTAL
      STOCKHOLDERS' EQUITY
              
              
              73,663,000
              
              
              
              41,866,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              140,068,000
              
              
              $
              145,863,000





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


- 3
-





ARGAN,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


(unaudited)




Three Months Ended
                                                                      October 31,
                                                                    
                                                                    
                                                                    Nine Months Ended
                                                                      October 31,2008
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    2008
                                                                    
                                                                    
                                                                    2007Net
      revenuesPower
      industry services
                                                                    
                                                                    $
                                                                    36,387,000
                                                                    
                                                                    
                                                                    $
                                                                    42,017,000
                                                                    
                                                                    
                                                                    $
                                                                    151,034,000
                                                                    
                                                                    
                                                                    $
                                                                    130,970,000Nutritional
      products
                                                                    
                                                                    
                                                                    2,662,000
                                                                    
                                                                    
                                                                    
                                                                    4,617,000
                                                                    
                                                                    
                                                                    
                                                                    7,287,000
                                                                    
                                                                    
                                                                    
                                                                    14,602,000Telecommunications
      infrastructure services
                                                                    
                                                                    
                                                                    2,338,000
                                                                    
                                                                    
                                                                    
                                                                    2,629,000
                                                                    
                                                                    
                                                                    
                                                                    6,570,000
                                                                    
                                                                    
                                                                    
                                                                    7,260,000Net
      revenues
                                                                    
                                                                    
                                                                    41,387,000
                                                                    
                                                                    
                                                                    
                                                                    49,263,000
                                                                    
                                                                    
                                                                    
                                                                    164,891,000
                                                                    
                                                                    
                                                                    
                                                                    152,832,000Cost
      of revenuesPower
      industry services
                                                                    
                                                                    
                                                                    29,742,000
                                                                    
                                                                    
                                                                    
                                                                    35,548,000
                                                                    
                                                                    
                                                                    
                                                                    131,425,000
                                                                    
                                                                    
                                                                    
                                                                    119,383,000Nutritional
      products
                                                                    
                                                                    
                                                                    2,983,000
                                                                    
                                                                    
                                                                    
                                                                    4,193,000
                                                                    
                                                                    
                                                                    
                                                                    7,701,000
                                                                    
                                                                    
                                                                    
                                                                    12,481,000Telecommunications
      infrastructure services
                                                                    
                                                                    
                                                                    1,824,000
                                                                    
                                                                    
                                                                    
                                                                    2,076,000
                                                                    
                                                                    
                                                                    
                                                                    5,474,000
                                                                    
                                                                    
                                                                    
                                                                    5,776,000Cost
      of revenues
                                                                    
                                                                    
                                                                    34,549,000
                                                                    
                                                                    
                                                                    
                                                                    41,817,000
                                                                    
                                                                    
                                                                    
                                                                    144,600,000
                                                                    
                                                                    
                                                                    
                                                                    137,640,000Gross
      profit
                                                                    
                                                                    
                                                                    6,838,000
                                                                    
                                                                    
                                                                    
                                                                    7,446,000
                                                                    
                                                                    
                                                                    
                                                                    20,291,000
                                                                    
                                                                    
                                                                    
                                                                    15,192,000Selling,
      general and administrative expenses
                                                                    
                                                                    
                                                                    3,090,000
                                                                    
                                                                    
                                                                    
                                                                    4,381,000
                                                                    
                                                                    
                                                                    
                                                                    11,118,000
                                                                    
                                                                    
                                                                    
                                                                    13,715,000Impairment
      losses of Vitarich Laboratories, Inc.
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    4,666,000
                                                                    
                                                                    
                                                                    
                                                                    1,946,000
                                                                    
                                                                    
                                                                    
                                                                    4,666,000Income
      (loss) from operations
                                                                    
                                                                    
                                                                    3,748,000
                                                                    
                                                                    
                                                                    
                                                                    (1,601,000
                                                                    )
                                                                    
                                                                    
                                                                    7,227,000
                                                                    
                                                                    
                                                                    
                                                                    (3,189,000
                                                                    )Interest
      expense
                                                                    
                                                                    
                                                                    (108,000
                                                                    )
                                                                    
                                                                    
                                                                    (171,000
                                                                    )
                                                                    
                                                                    
                                                                    (336,000
                                                                    )
                                                                    
                                                                    
                                                                    (550,000
                                                                    )Interest
      income
                                                                    
                                                                    
                                                                    609,000
                                                                    
                                                                    
                                                                    
                                                                    1,074,000
                                                                    
                                                                    
                                                                    
                                                                    1,545,000
                                                                    
                                                                    
                                                                    
                                                                    2,352,000Equity
      in the net loss of unconsolidated subsidiary
                                                                    
                                                                    
                                                                    (195,000
                                                                    )
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    (359,000
                                                                    )
                                                                    
                                                                    
                                                                    —Income
      (loss) from operations beforeincome
      taxes
                                                                    
                                                                    
                                                                    4,054,000
                                                                    
                                                                    
                                                                    
                                                                    (698,000
                                                                    )
                                                                    
                                                                    
                                                                    8,077,000
                                                                    
                                                                    
                                                                    
                                                                    (1,387,000
                                                                    )Income
      tax expense
                                                                    
                                                                    
                                                                    (1,430,000
                                                                    )
                                                                    
                                                                    
                                                                    (1,259,000
                                                                    )
                                                                    
                                                                    
                                                                    (3,092,000
                                                                    )
                                                                    
                                                                    
                                                                    (1,253,000
                                                                    )Net
      income (loss)
                                                                    
                                                                    $
                                                                    2,624,000
                                                                    
                                                                    
                                                                    $
                                                                    (1,957,000
                                                                    )
                                                                    
                                                                    $
                                                                    4,985,000
                                                                    
                                                                    
                                                                    $
                                                                    (2,640,000
                                                                    )Earnings
      per share:Basic
                                                                    
                                                                    $
                                                                    0.20
                                                                    
                                                                    
                                                                    $
                                                                    (0.18
                                                                    )
                                                                    
                                                                    $
                                                                    0.41
                                                                    
                                                                    
                                                                    $
                                                                    (0.24
                                                                    )Diluted
                                                                    
                                                                    $
                                                                    0.19
                                                                    
                                                                    
                                                                    $
                                                                    (0.18
                                                                    )
                                                                    
                                                                    $
                                                                    0.40
                                                                    
                                                                    
                                                                    $
                                                                    (0.24
                                                                    )Weighted
      average number of shares outstanding:Basic
                                                                    
                                                                    
                                                                    13,414,000
                                                                    
                                                                    
                                                                    
                                                                    11,096,000
                                                                    
                                                                    
                                                                    
                                                                    12,138,000
                                                                    
                                                                    
                                                                    
                                                                    11,095,000Diluted
                                                                    
                                                                    
                                                                    13,730,000
                                                                    
                                                                    
                                                                    
                                                                    11,096,000
                                                                    
                                                                    
                                                                    
                                                                    12,480,000
                                                                    
                                                                    
                                                                    
                                                                    11,095,000





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


- 4
-


ARGAN,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(unaudited)


Nine Months Ended October 31,2008
                                                              
                                                              
                                                              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                                              
                                                              $
                                                              4,985,000
                                                              
                                                              
                                                              $
                                                              (2,640,000
                                                              )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Deferred
      income taxes
                                                              
                                                              
                                                              (1,895,000
                                                              )
                                                              
                                                              
                                                              (2,424,000
                                                              )Impairment
      losses
                                                              
                                                              
                                                              1,946,000
                                                              
                                                              
                                                              
                                                              4,666,000Amortization
      of purchased intangibles
                                                              
                                                              
                                                              1,289,000
                                                              
                                                              
                                                              
                                                              5,290,000Non-cash
      stock option compensation expense
                                                              
                                                              
                                                              848,000
                                                              
                                                              
                                                              
                                                              282,000Depreciation
      and other amortization
                                                              
                                                              
                                                              842,000
                                                              
                                                              
                                                              
                                                              968,000Provision
      for inventory obsolescence
                                                              
                                                              
                                                              812,000
                                                              
                                                              
                                                              
                                                              378,000Equity
      in net loss of unconsolidated subsidiary
                                                              
                                                              
                                                              359,000
                                                              
                                                              
                                                              
                                                              —Other
                                                              
                                                              
                                                              103,000
                                                              
                                                              
                                                              
                                                              37,000Changes
      in operating assets and liabilities:Escrowed
      cash
                                                              
                                                              
                                                              4,074,000
                                                              
                                                              
                                                              
                                                              625,000Accounts
      receivable, net
                                                              
                                                              
                                                              4,820,000
                                                              
                                                              
                                                              
                                                              (994,000
                                                              )Estimated
      earnings in excess of billings
                                                              
                                                              
                                                              25,000
                                                              
                                                              
                                                              
                                                              11,373,000Inventories,
      net
                                                              
                                                              
                                                              (537,000
                                                              )
                                                              
                                                              
                                                              380,000Prepaid
      expenses and other assets
                                                              
                                                              
                                                              (56,000
                                                              )
                                                              
                                                              
                                                              (1,396,000
                                                              )Accounts
      payable and accrued expenses
                                                              
                                                              
                                                              (3,784,000
                                                              )
                                                              
                                                              
                                                              (12,428,000
                                                              )Billings
      in excess of cost and earnings
                                                              
                                                              
                                                              (7,537,000
                                                              )
                                                              
                                                              
                                                              50,774,000Other
                                                              
                                                              
                                                              9,000
                                                              
                                                              
                                                              
                                                              86,000Net
      cash provided by operating activities
                                                              
                                                              
                                                              6,303,000
                                                              
                                                              
                                                              
                                                              54,977,000CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      of contingent acquisition price
                                                              
                                                              
                                                              (2,000,000
                                                              )
                                                              
                                                              
                                                              —Investment
      in unconsolidated subsidiary
                                                              
                                                              
                                                              (1,600,000
                                                              )
                                                              
                                                              
                                                              —Purchases
      of property and equipment, net
                                                              
                                                              
                                                              (216,000
                                                              )
                                                              
                                                              
                                                              (463,000
                                                              )Purchases
      of investments
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              (19,997,000
                                                              )Proceeds
      from sale of investments
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              17,271,000Net
      cash used in investing activities
                                                              
                                                              
                                                              (3,816,000
                                                              )
                                                              
                                                              
                                                              (3,189,000
                                                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from the private placement sale of common stock
                                                              
                                                              
                                                              24,982,000
                                                              
                                                              
                                                              
                                                              —Principal
      payments on long-term debt
                                                              
                                                              
                                                              (1,939,000
                                                              )
                                                              
                                                              
                                                              (1,940,000
                                                              )Proceeds
      from the exercise of stock options and warrants
                                                              
                                                              
                                                              786,000
                                                              
                                                              
                                                              
                                                              27,000Net
      cash provided by (used in) financing activities
                                                              
                                                              
                                                              23,829,000
                                                              
                                                              
                                                              
                                                              (1,913,000
                                                              )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                                              
                                                              
                                                              26,316,000
                                                              
                                                              
                                                              
                                                              49,875,000CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                                              
                                                              
                                                              66,827,000
                                                              
                                                              
                                                              
                                                              25,393,000CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                                              
                                                              $
                                                              93,143,000
                                                              
                                                              
                                                              $
                                                              75,268,000SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest and income taxes as follows:Interest
                                                              
                                                              $
                                                              336,000
                                                              
                                                              
                                                              $
                                                              898,000Income
      taxes
                                                              
                                                              $
                                                              5,192,000
                                                              
                                                              
                                                              $
                                                              3,117,000Non-cash
      transactions as follows:Net
      (increase) decrease in the fair value of interest rate
    swaps
                                                              
                                                              $
                                                              (48,000
                                                              )
                                                              
                                                              $
                                                              36,000Reductions
      in accounts receivable and billings in excess of cost and
      earnings
                                                              
                                                              $
                                                              22,219,000
                                                              
                                                              
                                                              
                                                              —





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


- 5
-




ARGAN,
INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2008


(unaudited)





NOTE 1 – DESCRIPTION OF THE
BUSINESS AND BASIS OF PRESENTATION




Organization




Argan,
Inc. (“Argan”) conducts its operations through its wholly-owned subsidiaries,
Gemma Power Systems, LLC and affiliates (“GPS”) which were acquired in December
2006, Vitarich Laboratories, Inc. (“VLI”) which was acquired in August 2004, and
Southern Maryland Cable, Inc. (“SMC”) which was acquired in July 2003. Argan and
its consolidated wholly-owned subsidiaries are hereinafter referred to as the
“Company.” Through GPS, the Company provides a full range of development,
consulting, engineering, procurement, construction, commissioning, operating and
maintenance services to the power generation and renewable energy markets for a
wide range of customers including public utilities, independent power project
owners, municipalities, public institutions and private industry. Through VLI,
the Company develops, manufactures and distributes premium nutritional
supplements, whole-food dietary supplements and personal care products. Through
SMC, the Company provides telecommunications infrastructure services including
project management, construction, installation and maintenance primarily to the
federal government, telecommunications and broadband service providers, and
electric utilities in the Mid-Atlantic region. Each of the wholly-owned
subsidiaries represents a separate reportable segment.





In June
2008, the Company announced that GPS entered into a business partnership with
Invenergy Wind Management LLC, for the design and construction of wind farms
located in the United States and Canada (see Note 7). The partners each own 50%
of a new company, Gemma Renewable Power, LLC (“GRP”). The Company expects that
GRP will provide engineering, procurement and construction services for new wind
farms generating electrical power including the design and construction of
roads, foundations, and electrical collection systems, as well as the erection
of towers, turbines and blades.




Basis of
Presentation




The
condensed consolidated financial statements include the accounts of Argan and
its wholly-owned subsidiaries. The Company’s fiscal year ends on January 31. The
results of companies acquired during a reporting period are included in the
consolidated financial statements from the effective date of the acquisition.
All significant inter-company balances and transactions have been eliminated in
consolidation. The Company accounts for its investment in GRP using the equity
method.





The
condensed consolidated balance sheet as of October 31, 2008, the condensed
consolidated statements of operations for the three and nine months ended
October 31, 2008 and 2007, and the condensed consolidated statements of cash
flows for the nine months ended October 31, 2008 and 2007 are unaudited. The
condensed consolidated balance sheet as of January 31, 2008 has been derived
from audited financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain all
adjustments, which are of a normal and recurring nature, considered necessary to
present fairly the financial position of the Company as of October 31, 2008 and
the results of its operations and its cash flows for the interim periods
presented. The results of operations for any interim period are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year.





These
condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information not misleading. The
accompanying condensed consolidated financial statements and notes should be
read in conjunction with the consolidated financial statements, the notes
thereto, and the independent registered public accounting firm’s report thereon
that are included in the Company’s Annual Report on Form 10-K filed with the SEC
for the fiscal year ended January 31, 2008.





- 6
-





Recently Issued Accounting
Pronouncements





In
October 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB
Staff Position (“FSP”) FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active,” in order to clarify the
application of FASB Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements,” (“SFAS No. 157”) in a market that is not active and to
provide an example to illustrate the key considerations in the application of
this guidance. It emphasizes that the use of a reporting entity’s own
assumptions about future cash flows and an appropriately risk-adjusted discount
rate in determining the fair value for a financial asset is acceptable when
relevant observable inputs are not available. This FSP was effective upon its
issuance. SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. Certain provisions of this standard relating to
financial assets and financial liabilities were effective for the Company
beginning February 1, 2008. The effective provisions did not have a material
impact on the consolidated financial statements. Adoption of the other
provisions of this standard relating primarily to nonfinancial assets and
nonfinancial liabilities will first be required for the Company’s consolidated
financial statements covering the quarter ending April 30, 2009. The adoption of
these provisions is not expected to have a material impact on the Company’s
consolidated financial statements. The significant nonfinancial items included
in the Company’s consolidated balance sheet include property and equipment,
goodwill and other purchased intangible assets.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles”. This statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP (the
“GAAP Hierarchy”) and mandates that the GAAP Hierarchy reside in the accounting
literature as opposed to the audit literature. This pronouncement will become
effective 60 days following approval by the SEC. The Company does not believe
this pronouncement will impact its consolidated financial
statements.





In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”)
and  intends to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under FASB Statement of
Financial Accounting Standards No. 141R (see description below) and other
U.S. generally accepted accounting principles. This FSP is effective for the
Company’s interim and annual financial statements beginning in the fiscal year
commencing February 1, 2009. The Company does not expect the adoption of this
FSP to have a material impact on its consolidated financial
statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – An Amendment
of FASB Statement No. 133.” This new standard requires enhanced disclosures
about an entity’s derivative and hedging activities with the intent of improving
the transparency of financing reporting as the use and complexity of derivative
instruments and hedging activities have increased significantly over the past
several years. Currently, the Company uses interest rate swap agreements to
hedge the risks related to the variable interest paid on its term loans. The
current effects of the Company’s hedging activities are not significant to its
consolidated financial statements. However, the new standard will require the
Company to provide an enhanced understanding of 1) how and why it uses
derivative instruments, 2) how it accounts for derivative instruments and the
related hedged items, and 3) how derivatives and related hedged items affect its
financial position, financial performance and cash flows. In
September 2008, the FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161,” a new pronouncement intended to improve the disclosures
about credit derivatives by requiring more information about the potential
adverse effects of changes in credit risk on the financial statements of the
sellers of these instruments and by requiring additional disclosure about the
current status of the payment/performance risk of a guarantee. Adoption of FASB
Statement No. 161 will first be required for the Company’s consolidated
financial statements covering the quarter ending April 30, 2009. The provisions
of the FSP that amend FASB Statement No. 133 and Interpretation No. 45 will be
effective for the Company's consolidated financial statements for the year
ending January 31, 2009.




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, “Business Combinations,” (“SFAS No. 141R”) which replaces SFAS
No. 141 and provides greater consistency in the accounting and financial
reporting of business combinations. SFAS No. 141R requires the acquiring
entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction, establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed, establishes principles and requirements for how an acquirer recognizes
and measures any non-controlling interest in the acquiree and the goodwill
acquired, and requires the acquirer to disclose the nature and financial effect
of the business combination. Among other changes, this statement also requires
that “negative goodwill” be recognized in earnings as a gain attributable to the
acquisition, that acquisition-related costs are to be recognized separately from
the acquisition and expensed as incurred and that any deferred tax benefits
resulted in a business combination are recognized in income from continuing
operations in the period of the combination. SFAS No. 141R will be
effective for the Company for business combinations occurring subsequent to
January 31, 2009. The accounting for future acquisitions, if any, may be
affected by this pronouncement and will be evaluated by the Company at that
time.





- 7
-




In
December 2007, the FASB also issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” that
establishes accounting and reporting standards for minority interests in
consolidated subsidiaries. This standard will be effective for the Company on
February 1, 2009, and its adoption would not affect the Company’s current
consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
This standard permits companies to measure many financial instruments and
certain other items at fair value at specified election dates. The provisions of
this new standard were effective for the Company beginning February 1, 2008 and
did not have a significant impact on the consolidated financial
statements.





NOTE 2 - CASH, CASH
EQUIVALENTS AND ESCROWED CASH





The
Company considers all liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents. The Company holds
cash on deposit at banks in excess of federally insured limits. However, due to
a belief in the financial strength of the financial institutions, primarily Bank
of America (the “Bank”), management does not believe that the risk associated
with keeping deposits in excess of federal deposit limits represents a material
risk currently.





Pursuant
to the GPS acquisition agreement, the Company deposited $12.0 million into an
escrow account with the Bank. Of this amount, $10.0 million secures a letter of
credit that was issued in support of a bonding commitment. The remaining amount
of $2.0 million was set aside for the payment of up to $2.0 million of
additional purchase price in the event that GPS would meet certain financial
objectives in 2007. As the earnings before interest, taxes, depreciation and
amortization (“EBITDA”) of GPS for the twelve months ended December 31, 2007, as
defined in the acquisition agreement, exceeded the required amount of $12.0
million, the $2.0 million in additional purchase price was paid to the former
owners of GPS in March 2008. The obligation to pay the former owners was
included in accrued liabilities in the accompanying condensed consolidated
balance sheet at January 31, 2008.





In 2003,
Argan completed the sale of Puroflow Incorporated, a wholly-owned subsidiary, to
Western Filter Corporation (“WFC”). Proceeds in the amount of $300,000 were
placed in escrow, and were included in the condensed consolidated balance sheets
at October 31, 2008 and January 31, 2008, to indemnify WFC from any damages
resulting from any breach of representations and warranties under the stock
purchase agreement. This escrow fund was liquidated in December 2008, in
connection with the settlement of the litigation with WFC (see Note
14).





For
certain construction projects, cash may be held in escrow as a substitute for
retainage. Cash held in escrow for retainage at January 31, 2008 in the amount
of approximately $2.1 million related to a completed project was released and
paid to the Company in the first quarter of the current fiscal
year.





NOTE 3 - ACCOUNTS RECEIVABLE
AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS





Accounts
receivable and estimated earnings in excess of billings represent amounts due
from customers for services rendered or products delivered. The timing of
billing to customers under construction-type contracts varies based on
individual contracts and often differs from the period in which revenue is
recognized. The amounts of estimated earnings in excess of billings included in
the condensed consolidated balance sheets at October 31, 2008 and January 31,
2008 were $217,000 and $242,000, respectively, and were expected to be billed
and collected in the normal course of business. Retainages included in accounts
receivable represent amounts withheld by construction customers until a defined
phase of a contract or project has been completed and accepted by the customer.
There were no retainage amounts included in accounts receivable at October 31,
2008. Retainage amounts included in accounts receivable were approximately $5.6
million at January 31, 2008. The length of retainage periods may vary, but they
are typically between six months and two years.





The
Company conducts business and may extend credit to customers based on an
evaluation of the customers’ financial condition, generally without requiring
collateral. Exposure to losses on accounts receivable is expected to vary by
customer due to the different financial condition of each customer. The Company
monitors its exposure to credit losses and maintains allowances for anticipated
losses considered necessary under the circumstances based on historical
experience with uncollected accounts and a review of its current accounts
receivable. The Company’s allowance for doubtful accounts balance
was $70,000 at January 31, 2008. The
allowance was increased to $22,258,000 at October 31, 2008 offset by the
elimination of a corresponding amount of billings in excess of cost and
earnings.





- 8
-


NOTE 4 -
INVENTORIES





Inventories
are stated at the lower of cost or market (i.e., net realizable value). Cost is
determined on the first-in first-out (FIFO) method and includes material, labor
and overhead costs. Fixed overhead is allocated to inventory based on the normal
capacity of the Company’s production facilities. Any costs related to idle
facilities, excess spoilage, excess freight or re-handling are expensed
currently as period costs. Appropriate consideration is given to obsolescence,
excessive inventory levels, product deterioration and other factors (i.e. - lot
expiration dates, the ability to recertify or test for extended expiration
dates, the number of products that can be produced using the available raw
materials and the market acceptance or regulatory issues surrounding certain
materials) in evaluating net realizable value. The amounts expensed for
inventory obsolescence were approximately $640,000 and $286,000, respectively,
during the three months ended October 31, 2008 and 2007, and were approximately
$812,000 and $378,000, respectively, during the nine months ended October 31,
2008 and 2007.





Inventories
consisted of the following amounts at October 31, 2008 and January 31,
2008:





October 31,
                          2008
                        
                        
                        January 31,
                          2008Raw
      materials
                        
                        $
                        3,118,000
                        
                        
                        $
                        2,846,000Work-in
      process
                        
                        
                        175,000
                        
                        
                        
                        43,000Finished
      goods
                        
                        
                        154,000
                        
                        
                        
                        144,000Less:
      reserves
                        
                        
                        (914,000
                        )
                        
                        
                        (225,000
                        )Inventories,
      net
                        
                        $
                        2,533,000
                        
                        
                        $
                        2,808,000





NOTE 5 - PROPERTY AND
EQUIPMENT





Property
and equipment are stated at cost. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets, which are
generally from five to twenty years. Leasehold improvements are amortized on a
straight-line basis over the estimated useful life of the related asset or the
lease term, whichever is shorter. Depreciation expense amounts for property and
equipment, including assets under capital leases, were approximately $121,000
and $285,000, respectively, for the three months ended October 31, 2008 and
2007, and were approximately $732,000 and $845,000, respectively, for the nine
months ended October 31, 2008 and 2007. The costs of maintenance and repairs
(totaling approximately $175,000 and $422,000 for the three and nine months
ended October 31, 2008) are expensed as incurred. Such costs were approximately
$172,000 and $431,000, respectively, for the three and nine months ended October
31, 2007. Major improvements are capitalized. When assets are sold or retired,
the cost and related accumulated depreciation are removed from the accounts and
the resulting gain or loss is included in income. During the second quarter of
the current year, the Company recorded an impairment loss in the amount of
$939,000 related to the fixed assets of VLI as described in Note 6. Since then,
the costs of fixed asset purchases at VLI have been expensed; such costs
amounted to approximately $23,000 for the three months ended October 31,
2008.





Property
and equipment at October 31, 2008 and January 31, 2008 consisted of the
following:





October 31,
                              2008
                            
                            
                            January 31,
                              2008Leasehold
      improvements
                            
                            $
                            1,033,000
                            
                            
                            $
                            1,051,000Machinery
      and equipment
                            
                            
                            2,627,000
                            
                            
                            
                            3,778,000Trucks
      and other vehicles
                            
                            
                            1,260,000
                            
                            
                            
                            1,263,0004,920,000
                            
                            
                            
                            6,092,000Less
      – accumulated depreciation
                            
                            
                            (3,589,000
                            )
                            
                            
                            (3,200,000
                            )Property
      and equipment, net
                            
                            $
                            1,331,000
                            
                            
                            $
                            2,892,000





NOTE 6 -
INTANGIBLE ASSETS




In
connection with the acquisitions of GPS, VLI and SMC, the Company recorded
goodwill and other purchased intangible assets including contractual and other
customer relationships, proprietary formulas, non-compete agreements and trade
names. In accordance with FASB Statement of Financial Accounting
Standards  No. 142, “Goodwill and Other Intangible Assets,” the
Company reviews for impairment, at least annually, the carrying values of
goodwill and other purchased intangible assets deemed to have an indefinite
life. The Company tests for impairment of goodwill and these other intangible
assets more frequently if events or changes in circumstances indicate that the
asset value might be impaired. Long-lived assets, including purchased intangible
assets deemed to have finite lives, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount should be assessed
pursuant to FASB Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.”




- 9
-




VLI has
continued to report operating results that are below expected results. The loss
of major customers and the reduction in the amounts of orders received from
current major customers have caused net revenues to continue to decline and this
business to operate at a loss. Accordingly, during the second quarter of the
current year, we conducted analyses in order to determine whether additional
impairment losses had occurred related to the goodwill and the long-lived assets
of VLI. The assessment analyses indicated that the carrying value of the
business exceeded its fair value, that the carrying values of VLI’s long-lived
assets were not recoverable and that the carrying values of the long-lived
assets exceeded their corresponding fair values. As a result, VLI recorded
impairment losses related to goodwill, other purchased intangible assets, and
fixed assets in the amounts of $921,000, $86,000 and $939,000, respectively,
that were included in the condensed consolidated statements of operations for
the nine months ended October 31, 2008.





During
the quarter ended October 31, 2007, the Company conducted a similar asset
impairment analysis related to VLI. After analyzing this business using both an
income approach and a market approach, the Company recorded a goodwill
impairment loss of $3,826,000. The declining financial performance also
suggested that the carrying value of VLI’s long-lived intangible assets,
including non-contract customer relationships and non-compete agreements, might
be impaired. The Company determined that the net unadjusted carrying values of
these assets exceeded estimated amounts based on the undiscounted future cash
flows attributable to these assets. Using fair values based on the estimated
amounts of discounted cash flows, the Company recorded asset impairment losses
in the amounts of $513,000 and $327,000, respectively. The total amount of
$4,666,000 for the impairment of goodwill and other intangible assets was
included in the condensed consolidated statements of operations for the nine
months ended October 31, 2007.





The
Company’s intangible assets consisted of the following at October 31, 2008 and
January 31, 2008:





October 31, 2008Estimated
                    Useful
                    Life
                  
                  Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net
                    Amount
                  
                  
                  January 31,
                    2008
                    Net AmountIntangible
      assets being amortized:Contractual
      customerrelationships
      - VLI and SMC
                  5-7
      years
                  
                  $
                  2,190,000
                  
                  
                  $
                  2,014,000
                  
                  
                  $
                  176,000
                  
                  
                  $
                  379,000Customer
      relationships - GPS
                  1-2
      years
                  
                  
                  6,678,000
                  
                  
                  
                  6,678,000
                  
                  
                  
                  —
                  
                  
                  
                  904,000Proprietary
      formulas - VLI
                  3
      years
                  
                  
                  1,813,000
                  
                  
                  
                  1,813,000
                  
                  
                  
                  —
                  
                  
                  
                  —Non-compete
      agreements - GPS and VLI
                  5
      years
                  
                  
                  1,731,000
                  
                  
                  
                  1,393,000
                  
                  
                  
                  338,000
                  
                  
                  
                  424,000Trade
      name - GPS
                  15
      years
                  
                  
                  3,643,000
                  
                  
                  
                  460,000
                  
                  
                  
                  3,183,000
                  
                  
                  
                  3,365,000Intangible
      assets not being amortized:Trade
      name - SMC
                  Indefinite
                  
                  
                  224,000
                  
                  
                  
                  —
                  
                  
                  
                  224,000
                  
                  
                  
                  224,000Total
      other intangible assets
                  
                  
                  $
                  16,279,000
                  
                  
                  $
                  12,358,000
                  
                  
                  $
                  3,921,000
                  
                  
                  $
                  5,296,000Goodwill
                  Indefinite
                  
                  $
                  19,416,000
                  
                  
                  $
                  —
                  
                  
                  $
                  19,416,000
                  
                  
                  $
                  20,337,000





Amortization
expense totaling $115,000 for the three months ended October 31, 2008, consisted
of $26,000, $61,000 and $28,000 for contractual customer relationships, the
trade name and non-compete agreements, respectively. Amortization expense
totaling $1,201,000 for the three months ended October 31, 2007, consisted of
$985,000, $60,000, $118,000, and $38,000 for contractual customer relationships,
the trade name, non-compete agreements and proprietary formulas,
respectively.





Amortization
expense totaling $1,289,000 for the nine months ended October 31, 2008,
consisted of $1,021,000, $183,000 and $85,000 for contractual customer
relationships, the trade name and non-compete agreements, respectively.
Amortization expense totaling $5,290,000 for the nine months ended October 31,
2007, consisted of $4,490,000, $182,000, $350,000 and $268,000 for contractual
customer relationships, the trade name, non-compete agreements and proprietary
formulas, respectively.


- 10
-


NOTE 7 – INVESTMENT IN
UNCONSOLIDATED SUBSIDIARY





In June
2008, the Company announced that GPS had entered into a business partnership
with Invenergy Wind Management LLC for the design and construction of
wind-energy farms located in the United States and Canada. The business partners
each own 50% of a new company, Gemma Renewable Power, LLC (“GRP”). GRP provides
engineering, procurement and construction services for new wind farms generating
electrical power including the design and construction of roads, foundations,
and electrical collection systems, as well as the erection of towers, turbines
and blades. In connection with the formation of GRP, GPS has made cash
investments totaling $1.6 million. At October 31, 2008, the formation agreement
provided for GPS to make an additional contribution of $1.4 million which has
been deferred.





The
Company accounts for its investment in GRP using the equity method. Under this
method, the Company records its proportionate share of GRP’s net income or loss
based on the most recent available quarterly financial statements. As GRP
follows a calendar year basis of financial reporting, the Company’s results of
operations for the three months ended October 31, 2008 included the Company’s
share of GRP’s net loss from July 1, 2008 through September 30, 2008. The
results of operations for the nine months ended October 31, 2008 included the
Company’s share of GRP’s net loss from the date of formation (May 27, 2008)
through September 30, 2008. The Company’s share of the net losses for these
periods was approximately $195,000 and $359,000, respectively. The net
investment in GRP was included in the Company’s condensed consolidated balance
sheet at October 31, 2008.





NOTE 8 -
DEBT




The
Company has financing arrangements with the Bank including an amended 3-year
term loan for VLI in the initial amount of $1.4 million which bears interest at
LIBOR (3.12% at October 31, 2008) plus 3.25%; a 4-year term loan in the initial
amount of $8.0 million which bears interest at LIBOR plus 3.25%, the proceeds
from which were used to acquire GPS; and a revolving loan with a maximum
borrowing amount of $4.25 million available until May 31, 2010, with interest at
LIBOR plus 3.25%. The outstanding principal amounts of the VLI and GPS loans
were $417,000 and $4,333,000, respectively, at October 31, 2008. No borrowed
amounts were outstanding under the revolving loan at October 31,
2008.




The
financing arrangements with the Bank require compliance with certain financial
covenants at the Company’s fiscal year end and at each of the Company’s fiscal
quarter ends (using a rolling 12-month period), including requirements that the
ratio of total funded debt to EBITDA not exceed 2 to 1, that the fixed charge
coverage ratio be not less than 1.25 to 1, and that the ratio of senior funded
debt to EBITDA not exceed 1.50 to 1. The Bank’s consent continues to be required
for acquisitions and divestitures. The Company continues to pledge the majority
of the Company’s assets to secure the financing arrangements. The amended
financing arrangements contain an acceleration clause which allows the Bank to
declare amounts outstanding under the financing arrangements due and payable if
it determines in good faith that a material adverse change has occurred in the
financial condition of the Company or any of its subsidiaries. The Company
believes that it will continue to comply with its financial covenants under the
financing arrangements. If the Company’s performance does not result in
compliance with any of its financial covenants, or if the Bank seeks to exercise
its rights under the acceleration clause referred to above, the Company would
seek to modify its financing arrangements, but there can be no assurance that
the Bank would not exercise its rights and remedies under the financing
arrangements including accelerating payments of all outstanding senior debt due
and payable. At October 31, 2008 and January 31, 2008, the Company was in
compliance with the covenants of its amended financing
arrangements.





During
the year ended January 31, 2007, the Company entered into interest rate swap
agreements as cash flow hedges related to the VLI and GPS loans with a total
initial notional amount of $5,125,000 and terms of three years. Under the swap
agreements, the Company receives a floating rate based on the LIBOR interest
rate and pays fixed rates; the Company’s weighted-average fixed rate related to
its interest rate swap agreements is 5.22%. At October 31, 2008 and January 31,
2008, the Company’s consolidated balance sheets included liabilities in the
amounts of $58,000 and $107,000, respectively, in order to recognize the fair
value of the interest rate swaps; these amounts were included in other long-term
liabilities in the accompanying condensed consolidated balance
sheets.





Total
interest expense amounts related to the VLI and GPS loans were $99,000 and
$167,000 for the three months ended October 31, 2008 and 2007, respectively, and
were $322,000 and $535,000 for the nine months ended October 31, 2008 and 2007,
respectively.





The
Company may obtain standby letters of credit from the Bank in the ordinary
course of business in amounts not to exceed $10.0 million in the aggregate. On
December 11, 2006, the Company pledged $10.0 million in cash to the Bank in
order to secure a standby letter of credit that was issued by the Bank for the
benefit of Travelers Casualty and Surety Company of America in connection with
the bonding facility provided to GPS.


- 11
-


NOTE 9 – PRIVATE PLACEMENT
OF COMMON STOCK





In July
2008, the Company completed a private placement sale of 2.2 million shares of
common stock to investors at a price of $12.00 per share that provided net
proceeds of approximately $25 million. It is expected that the proceeds will
provide resources to support GPS’s cash requirements relating to the new
wind-power energy subsidiary described in Note 7 and will make available
additional collateral to support the bonding requirements associated with future
energy plant construction projects. Allen & Company LLC (“Allen”) served as
placement agent for the stock offering and was paid a fee of approximately $1.3
million for their services by the Company. One of the members of our Board of
Directors is a managing director of Allen.





NOTE 10 - STOCK-BASED
COMPENSATION




The
Company has a stock option plan which was established in August 2001 (the
“Option Plan”). Under the Option Plan, the Company’s Board of Directors may
grant stock options to officers, directors and key employees. Stock options
granted may be incentive stock options or nonqualified stock options. Currently,
the Company is authorized to grant options for up to 1,150,000 shares of the
Company’s common stock, including 500,000 shares that were authorized for award
at the Company’s Annual Meeting for Stockholders held in June 2008.





A summary
of stock option activity under the Option Plan during the nine months ended
October 31, 2008 is presented below:




Options
                                  
                                  Shares
                                  
                                  
                                  Weighted-
                                    Average
                                    Exercise
                                    Price
                                  
                                  
                                  Weighted-
                                    Average
                                    Remaining
                                    Contract
                                    Term (Years)
                                  
                                  
                                  Weighted-
                                    Average
                                    Fair
                                    ValueOutstanding, January 31, 2008
                                  
                                  
                                  426,000
                                  
                                  
                                  $
                                  6.07Granted
                                  
                                  
                                  205,000
                                  
                                  
                                  $
                                  12.15Exercised
                                  
                                  
                                  (98,000
                                  )
                                  
                                  $
                                  6.35Forfeited
      or expired
                                  
                                  
                                  (51,000
                                  )
                                  
                                  $
                                  10.13Outstanding,
      October 31, 2008
                                  
                                  
                                  482,000
                                  
                                  
                                  $
                                  8.17
                                  
                                  
                                  
                                  6.8
                                  
                                  
                                  $
                                  4.56Exercisable,
      October 31, 2008
                                  
                                  
                                  257,000
                                  
                                  
                                  $
                                  4.76
                                  
                                  
                                  
                                  6.1
                                  
                                  
                                  $
                                  2.72Exercisable,
      January 31, 2008
                                  
                                  
                                  235,000
                                  
                                  
                                  $
                                  4.16
                                  
                                  
                                  
                                  6.9
                                  
                                  
                                  $
                                  2.19




The
weighted-average grant date fair value amount per share for stock options
awarded during the nine months ended October 31, 2008 was $6.74. Compensation
expense amounts relating to vesting stock options were $60,000 and $182,000,
respectively, in the three months ended October 31, 2008 and 2007 and were
$848,000 and $282,000, respectively, in the nine months ended October 31, 2008
and 2007. At October 31, 2008, there was $836,000 in unrecognized compensation
cost related to stock options granted under the Option Plan. The end of the
period over which the compensation expense for these awards is expected to be
recognized is October 2009. The total intrinsic value of the stock options
exercised during the nine months ended October 31, 2008 was approximately
$951,000. The aggregate intrinsic value amount for exercisable stock options at
October 31, 2008 was approximately $1,823,000.





The fair
value of each stock option granted in the nine months ended October 31, 2008 was
estimated on the date of award using the Black-Scholes option-pricing model
based on the following weighted average assumptions.




Nine Months
                                Ended October
                                31, 2008Dividend yield
                              
                              
                              —Expected
      volatility
                              
                              
                              61.22
                              %Risk-free
      interest rate
                              
                              
                              4.00
                              %Expected
      life in years
                              
                              
                              5





The
Company also has outstanding warrants to purchase 204,000 shares of the
Company’s common stock as of October 31, 2008, exercisable at a per share price
of $7.75, that were issued in connection with the Company’s private placement in
April 2003 to three individuals who became the executive officers of the Company
upon completion of the offering and also to an investment advisory firm. A
director of the Company is the chief executive officer of the investment
advisory firm. The fair value of the issued warrants of $849,000 was recognized
as offering costs. All warrants are exercisable and expire in April
2013.


- 12
-





At
October 31, 2008, there were 1,227,000 shares of the Company’s common stock
available for issuance upon the exercise of stock options and warrants,
including 542,000 shares of the Company’s common stock available for award under
the Option Plan.




NOTE 11 - NET INCOME (LOSS)
PER SHARE




Basic
income per share amounts for the three and nine months ended October 31, 2008,
were computed by dividing net income by the weighted average number of common
shares outstanding for the applicable period. Diluted income per share amounts
were computed in accordance with the treasury stock method by dividing net
income by the weighted average number of common shares outstanding during the
applicable period plus 317,000 and 342,000 shares representing the total
dilutive effects of outstanding stock options and warrants for the three and
nine months ended October 31, 2008, respectively.





Basic
loss per share amounts for the three and nine months ended October 31, 2007 were
calculated by dividing the net loss for the applicable period by the weighted
average number of common shares outstanding for the applicable period. Common
stock equivalents, including stock options and warrants, were not considered
because the effect of their inclusion would be anti-dilutive.





NOTE 12 - INCOME
TAXES




The
Company’s income tax expense for the nine months ended October 31, 2008 differs
from the expected income tax expense computed by applying the U.S. Federal
corporate income tax rate of 34% to the income from operations before income
taxes as shown in the table below. For the nine months ended October 31, 2008,
the unfavorable tax effect of permanent items reflects primarily the impairment
loss recorded in the current year related to the goodwill of VLI. This
impairment loss is not deductible for income tax reporting
purposes.





Despite
reporting a loss from operations before income taxes of $1,387,000 for the nine
months ended October 31, 2007, the Company recorded income tax expense of
$1,253,000 for the period. In the prior year, the Company was adversely impacted
by its inability to utilize certain current operating losses for state income
tax reporting purposes. In addition, the goodwill impairment loss of $3,826,000
was not deductible for income tax reporting purposes.





2008
                        
                        
                        2007Computed
      expected income tax (expense) benefit
                        
                        $
                        (2,746,000
                        )
                        
                        $
                        471,000State
      income taxes, net
                        
                        
                        (179,000
                        )
                        
                        
                        (386,000
                        )Permanent
      differences
                        
                        
                        (167,000
                        )
                        
                        
                        (1,338,000
                        )$
                        (3,092,000
                        )
                        
                        $
                        (1,253,000
                        )





As of
October 31, 2008 and January 31, 2008, accrued expenses included income tax
amounts currently payable of approximately $726,000 and $1,003,000,
respectively.





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109” (“FIN 48”), on
February 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold
and measurement process for financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. There was no material
effect on the Company’s consolidated financial statements as a result of
adopting this standard.




- 13
-


NOTE 13 - TERMINATED
CONSTRUCTION CONTRACT




Pursuant
to an amended agreement between GPS and a customer covering engineering,
procurement and construction services (the “EPC Agreement”), the deadline date
for the customer to obtain financing for the completion of the project lapsed
during the current year. Financing was not obtained and the EPC Agreement was
terminated. Attempts by the customer to sell the partially completed plant have
been unsuccessful. Construction activity on this project was suspended in
November 2007.





In order
to reflect the termination of the EPC Agreement and the exhaustion of the
customer’s efforts to finance or to sell the plant, the Company established a
reserve against the balance of accounts receivable from this customer and
eliminated the related balance from billings in excess of cost and earnings in
the current quarter resulting in a net increase to consolidated revenues of
approximately $500,000. No additional loss was incurred by the Company in
connection with the termination of the EPC Agreement.





NOTE 14 - LEGAL
CONTINGENCIES





In the
normal course of business, the Company has pending claims and legal proceedings.
It is the opinion of the Company’s management, based on information available at
this time, that none of current claims and proceedings will have a material
effect on the Company’s consolidated financial statements other than the matters
discussed below.





Western Filter Corporation
Litigation





On March
22, 2005, WFC filed a civil action against the Company, and its executive
officers. The suit was filed in the Superior Court of the State of California
for the County of Los Angeles. WFC purchased the capital stock of the Company's
wholly owned subsidiary, Puroflow Incorporated, pursuant to the terms of the
Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company
and its executive officers breached the Stock Purchase Agreement between WFC and
the Company and engaged in misrepresentations and negligent conduct with respect
to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and
punitive damages in an amount to be proven at trial as well as the recovery of
attorney's fees. This action was removed to the United States District Court for
the Central District of California. The Company and its officers denied that any
breach of contract or that any misrepresentations or negligence occurred on
their part. This case was scheduled for trial on April 10, 2007. On March 15,
2007, the District Court granted the Company and its executive officers' motion
for summary judgment, thereby dismissing WFC's lawsuit against the Company and
its executive officers in its entirety. WFC appealed the District Court’s
decision.  The parties filed their appellate briefs and oral arguments
occurred on June 3, 2008. On August 25, 2008, the Ninth Circuit Court of Appeals
reversed the summary judgment decision and remanded the case back to the
District Court.




Although
the Company continues to believe that the plaintiff’s claims were without merit,
the parties have agreed to an out-of-court settlement of this litigation.
Pursuant to the corresponding agreement between the parties, the Company made a
payment to WFC in the amount of $750,000 in December 2008 in order to settle the
lawsuit. This payment was funded, in part, with $300,000 previously held in
escrow related to the sale of WFC. The Company expects that $250,000 of the
difference will be reimbursed by the Company’s insurance company. As of October
31, 2008, the Company had accrued the amount of its loss incurred in connection
with the settlement resulting in additional legal expense of approximately
$221,000. This amount was included in selling, general and administrative
expenses in the accompanying statements of operations for the three and nine
months ended October 31, 2008.





Kevin Thomas
Litigation





On August
27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit against the
Company, VLI and the Company’s Chief Executive Officer (the “CEO”) in the
Circuit Court of Florida for Collier County. The Company acquired VLI by way of
merger on August 31, 2004. Mr. Thomas alleges that the Company, VLI and the CEO
breached various agreements regarding his compensation and employment package
that arose from the acquisition of VLI. Mr. Thomas has alleged contractual and
tort-based claims arising from his compensation and employment agreements and
seeks rescission of his covenant not to compete against VLI. The Company, VLI
and the CEO deny that any breach of contract or tortious conduct occurred on
their part. The Company and VLI have also asserted four counterclaims against
Mr. Thomas for breach of the merger agreement, breach of his employment
agreement, breach of fiduciary duty and tortious interference with contractual
relations because Mr. Thomas violated his non-solicitation, confidentiality and
non-compete obligations after he left VLI. The Company intends to vigorously
defend this lawsuit and prosecute its counterclaims.




Although
the Company has reviewed the claims of Mr. Thomas and believes that they are
without merit, the Company’s condensed consolidated balance sheet at October 31,
2008 included an amount in accrued expenses reflecting the Company’s estimate of
the amount of future legal fees that it expects to be billed in connection with
this matter. It is possible however, that the ultimate resolution of the
litigation with Mr. Thomas could result in a material adverse effect on the
results of operations of the Company for a particular future reporting
period.




- 14
-


On March
4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its
current president in the Circuit Court of Florida for Collier County. VFI, which
is owned by Kevin Thomas, supplied VLI with certain organic raw materials used
in the manufacture of VLI products.  VFI has asserted a breach of
contract claim against VLI and alleges that VLI breached a supply agreement with
VFI by acquiring the organic products from a different supplier.  VFI
also asserted a claim for defamation against VLI’s president alleging that he
made false statements regarding VFI’s organic certification to one of VLI's
customers. VLI and its president filed their Answer and Affirmative Defenses on
May 8, 2008. VLI and its president deny that VLI breached any contract or that
its president defamed VFI. The defendants intend to continue to vigorously
defend this lawsuit. The Company’s condensed consolidated balance sheet at
October 31, 2008 included an amount in accrued expenses reflecting the Company’s
estimate of the amount of future legal fees that it expects to be billed in
connection with this matter.





On March
4, 2008, Mr. Thomas filed a lawsuit against VLI's president in the Circuit Court
of Florida for Collier County.  Mr. Thomas has filed this new lawsuit
against VLI’s president for defamation.  Mr. Thomas alleges that VLI’s
president made false statements to third-parties regarding Mr. Thomas' conduct
that is the subject of counterclaims by the Company and VLI in the litigation
matter discussed above and that these statements have caused him damage to his
business reputation.  VLI’s president filed his answer with the court
on May 8, 2008. VLI’s president denies that he defamed Mr. Thomas and intends to
continue to vigorously defend this lawsuit.





NOTE 15 - RELATED PARTY
TRANSACTIONS




The
Company leased administrative, manufacturing and warehouse facilities for VLI
from an individual who was the former officer and shareholder of VLI. The lease
costs through March 2007, the date of his employment termination, were
considered related party expenses. The total prior year expense amount under
this arrangement of $45,000 was recorded in the quarter ended April 30,
2007.





The
Company entered into a supply agreement with an entity owned by the former
shareholder of VLI whereby the supplier committed to sell to the Company, and
the Company committed to purchase on an as-needed basis, certain organic
products. Last year, VLI made $47,000 in purchases under the supply agreement
through March 2007, the date on which the former officer and shareholder of VLI
was terminated.




The
Company also sold its products in the normal course of business to an entity in
which the former shareholder of VLI had an ownership interest. VLI had
approximately $117,000 in prior year net revenues related to this entity through
the aforementioned termination in March 2007 which were recorded in the quarter
ended April 30, 2007; this amount was collected.





During
the start-up period and under an agreement with GRP, GPS is incurring certain
costs on behalf of GRP. In addition, GPS provides administrative and accounting
services for GRP. The total amounts of such reimbursable costs in the three and
nine months ended October 31, 2008 were approximately $541,000 and $1,080,000,
respectively.





NOTE 16 - SEGMENT REPORTING
AND MAJOR CUSTOMERS




The Company’s three reportable segments
are power industry services, nutritional products and telecommunications
infrastructure services. The Company conducts these operations through its
wholly owned subsidiaries - GPS, VLI and SMC, respectively. The “Other” column
includes the Company’s corporate and unallocated expenses. The Company’s operating segments are
organized in separate business units with different management, customers,
technologies and services.





The
following business segment information is presented for the three and nine
months ended October 31, 2008 and 2007, except for total assets and goodwill
which amounts are presented as of those dates:


- 15
-





Three Months Ended October 31, 2008
                                                            
                                                            Power Industry
                                                              Services
                                                            
                                                            
                                                            Nutritional
                                                              Products
                                                            
                                                            
                                                            Telecom
                                                              Infrastructure
                                                              Services
                                                            
                                                            
                                                            Other
                                                            
                                                            
                                                            ConsolidatedNet revenues
                                                            
                                                            $
                                                            36,387,000
                                                            
                                                            
                                                            $
                                                            2,662,000
                                                            
                                                            
                                                            $
                                                            2,338,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            41,387,000Cost
      of revenues
                                                            
                                                            
                                                            29,742,000
                                                            
                                                            
                                                            
                                                            2,983,000
                                                            
                                                            
                                                            
                                                            1,824,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            34,549,000Gross
      profit
                                                            
                                                            
                                                            6,645,000
                                                            
                                                            
                                                            
                                                            (321,000
                                                            )
                                                            
                                                            
                                                            514,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            6,838,000Selling,
      general and administrative expenses
                                                            
                                                            
                                                            933,000
                                                            
                                                            
                                                            
                                                            582,000
                                                            
                                                            
                                                            
                                                            393,000
                                                            
                                                            
                                                            
                                                            1,182,000
                                                            
                                                            
                                                            
                                                            3,090,000Income
      (loss) from operations
                                                            
                                                            
                                                            5,712,000
                                                            
                                                            
                                                            
                                                            (903,000
                                                            )
                                                            
                                                            
                                                            121,000
                                                            
                                                            
                                                            
                                                            (1,182,000
                                                            )
                                                            
                                                            
                                                            3,748,000Interest
      expense
                                                            
                                                            
                                                            (89,000
                                                            )
                                                            
                                                            
                                                            (13,000
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (6,000
                                                            )
                                                            
                                                            
                                                            (108,000
                                                            )Interest
      income
                                                            
                                                            
                                                            480,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            129,000
                                                            
                                                            
                                                            
                                                            609,000Equity
      in the net loss of unconsolidated subsidiary
                                                            
                                                            
                                                            (195,000
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (195,000
                                                            )Income
      (loss) before income taxes
                                                            
                                                            $
                                                            5,908,000
                                                            
                                                            
                                                            $
                                                            (916,000
                                                            )
                                                            
                                                            $
                                                            121,000
                                                            
                                                            
                                                            $
                                                            (1,059,000
                                                            )
                                                            
                                                            
                                                            4,054,000Income
      tax expense
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            (1,430,000
                                                            )Net
      income
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            2,624,000Amortization
      of purchased intangibles
                                                            
                                                            $
                                                            87,000
                                                            
                                                            
                                                            $
                                                            2,000
                                                            
                                                            
                                                            $
                                                            26,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            115,000Depreciation
      and other amortization
                                                            
                                                            $
                                                            53,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            103,000
                                                            
                                                            
                                                            $
                                                            3,000
                                                            
                                                            
                                                            $
                                                            159,000Goodwill
                                                            
                                                            $
                                                            18,476,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            940,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            19,416,000Total
      assets
                                                            
                                                            $
                                                            93,054,000
                                                            
                                                            
                                                            $
                                                            4,915,000
                                                            
                                                            
                                                            $
                                                            3,960,000
                                                            
                                                            
                                                            $
                                                            38,139,000
                                                            
                                                            
                                                            $
                                                            140,068,000Fixed
      asset additions
                                                            
                                                            $
                                                            24,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            25,000
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            49,000




Three Months Ended October 31, 2007
                                                        
                                                        Power Industry
                                                          Services
                                                        
                                                        
                                                        Nutritional
                                                          Products
                                                        
                                                        
                                                        Telecom
                                                          Infrastructure
                                                          Services
                                                        
                                                        
                                                        Other
                                                        
                                                        
                                                        ConsolidatedNet revenues
                                                        
                                                        $
                                                        42,017,000
                                                        
                                                        
                                                        $
                                                        4,617,000
                                                        
                                                        
                                                        $
                                                        2,629,000
                                                        
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        49,263,000Cost
      of revenues
                                                        
                                                        
                                                        35,548,000
                                                        
                                                        
                                                        
                                                        4,193,000
                                                        
                                                        
                                                        
                                                        2,076,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        41,817,000Gross
      profit
                                                        
                                                        
                                                        6,469,000
                                                        
                                                        
                                                        
                                                        424,000
                                                        
                                                        
                                                        
                                                        553,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        7,446,000Selling,
      general and administrative expenses
                                                        
                                                        
                                                        1,892,000
                                                        
                                                        
                                                        
                                                        1,047,000
                                                        
                                                        
                                                        
                                                        346,000
                                                        
                                                        
                                                        
                                                        1,096,000
                                                        
                                                        
                                                        
                                                        4,381,000Impairment
      losses of VLI
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        4,666,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        4,666,000Income
      (loss) from operations
                                                        
                                                        
                                                        4,577,000
                                                        
                                                        
                                                        
                                                        (5,289,000
                                                        )
                                                        
                                                        
                                                        207,000
                                                        
                                                        
                                                        
                                                        (1,096,000
                                                        )
                                                        
                                                        
                                                        (1,601,000
                                                        )Interest
      expense
                                                        
                                                        
                                                        (145,000
                                                        )
                                                        
                                                        
                                                        (26,000
                                                        )
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        (171,000
                                                        )Interest
      income
                                                        
                                                        
                                                        1,067,000
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        7,000
                                                        
                                                        
                                                        
                                                        1,074,000Income
      (loss) before income taxes
                                                        
                                                        $
                                                        5,499,000
                                                        
                                                        
                                                        $
                                                        (5,315,000
                                                        )
                                                        
                                                        $
                                                        207,000
                                                        
                                                        
                                                        $
                                                        (1,089,000
                                                        )
                                                        
                                                        
                                                        (698,000
                                                        )Income
      tax expense
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (1,259,000
                                                        )Net
      loss
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        (1,957,000
                                                        )Amortization
      of purchased intangibles
                                                        
                                                        $
                                                        947,000
                                                        
                                                        
                                                        $
                                                        228,000
                                                        
                                                        
                                                        $
                                                        26,000
                                                        
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        1,201,000Depreciation
      and other amortization
                                                        
                                                        $
                                                        45,000
                                                        
                                                        
                                                        $
                                                        140,000
                                                        
                                                        
                                                        $
                                                        135,000
                                                        
                                                        
                                                        $
                                                        4,000
                                                        
                                                        
                                                        $
                                                        324,000Goodwill
                                                        
                                                        $
                                                        16,476,000
                                                        
                                                        
                                                        $
                                                        2,739,000
                                                        
                                                        
                                                        $
                                                        940,000
                                                        
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        20,155,000Total
      assets
                                                        
                                                        $
                                                        124,193,000
                                                        
                                                        
                                                        $
                                                        9,909,000
                                                        
                                                        
                                                        $
                                                        4,896,000
                                                        
                                                        
                                                        $
                                                        14,799,000
                                                        
                                                        
                                                        $
                                                        153,797,000Fixed
      asset additions
                                                        
                                                        $
                                                        31,000
                                                        
                                                        
                                                        $
                                                        88,000
                                                        
                                                        
                                                        $
                                                        164,000
                                                        
                                                        
                                                        $
                                                        —
                                                        
                                                        
                                                        $
                                                        283,000




- 16
-





Nine
      Months Ended October 31, 2008
                                              
                                              Power
      IndustryServices
                                              
                                              
                                              Nutritional
                                                Products
                                              
                                              
                                              Telecom
                                                Infrastructure
                                                Services
                                              
                                              
                                              Other
                                              
                                              
                                              ConsolidatedNet
      revenues
                                              
                                              $
                                              151,034,000
                                              
                                              
                                              $
                                              7,287,000
                                              
                                              
                                              $
                                              6,570,000
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              164,891,000Cost
      of revenues
                                              
                                              
                                              131,425,000
                                              
                                              
                                              
                                              7,701,000
                                              
                                              
                                              
                                              5,474,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              144,600,000Gross
      profit
                                              
                                              
                                              19,609,000
                                              
                                              
                                              
                                              (414,000
                                              )
                                              
                                              
                                              1,096,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              20,291,000Selling,
      general and administrative expenses
                                              
                                              
                                              4,354,000
                                              
                                              
                                              
                                              2,097,000
                                              
                                              
                                              
                                              1,143,000
                                              
                                              
                                              
                                              3,524,000
                                              
                                              
                                              
                                              11,118,000Impairment
      losses of VLI
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,946,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,946,000Income
      (loss) from operations
                                              
                                              
                                              15,255,000
                                              
                                              
                                              
                                              (4,457,000
                                              )
                                              
                                              
                                              (47,000
                                              )
                                              
                                              
                                              (3,524,000
                                              )
                                              
                                              
                                              7,227,000Interest
      expense
                                              
                                              
                                              (283,000
                                              )
                                              
                                              
                                              (47,000
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (6,000
                                              )
                                              
                                              
                                              (336,000
                                              )Interest
      income
                                              
                                              
                                              1,374,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              171,000
                                              
                                              
                                              
                                              1,545,000Equity
      in the net loss of unconsolidated subsidiary
                                              
                                              
                                              (359,000
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (359,000
                                              )Income
      (loss) before income taxes
                                              
                                              $
                                              15,987,000
                                              
                                              
                                              $
                                              (4,504,000
                                              )
                                              
                                              $
                                              (47,000
                                              )
                                              
                                              $
                                              (3,359,000
                                              )
                                              
                                              
                                              8,077,000Income
      tax expense
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (3,092,000
                                              )Net
      income
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              4,985,000Amortization
      of purchased intangibles
                                              
                                              $
                                              1,166,000
                                              
                                              
                                              $
                                              45,000
                                              
                                              
                                              $
                                              78,000
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              1,289,000Depreciation
      and other amortization
                                              
                                              $
                                              152,000
                                              
                                              
                                              $
                                              297,000
                                              
                                              
                                              $
                                              386,000
                                              
                                              
                                              $
                                              7,000
                                              
                                              
                                              $
                                              842,000Fixed
      asset additions
                                              
                                              $
                                              113,000
                                              
                                              
                                              $
                                              131,000
                                              
                                              
                                              $
                                              69,000
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              313,000





Nine Months Ended October 31, 2007
                                                    
                                                    Power IndustryServices
                                                    
                                                    
                                                    Nutritional
                                                      Products
                                                    
                                                    
                                                    Telecom
                                                      Infrastructure
                                                      Services
                                                    
                                                    
                                                    Other
                                                    
                                                    
                                                    ConsolidatedNet revenues
                                                    
                                                    $
                                                    130,970,000
                                                    
                                                    
                                                    $
                                                    14,602,000
                                                    
                                                    
                                                    $
                                                    7,260,000
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    152,832,000Cost
      of revenues
                                                    
                                                    
                                                    119,383,000
                                                    
                                                    
                                                    
                                                    12,481,000
                                                    
                                                    
                                                    
                                                    5,776,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    137,640,000Gross
      profit
                                                    
                                                    
                                                    11,587,000
                                                    
                                                    
                                                    
                                                    2,121,000
                                                    
                                                    
                                                    
                                                    1,484,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    15,192,000Selling,
      general and administrative expenses
                                                    
                                                    
                                                    6,998,000
                                                    
                                                    
                                                    
                                                    3,231,000
                                                    
                                                    
                                                    
                                                    1,044,000
                                                    
                                                    
                                                    
                                                    2,442,000
                                                    
                                                    
                                                    
                                                    13,715,000Impairment
      losses of VLI
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    4,666,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    4,666,000Income
      (loss) from operations
                                                    
                                                    
                                                    4,589,000
                                                    
                                                    
                                                    
                                                    (5,776,000
                                                    )
                                                    
                                                    
                                                    440,000
                                                    
                                                    
                                                    
                                                    (2,442,000
                                                    )
                                                    
                                                    
                                                    (3,189,000
                                                    )Interest
      expense
                                                    
                                                    
                                                    (461,000
                                                    )
                                                    
                                                    
                                                    (88,000
                                                    )
                                                    
                                                    
                                                    (1,000
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (550,000
                                                    )Interest
      income
                                                    
                                                    
                                                    2,343,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    9,000
                                                    
                                                    
                                                    
                                                    2,352,000Income
      (loss) before income taxes
                                                    
                                                    $
                                                    6,471,000
                                                    
                                                    
                                                    $
                                                    (5,864,000
                                                    )
                                                    
                                                    $
                                                    439,000
                                                    
                                                    
                                                    $
                                                    (2,433,000
                                                    )
                                                    
                                                    
                                                    (1,387,000
                                                    )Income
      tax expense
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (1,253,000
                                                    )Net
      loss
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    (2,640,000
                                                    )Amortization
      of purchased intangibles
                                                    
                                                    $
                                                    4,375,000
                                                    
                                                    
                                                    $
                                                    837,000
                                                    
                                                    
                                                    $
                                                    78,000
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    5,290,000Depreciation
      and other amortization
                                                    
                                                    $
                                                    139,000
                                                    
                                                    
                                                    $
                                                    434,000
                                                    
                                                    
                                                    $
                                                    383,000
                                                    
                                                    
                                                    $
                                                    12,000
                                                    
                                                    
                                                    $
                                                    968,000Fixed
      asset additions
                                                    
                                                    $
                                                    35,000
                                                    
                                                    
                                                    $
                                                    212,000
                                                    
                                                    
                                                    $
                                                    260,000
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    507,000





During
the three and nine months ended October 31, 2008, the majority of the Company’s
net revenues related to engineering, procurement and construction services that
were provided by GPS to the power industry. Total net revenues from power
industry services accounted for approximately 88% and 92% of consolidated net
revenues for the periods, respectively. The Company’s most significant current
year customer relationships included two power industry service customers which
accounted for approximately 44% and 39%, respectively, of consolidated net
revenues for the current quarter, and approximately 43% and 47%, respectively,
of consolidated net revenues year to date. VLI, which provides nutritional and
whole-food supplements as well as personal care products to customers in the
global nutrition industry, accounted for approximately 6% and 4% of consolidated
net revenues for the three and nine months ended October 31, 2008, respectively.
SMC, which provides infrastructure services to telecommunications and utility
customers as well as to the federal government, accounted for approximately 6%
and 4% of consolidated net revenues for the three and nine month periods ended
October 31, 2008, respectively.




- 17
-


For the
three and nine months ended October 31, 2007, net revenues from power industry
services represented approximately 85% and 86% of consolidated net revenues,
respectively. The Company’s most significant customer relationships during this
period included four power industry service customers, which accounted for
approximately 31%, 24%, 16% and 14%, respectively, of consolidated net revenues
for the three months ended October 31, 2007, and approximately 23%, 16%, 23% and
17%, respectively, of consolidated net revenues for the nine months ended
October 31, 2007. VLI and SMC accounted for approximately 9% and 5%,
respectively, of consolidated net revenues for the three months ended October
31, 2007, and approximately 10% and 5%, respectively, of consolidated net
revenues for the nine months ended October 31, 2007.





ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




The
following discussion summarizes the financial position of Argan, Inc. and its
subsidiaries as of October 31, 2008, and the results of operations for the three
and nine months ended October 31, 2008 and 2007, and should be read in
conjunction with (i) the unaudited condensed consolidated financial
statements and notes thereto included elsewhere in this Quarterly Report on Form
10-Q and (ii) the consolidated financial statements and accompanying notes
included in our Annual Report on Form 10-K for the fiscal year ended January 31,
2008 that was filed with the Securities and Exchange Commission on April 24,
2008 (the “2008 Annual Report”).





Cautionary
Statement Regarding Forward Looking Statements





The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
certain forward-looking statements. We have made statements in this Item 2 and
elsewhere in this Quarterly Report on Form 10-Q that may constitute
“forward-looking statements”. The words “believe,” “expect,” “anticipate,”
“plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are based on our current expectations and beliefs
concerning future developments and their potential effects on us. There can be
no assurance that future developments affecting us will be those that we
anticipate. All comments concerning our expectations for future revenues and
operating results are based on our forecasts for our existing operations and do
not include the potential impact of any future acquisitions. These
forward-looking statements involve significant risks and uncertainties (some of
which are beyond our control) and assumptions. They are subject to change based
upon various factors including, but not limited to, the risks and uncertainties
described in Item 1A of our 2008 Annual Report and Item 1A in Part II of this
Quarterly Report on Form 10-Q. Should one or more of these risks or
uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may vary in material respects from those projected in the
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.





Introduction





Argan,
Inc. (the “Company,” “we,” “us,” or “our”) conducts operations through our
wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”) that
we acquired in December 2006, Vitarich Laboratories, Inc. (“VLI”) that we
acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) that we
acquired in July 2003. Through GPS, we provide a full range of development,
consulting, engineering, procurement, construction, commissioning, operations
and maintenance services to the power generation and renewable energy markets
for a wide range of customers including public utilities, independent power
project owners, municipalities, public institutions and private industry.
Through VLI, we develop, manufacture and distribute premium nutritional
products. Through SMC, we provide telecommunications infrastructure services
including project management, construction and maintenance to the Federal
Government, telecommunications and broadband service providers as well as
electric utilities. Each of the wholly-owned subsidiaries represents a separate
reportable segment - power industry services, nutritional products and
telecommunications infrastructure services, respectively.





Critical Accounting
Policies





We
consider the accounting policies related to revenue recognition on long-term
construction contracts, the valuation of goodwill and other purchased intangible
assets, income tax reporting and the reporting of legal matters to be most
critical to the understanding of our financial position and results of
operations. Critical accounting policies are those related to the areas where we
have made what we consider to be particularly subjective or complex judgments in
making estimates and where these estimates can significantly impact our
financial results under different assumptions and conditions. These estimates,
judgments, and assumptions affect the reported amounts of assets, liabilities
and equity and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates on historical experience and
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets, liabilities and equity that are not readily
apparent from other sources. Actual results and outcomes could differ from these
estimates and assumptions.




- 18
-


In
addition to evaluating estimates relating to the items discussed above, we also
consider other estimates and judgments, including, but not limited to, those
related to our allowances for doubtful accounts and inventory obsolescence.
Included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2008 are a discussion of critical accounting policies in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and a description of the Company’s significant accounting policies
in Item 8, specifically Note 2 to the consolidated financial
statements.





New Accounting
Pronouncements





In
October 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB
Staff Position(“FSP”) FAS 157-3,
“Determining the Fair Value of an Asset When the Market for That Asset Is Not
Active,” with the intent to clarify the application of FASB Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS No.
157”) in a market that is not active by providing an example to illustrate the
key considerations in the application of this guidance. It emphasizes that the
use of a reporting entity’s own assumptions about future cash flows and an
appropriately risk-adjusted discount rate in determining the fair value for a
financial asset is acceptable when relevant observable inputs are not available.
This FSP was effective upon its issuance. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
Certain provisions of this standard relating to financial assets and financial
liabilities were effective for us beginning February 1, 2008. The effective
provisions of this standard did not have a material impact on our consolidated
financial statements. Adoption of the other provisions of this standard relating
primarily to nonfinancial assets and nonfinancial liabilities will first be
required for our consolidated financial statements covering the quarter ending
April 30, 2009. The adoption of these provisions is not expected to have a
material impact on our consolidated financial statements. The significant
nonfinancial items included in our consolidated balance sheet include property
and equipment, goodwill and other purchased intangible assets.





In May 2008, the FASB issued Statement
of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. GAAP (the “GAAP Hierarchy”) and mandates that
the GAAP Hierarchy reside in the accounting literature as opposed to the audit
literature. This pronouncement will become effective 60 days following approval
by the SEC. We do not believe this pronouncement will impact our consolidated
financial statements.





In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”)
and  intends to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under FASB Statement of
Financial Accounting Standards No. 141R (see description below) and other
U.S. generally accepted accounting principles. This FSP is effective for our
interim and annual financial statements beginning in the fiscal year commencing
February 1, 2009. We do not expect the adoption of this FSP to have a material
impact on our consolidated financial statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – An Amendment
of FASB Statement No. 133.” This new standard requires enhanced disclosures
about an entity’s derivative and hedging activities with the intent of improving
the transparency of financing reporting as the use and complexity of derivative
instruments and hedging activities have increased significantly over the past
several years. Currently, we use interest rate swap agreements to hedge the
risks related to the variable interest paid on our term loans. The current
effects of our hedging activities are not significant to our consolidated
financial statements. However, the new standard will require us to provide an
enhanced understanding of 1) how and why we use derivative instruments, 2) how
we account for derivative instruments and the related hedged items, and 3) how
derivatives and related hedged items affect our financial position, financial
performance and cash flows. In
September 2008, the FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161,” a new pronouncement intended to improve the disclosures
about credit derivatives by requiring more information about the potential
adverse effects of changes in credit risk on the financial statements of the
sellers of these instruments and by requiring additional disclosure about the
current status of the payment/performance risk of a guarantee. Adoption of FASB
Statement No. 161 will first be required for our consolidated financial
statements covering the quarter ending April 30, 2009. The provisions of the FSP
that amend FASB Statement No. 133 and Interpretation No. 45 will be effective
for the Company's consolidated financial statements for the year ending January
31, 2009.


- 19
-


In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, “Business Combinations,” (“SFAS No. 141R”) which replaces SFAS
No. 141 and provides greater consistency in the accounting and financial
reporting of business combinations. SFAS No. 141R requires the acquiring
entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction, establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed, establishes principles and requirements for how an acquirer recognizes
and measures any non-controlling interest in the acquiree and the goodwill
acquired, and requires the acquirer to disclose the nature and financial effect
of the business combination. Among other changes, this statement also requires
that “negative goodwill” be recognized in earnings as a gain attributable to the
acquisition, that acquisition-related costs are to be recognized separately from
the acquisition and expensed as incurred and that any deferred tax benefits
resulted in a business combination are recognized in income from continuing
operations in the period of the combination. For us, SFAS 141R will be
effective for business combinations occurring subsequent to January 31, 2009.
The accounting for future acquisitions, if any, may be affected by this
pronouncement and will be evaluated at that time.





In
December 2007, the FASB also issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” that
establishes accounting and reporting standards for minority interests in
consolidated subsidiaries. This standard will be effective for us on February 1,
2009, and its adoption would not affect our current consolidated financial
statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
This standard permits companies to measure many financial instruments and
certain other items at fair value at specified election dates. The provisions of
this new standard were effective for us beginning February 1, 2008 and did not
have a significant impact on the consolidated financial statements.





Recent
Events





New Construction Projects and
Backlog.Our energy-plant construction contract backlog was $505 million
at October 31, 2008, not including the backlog of GRP (see the discussion of the
“Investment in Unconsolidated Subsidiary” below).  The comparable
construction contract backlog was $122 million at January 31, 2008.





In
October 2008, we announced that GPS signed an engineering, procurement and
construction agreement and received a limited notice to proceed from Competitive
Power Ventures Inc. (“CPV”) to design and build the Sentinel Power Project. This
project, valued at $211 million, consists of eight simple cycle gas-fired
peaking plants with a total power rating of 800 megawatts to be located in
southern California. The project is currently expected to be completed in 2012.
CPV has a power supply agreement with Southern California Edison.





In May
2008, we announced that GPS signed an engineering, procurement and construction
agreement with Pacific Gas & Electric Company (“PG&E”) in the amount of
$340 million for the design and construction of a natural gas-fired power plant
in Colusa, California.  This energy plant is planned to be a 640
megawatt combined cycle facility and construction is expected to be completed in
2010. We announced the receipt from PG&E of a full notice to proceed on this
project in October 2008. GPS commenced activity on this project in the fourth
quarter ended January 31, 2008 under an interim notice to proceed that it
received from PG&E in December 2007.





Terminated Construction Contract.Pursuant to an amended agreement between GPS and a customer covering
engineering, procurement and construction services (the “EPC Agreement”), the
deadline date for the customer to obtain financing for the completion of the
project lapsed during the current year. Financing was not obtained and the EPC
Agreement was terminated. Attempts by the customer to sell the partially
completed plant have been unsuccessful. Construction activity on this project
was suspended in November 2007. In order to reflect the termination of the EPC
Agreement and the exhaustion of the customer’s efforts to finance or sell the
plant, we established a reserve against the balance of accounts receivable from
this customer and eliminated the related balance of billings in excess of cost
and earnings in the current quarter resulting in a net increase to consolidated
revenues of approximately $500,000. No additional loss was incurred by the
Company in connection with the termination of the EPC Agreement.





Private Placement Sale of Common
Stock.In July 2008, we completed a private placement sale of
2.2 million shares of common stock to investors at a price of $12.00 per share
that provided net cash proceeds of approximately $25 million. It is expected
that the proceeds will provide resources to support GPS’s cash requirements
relating to the new wind-power energy subsidiary described below and will make
available additional collateral to support the bonding requirements associated
with future energy plant construction projects.





Investment in Unconsolidated
Subsidiary.In June 2008, we announced that GPS had entered into a
business partnership with Invenergy Wind Management LLC for the design and
construction of wind farms located in the United States and Canada. The business
partners each own 50% of a new company, Gemma Renewable Power, LLC (“GRP”). GRP
provides engineering, procurement and construction services for new wind farms
generating electrical power including the design and construction of roads,
foundations, and electrical collection systems, as well as the erection of
towers, turbines and blades. During the start-up phase of this new business and
pursuant to the formation document, GPS has contributed $1,600,000 cash to GRP.
In accordance with the equity method of accounting for unconsolidated
subsidiaries, the condensed consolidated statements of operations for the three
and nine months ended October 31, 2008 included our share of the net loss
incurred to date by GRP in the approximate amounts of $195,000 and $359,000,
respectively. In October 2008, GRP received an initial limited notice to proceed
on a project to design and build the expansion of a wind farm in LaSalle County,
Illinois; the estimated contract value of this project is $50
million.




- 20
-


Performance of VLI. During the
second quarter of the current fiscal year, we conducted analyses in order to
determine whether additional impairment losses had occurred related to the
goodwill and the long-lived assets of VLI. The new assessment analyses indicated
that the carrying value of the business exceeded its fair value, that the
carrying values of VLI’s long-lived assets were not recoverable and that the
carrying values of the long-lived assets exceeded their corresponding fair
values. As a result, VLI recorded impairment losses related to goodwill, other
purchased intangible assets, and fixed assets in the amounts of $921,000,
$86,000 and $939,000, respectively, that were included in the condensed
consolidated statements of operations for the nine months ended October 31,
2008. These adjustments eliminated the remaining carrying value of VLI’s
goodwill and significantly reduced the carrying values of VLI’s other purchased
intangible assets and fixed assets. The declining product sales of VLI have also
caused the overstocking of various inventory items, in particular liquid
adaptogens. Although VLI continues to hold discussions with potential new
customers, efforts to secure orders for this product from additional customers
have been unsuccessful so far this year. As a result, VLI increased its reserve
for overstocked and obsolete inventory by approximately $640,000 during the
current quarter with the corresponding charge included in VLI’s cost of revenues
for the three and nine months ended October 31, 2008. The remaining carrying
value of adaptogen inventory and related deposits at October 31, 2008 was
approximately $1.2 million.





Legal Matters.  As
described in Item 1 of Part II of this Form 10-Q and in Note 14 to the condensed
consolidated financial statements, we have agreed to an out-of-court settlement
of the lawsuit with WFC. Pursuant to the corresponding agreement between the
parties, we made a settlement payment to WFC in the amount of $750,000 in
December 2008. This payment was funded, in part, with $300,000 previously held
in escrow related to the sale of WFC. We expect that $250,000 of the difference
will be reimbursed by our insurance company. As of October 31, 2008, we had
accrued the amount of loss that we incurred in connection with the settlement
resulting in additional legal expense of approximately $221,000. This amount was
included in selling, general and administrative expenses in the accompanying
statements of operations for the three and nine months ended October 31,
2008.





As
described in Item 1 of Part II of this Form 10-Q and in Note 14 to the condensed
consolidated financial statements, Vitarich Farms, Inc. (“VFI”) filed a lawsuit
against VLI and its current president in March 2008. VFI, which is owned by
Kevin Thomas, the former owner of VLI, supplied VLI with certain organic raw
materials used in the manufacture of VLI's products.  VFI has asserted
a breach of contract claim against VLI and alleges that VLI breached a supply
agreement with VFI by acquiring the organic products from a different
supplier.  VFI also asserted a claim for defamation against VLI’s
president alleging that he made false statements regarding VFI’s organic
certification to one of VLI's customers.  In March 2008, Mr. Thomas
filed a lawsuit against VLI's president for defamation.  The Company,
VLI and VLI’s president deny all of the new allegations and intend to vigorously
defend these lawsuits.




- 21
-


Comparison of the Results of
Operations for the Three Months Ended October 31, 2008 and
2007





The
following schedule compares the results of our operations for the three months
ended October 31, 2008 and 2007. Except where noted, the percentage amounts
represent the percentage of net revenues for the corresponding
period.




Three
      Months Ended October 31,2008
                                  
                                  
                                  2007Net
      revenuesPower
      industry services
                                  
                                  $
                                  36,387,000
                                  
                                  
                                  
                                  87.9
                                  %
                                  
                                  $
                                  42,017,000
                                  
                                  
                                  
                                  85.3
                                  %Nutritional
      products
                                  
                                  
                                  2,662,000
                                  
                                  
                                  
                                  6.4
                                  %
                                  
                                  
                                  4,617,000
                                  
                                  
                                  
                                  9.4
                                  %Telecommunications
      infrastructure services
                                  
                                  
                                  2,338,000
                                  
                                  
                                  
                                  5.7
                                  %
                                  
                                  
                                  2,629,000
                                  
                                  
                                  
                                  5.3
                                  %Net
      revenues
                                  
                                  
                                  41,387,000
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  49,263,000
                                  
                                  
                                  
                                  100.0
                                  %Cost
      of revenues **Power
      industry services
                                  
                                  
                                  29,742,000
                                  
                                  
                                  
                                  81.7
                                  %
                                  
                                  
                                  35,548,000
                                  
                                  
                                  
                                  84.6
                                  %Nutritional
      products
                                  
                                  
                                  2,983,000
                                  
                                  
                                  
                                  112.1
                                  %
                                  
                                  
                                  4,193,000
                                  
                                  
                                  
                                  90.8
                                  %Telecommunications
      infrastructure services
                                  
                                  
                                  1,824,000
                                  
                                  
                                  
                                  78.0
                                  %
                                  
                                  
                                  2,076,000
                                  
                                  
                                  
                                  79.0
                                  %Cost
      of revenues
                                  
                                  
                                  34,549,000
                                  
                                  
                                  
                                  83.5
                                  %
                                  
                                  
                                  41,817,000
                                  
                                  
                                  
                                  84.9
                                  %Gross
      profit
                                  
                                  
                                  6,838,000
                                  
                                  
                                  
                                  16.5
                                  %
                                  
                                  
                                  7,446,000
                                  
                                  
                                  
                                  15.1
                                  %Selling,
      general and administrative expenses
                                  
                                  
                                  3,090,000
                                  
                                  
                                  
                                  7.5
                                  %
                                  
                                  
                                  4,381,000
                                  
                                  
                                  
                                  8.9
                                  %Impairment
      losses of VLI
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  %
                                  
                                  
                                  4,666,000
                                  
                                  
                                  
                                  9.5
                                  %Income
      (loss) from operations
                                  
                                  
                                  3,748,000
                                  
                                  
                                  
                                  9.1
                                  %
                                  
                                  
                                  (1,601,000
                                  )
                                  
                                  
                                  (3.3
                                  )%Interest
      expense
                                  
                                  
                                  (108,000
                                  )
                                  
                                  
                                  *
                                  
                                  
                                  
                                  (171,000
                                  )
                                  
                                  
                                  *Interest
      income
                                  
                                  
                                  609,000
                                  
                                  
                                  
                                  1.0
                                  
                                  
                                  
                                  1,074,000
                                  
                                  
                                  
                                  2.2
                                  %Equity
      in the net loss of unconsolidated subsidiary
                                  
                                  
                                  (195,000
                                  )
                                  
                                  
                                  *
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  %Income
      (loss) from operations before income taxes
                                  
                                  
                                  4,054,000
                                  
                                  
                                  
                                  9.8
                                  %
                                  
                                  
                                  (698,000
                                  )
                                  
                                  
                                  (1.4
                                  )%Income
      tax expense
                                  
                                  
                                  (1,430,000
                                  )
                                  
                                  
                                  (3.5
                                  )%
                                  
                                  
                                  (1,259,000
                                  )
                                  
                                  
                                  (2.6
                                  )%Net
      income (loss)
                                  
                                  $
                                  2,624,000
                                  
                                  
                                  
                                  6.3
                                  %
                                  
                                  $
                                  (1,957,000
                                  )
                                  
                                  
                                  (4.0
                                  )%




* Less
than 1%.





** The
percentage amounts for cost of revenues represent the percentage of net revenues
of the applicable segment.





The
following analysis provides information as to the results of our operations for
the three month periods ended October 31, 2008 and 2007. As analyzed below, we
reported net income of $2.6 million for the three months ended October 31, 2008,
or $0.19 per diluted share. For the three months ended October 31, 2007, we
reported a net loss of $2.0 million, or $(0.18) per diluted share.





Net Revenues.Net revenues decreased by
approximately 16.0% in the three months ended October 31, 2008 compared with the
three months ended October 31, 2007, due primarily to a decrease in the net
revenues of GPS.





For the
quarter ended October 31, 2008, the business of GPS represented 87.9% of
consolidated net revenues. This business represented 85.3% of consolidated net
revenues for the quarter ended October 31, 2007. The two significant customers
of the power industry services business for the current quarter represented
approximately 49.6% and 44.3% of the net revenues of this business segment for
the current quarter, respectively, and represented approximately 43.6% and 38.9%
of our consolidated net revenues for the current quarter, respectively. In the
aggregate, four significant customers of the power industry services business
represented approximately 99.0% of its net revenues for the quarter ended
October 31, 2007, and approximately 30.6%, 23.9%, 15.8% and 14.2% of the
Company’s consolidated net revenues for the three months ended October 31, 2007,
respectively. By the beginning of the current quarter, three of these four
projects had been completed. Although GPS has obtained new contracts that have
increased its contract backlog substantially during the current year, the
activity under the new work has not yet reached the level of activity
experienced by GPS during the corresponding quarter of last year.





The net
revenues from the sale of nutritional products by VLI were $2.7 million for the
three months ended October 31, 2008, and represented 6.4% of consolidated net
revenues. The net revenues from the sale of nutritional products were $4.6
million for the three months ended October 31, 2007. This amount represented
9.4% of consolidated net revenues for the prior-year period. The decrease in the
net revenues of nutritional products of $2.0 million, or 42.3%, primarily was
due to the loss of several large customers and lower than expected sales of
products to many of VLI’s largest current customers.


- 22
-




Net
revenues of the telecommunications infrastructure services of SMC were $2.3
million for the three months ended October 31, 2008 compared with $2.6 million
for the three months ended October 31, 2007, representing a decrease in the net
revenues of SMC of approximately 11.1%. The net revenues of this business
segment for the three months ended October 31, 2008 and 2007 were 5.7% and 5.3%
of consolidated net revenues for the corresponding periods, respectively. Net
revenues related to inside premises customers increased by approximately 28.9%
for the three months ended October 31, 2008 compared with the corresponding
three months of the prior year due to primarily to increased demand for our
services from EDS and other ISP customers. However, this strong performance was
more than offset by reduced net revenues related to outside plant jobs. Although
SMC signed a new eighteen-month contract with Verizon during the current quarter
and net revenues related to this customer increased during the current quarter
compared to the first and second quarters, the level of business from outside
plant customers has declined by 28.3% between years. The uncertain contract
situation that existed earlier in the current year and Verizon’s focus on its
new FIOS transmission technology have adversely affected our business. Work
performed for SMC’s other large outside plant customer also decreased between
years.
 
 Cost of Revenues. The cost of
revenues for the power industry services business of GPS decreased in the three
months ended October 31, 2008 to $29.7 million from $35.5 million in the three
months ended October 31, 2007. The cost of revenues as a percentage of
corresponding net revenues was 81.7% in the current quarter compared with 84.6%
in the third quarter of last year. Our gross profit for the current quarter was
favorably affected by the recognition in revenues of earned incentive fees
related to construction services that totaled approximately $2.2
million.
 
 Although
the cost of revenues for the nutritional products business of VLI decreased in
the three-month period ended October 31, 2008 to $3.0 million from $4.2 million
in the three months ended October 31, 2007, the cost of revenues percentage
increased to 112.1% of net revenues in the current quarter from a percentage of
90.8% in the corresponding quarter of the prior year due primarily to the
provision for overstocked and obsolete inventory recorded in the current quarter
in the amount of $640,000. In addition, on an overall basis, raw material costs
as a percentage of net revenues increased between quarters due primarily to
product pricing pressure from customers. Direct labor and related manufacturing
overhead costs have been reduced between quarters. However, the reductions have
not occurred in proportion to the reduction in net revenues.
 
 Cost of
revenues for the telecommunication infrastructure services business of SMC
decreased by $252,000, or approximately 12.1%, in the current quarter compared
with the same quarter a year ago, and decreased slightly as a percentage of
corresponding net revenues to 78.0% in the current quarter from 79.0% in the
third quarter last year.
 
 Although
our overall gross profit percentage increased to 16.5% of consolidated revenues
for the current quarter from a percentage of 15.1% of consolidated revenues in
the corresponding period of the prior year, the gross profit declined in the
current quarter to $6.8 million from $7.4 million in the corresponding period of
the prior year due primarily to the deteriorating performance of
VLI.
 
 Selling, General and Administrative
Expenses. These expenses decreased to $3.1 million for the three months
ended October 31, 2008 from $4.4 million for the three months ended October 31,
2007, a reduction of approximately $1.3 million, or 29.5%. Amortization expense
related to purchased intangible assets decreased by approximately $1.1 million
in the current quarter compared with the third quarter of last year as the
amortization expense related to contractual and other customer relationships
decreased between quarters by approximately $959,000. Most of this decrease was
scheduled and attributable to backlog for construction contracts completed by
GPS last year. In addition, the impairment losses recorded by VLI last year
served to reduce its amortization expense related to customer relationships and
the noncompete agreement prospectively, and the amortization of propriety
formulas was completed last year. We have also reduced selling, general and
administrative expenses at VLI in the approximate amount of
$238,000.
 
 Interest Income and Expense.
We reported interest income of $609,000 for the three months ended October 31,
2008 compared to interest income of $1.1 million for the three months ended
October 31, 2007. During the current year, our cash balances have been invested
in liquid money-market type collective funds. Although favorable cash flow from
operations and the proceeds of the private placement sale of our common stock in
the second quarter of the current year have increased the balance of our cash
and cash equivalents, investment returns have declined as short-term interest
rates have dropped substantially over the last year. Interest expense declined
to $108,000 in the current quarter from $171,000 in the comparable quarter of
the prior year due to the overall reduction in the level of debt between
quarters. Debt payments have reduced the total balance of debt (including
current and noncurrent portions) to approximately $4.7 million at October 31,
2008 from approximately $7.2 million at October 31, 2007.
 
 Income Tax Expense. For the
three months ended October 31, 2008, we incurred income tax expense of $1.4
million representing an effective income tax rate of 35.27% for the current
quarter. The effective tax rate for the current quarter differs from the
expected federal income tax rate of 34% due to the effect of state income taxes
offset partially by the favorable net effect of permanent differences. Despite
reporting a loss from operations before income taxes of $698,000 for the three
months ended October 31, 2007, we incurred income tax expense of $1,259,000 for
the period. In the prior year, the Company was adversely impacted by its
inability to utilize certain current operating losses for state income tax
reporting purposes. In addition, the goodwill impairment loss of $3,826,000 was
not deductible for income tax reporting purposes, and represented a permanent
difference between financial and income tax reporting.
 
 - 23
-
  Comparison of the Results of
Operations for the Nine Months Ended October 31, 2008 and
2007
 
 The
following schedule compares the results of our operations for the nine months
ended October 31, 2008 and 2007. Except where noted, the percentage amounts
represent the percentage of net revenues for the corresponding
period.
 Nine Months Ended October 31,2008
                                                
                                                
                                                2007Net revenuesPower
      industry services
                                                
                                                $
                                                151,034,000
                                                
                                                
                                                
                                                91.6
                                                %
                                                
                                                $
                                                130,970,000
                                                
                                                
                                                
                                                85.7
                                                %Nutritional
      products
                                                
                                                
                                                7,287,000
                                                
                                                
                                                
                                                4.4
                                                %
                                                
                                                
                                                14,602,000
                                                
                                                
                                                
                                                9.6
                                                %Telecommunications
      infrastructure services
                                                
                                                
                                                6,570,000
                                                
                                                
                                                
                                                4.0
                                                %
                                                
                                                
                                                7,260,000
                                                
                                                
                                                
                                                4.7
                                                %Net
      revenues
                                                
                                                
                                                164,891,000
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                
                                                152,832,000
                                                
                                                
                                                
                                                100.0
                                                %Cost
      of revenues **Power
      industry services
                                                
                                                
                                                131,425,000
                                                
                                                
                                                
                                                87.0
                                                %
                                                
                                                
                                                119,383,000
                                                
                                                
                                                
                                                91.2
                                                %Nutritional
      products
                                                
                                                
                                                7,701,000
                                                
                                                
                                                
                                                105.7
                                                %
                                                
                                                
                                                12,481,000
                                                
                                                
                                                
                                                85.5
                                                %Telecommunications
      infrastructure services
                                                
                                                
                                                5,474,000
                                                
                                                
                                                
                                                83.3
                                                %
                                                
                                                
                                                5,776,000
                                                
                                                
                                                
                                                79.6
                                                %Cost
      of revenues
                                                
                                                
                                                144,600,000
                                                
                                                
                                                
                                                87.7
                                                %
                                                
                                                
                                                137,640,000
                                                
                                                
                                                
                                                90.1
                                                %Gross
      profit
                                                
                                                
                                                20,291,000
                                                
                                                
                                                
                                                12.3
                                                %
                                                
                                                
                                                15,192,000
                                                
                                                
                                                
                                                9.9
                                                %Selling,
      general and administrative expenses
                                                
                                                
                                                11,118,000
                                                
                                                
                                                
                                                6.7
                                                %
                                                
                                                
                                                13,715,000
                                                
                                                
                                                
                                                9.0
                                                %Impairment
      losses of VLI
                                                
                                                
                                                1,946,000
                                                
                                                
                                                
                                                1.2
                                                %
                                                
                                                
                                                4,666,000
                                                
                                                
                                                
                                                3.0
                                                %Income
      (loss) from operations
                                                
                                                
                                                7,227,000
                                                
                                                
                                                
                                                4.4
                                                %
                                                
                                                
                                                (3,189,000
                                                )
                                                
                                                
                                                (2.1
                                                )%Interest
      expense
                                                
                                                
                                                (336,000
                                                )
                                                
                                                
                                                *
                                                
                                                
                                                
                                                (550,000
                                                )
                                                
                                                
                                                *Interest
      income
                                                
                                                
                                                1,545,000
                                                
                                                
                                                
                                                1.0
                                                
                                                
                                                
                                                2,352,000
                                                
                                                
                                                
                                                1.5
                                                %Equity
      in the net loss of unconsolidated subsidiary
                                                
                                                
                                                (359,000
                                                )
                                                
                                                
                                                *
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                %Income
      (loss) from operations before income taxes
                                                
                                                
                                                8,077,000
                                                
                                                
                                                
                                                4.9
                                                %
                                                
                                                
                                                (1,387,000
                                                )
                                                
                                                
                                                *Income
      tax expense
                                                
                                                
                                                (3,092,000
                                                )
                                                
                                                
                                                (1.9
                                                )%
                                                
                                                
                                                (1,253,000
                                                )
                                                
                                                
                                                *Net
      income (loss)
                                                
                                                $
                                                4,985,000
                                                
                                                
                                                
                                                3.0
                                                %
                                                
                                                $
                                                (2,640,000
                                                )
                                                
                                                
                                                (1.7
                                                )%
  * Less than 1%.
 
 **
The percentage amounts for cost of revenues represent the percentage of net
revenues of the applicable segment.
 
 The
following analysis provides information as to the results of our operations for
the nine month periods ended October 31, 2008 and 2007. As analyzed below, we
reported net income of approximately $5.0 million for the nine months ended
October 31, 2008, or $0.40 per diluted share. For the nine months ended October
31, 2007, we reported a net loss of $2.6 million, or $(0.24) per diluted
share.
 
 Net Revenues.Despite the reduction in
consolidated revenues in the current quarter compared to the corresponding
quarter of last year, our consolidated net revenues have increased by
approximately 7.9% in the nine months ended October 31, 2008 compared with the
nine months ended October 31, 2007 due to a 15.3% increase in the net revenues
of GPS, partially offset by a 50.1% reduction in the net revenues of VLI and
9.5% reduction in the net revenues of SMC.
 
 The
business of GPS represented 91.6% of consolidated net revenues for the nine
months ended October 31, 2008. This business represented 85.7% of consolidated
net revenues for the nine months ended October 31, 2007. The net revenues
related to two customers represented approximately 50.7% and 47.5% of the net
revenues of this business segment for the current year period, respectively, and
represented approximately 46.5% and 43.4% of our consolidated net revenues for
the current year period, respectively. The power industry services business had
four significant customers in the nine-month period ended October 31, 2007. In
total, GPS recognized approximately 92.7% of its net revenues for the prior-year
period under contracts with these customers. The net revenues for these four
customers represented approximately 23.1%, 22.8%, 17.2% and 16.3% of the
Company’s consolidated net revenues for the nine months ended October 31, 2007,
respectively.
 
 Net
revenues from the sale of nutritional products by VLI were $7.3 million for the
nine months ended October 31, 2008, which represented 4.4% of consolidated net
revenues. Net revenues from the sale of nutritional products were $14.6 million
for the nine months ended October 31, 2007. This amount represented 9.6% of
consolidated net revenues for the prior year period. The decrease in the net
revenues of nutritional products between years was approximately $7.3 million,
or 50.1%. Sales to two of VLI’s four largest current year customers have
decreased by approximately $3.1 million between years, and VLI lost two of its
largest accounts that represented approximately $4.6 million of VLI’s revenues
in the nine months ended October 31, 2007.
  - 24
-


Net
revenues of the telecommunications infrastructure services of SMC were $6.6
million for the nine months ended October 31, 2008 compared to $7.3 million for
the nine months ended October 31, 2007, representing a decrease in the net
revenues of SMC of approximately 9.5%. The net revenues of this business segment
for the nine months ended October 31, 2008 and 2007 were 4.0% and 4.7% of
consolidated net revenues for the corresponding periods, respectively. Net
revenues related to inside premises customers increased by approximately 43.2%
for the nine months ended October 31, 2008 compared with the corresponding nine
months of the prior year due to increases in revenues related to EDS and other
customers. However, this strong performance was more than offset by a 31.8%
reduction between years in the net revenues related to outside plant jobs. The
net revenues of the two largest customers of this business have declined between
years.





Cost of Revenues. The cost of
revenues for the power industry services business of GPS increased in the nine
months ended October 31, 2008 to $131.4 million from $119.4 million in the nine
months ended October 31, 2007. The cost of revenues as a percentage of
corresponding net revenues declined between the periods. The percentage was
87.0% in the current year period compared with 91.2% in the prior year period,
reflecting primarily the loss on one power plant construction project that was
recorded last year in the amount of $11.6 million.





Although
the cost of revenues for the nutritional products business of VLI decreased in
the nine-month period ended October 31, 2008 to $7.7 million from $12.5 million
in the nine months ended October 31, 2007, the cost of revenues expressed as a
percentage of corresponding net revenues increased to 105.7% in the current year
from a percentage of 85.5% in the corresponding period of the prior year. The
cost of revenues for the current year includes a provision for inventory
obsolescence of $812,000; the comparable amount for the prior fiscal year was
$378,000. In addition, the declining sales and competitive product pricing
pressures continued to squeeze gross margins and increased the recurring cost of
excess production capacity.





The cost
of revenues for the telecommunication infrastructure services business of SMC
declined by $302,000, or approximately 5.2%, in the current year period compared
with the corresponding period a year ago, but increased as a percentage of
corresponding net revenues to 83.3% in the current period from 79.6% in the
comparable period last year. On an overall basis, direct labor and related costs
have been reduced between the periods. Despite the increased inside plant work
requiring an increase in the use of subcontractors and an increase in job
material and supply costs, the profitability of the inside plant work has
improved between the periods. On the other hand, the effects of reduced net
revenues and competitive pricing pressures have decreased the profit of the
outside plant work between the periods.





Primarily
as a result of the improvement in the performance of GPS, our overall gross
profit increased to $20.3 million for the nine months ended October 31, 2008
from $15.2 million for the nine months ended October 31, 2007, and our gross
profit percentage increased to 12.3% for the current year period from a
percentage of 9.9% in the corresponding period of the prior year.





Selling, General and Administrative
Expenses. These expenses decreased to $11.1 million for the nine months
ended October 31, 2008 from $13.7 million for the nine months ended October 31,
2007, a reduction of $2.6 million, or 18.9%.




Amortization
expense related to purchased intangible assets decreased by approximately $4.0
million in the current year period compared with the corresponding period of
last year as the amortization expense related to contractual and other customer
relationships decreased between years by approximately $3.5 million. Most of
this decrease was scheduled and attributable to backlog for construction
contracts completed by GPS last year. The impairment losses recorded by VLI last
year served to reduce its amortization expense related to customer relationships
and the noncompete agreement prospectively, and the amortization of propriety
formulas was completed last year. Partially offsetting the favorable effects of
the amortization expense reductions in the current period and reductions in
expenses at VLI and SMC were an increase in salaries expense at GPS of
approximately $513,000 and increases in certain corporate expenses. Stock option
compensation expense has increased by $566,000 and legal fees related to the WFC
and Thomas matters have increased by $310,000 between years.





Impairment Losses. The
statement of operations for the nine months ended October 31, 2008 included the
VLI impairment losses related to goodwill, other purchased intangible assets,
and fixed assets in the total amount of approximately $1,946,000. Last year, VLI
recorded impairment losses related to goodwill and other purchased intangible
assets in the amounts of $3,826,000 and $840,000, respectively. Through
scheduled amortization for the long-lived assets and additional impairment
losses recorded by VLI in the fourth quarter last year and the second quarter
this year, the carrying values have been essentially eliminated.





Interest Income and Expense.
We reported interest income of $1.5 million for the nine months ended October
31, 2008 compared to interest income of $2.4 million for the nine months ended
October 31, 2007, reflecting the decline in short-term investment returns over
the last year. Interest expense declined to $336,000 in the current year period
from $550,000 in the comparable period of the prior year due to the overall
reduction in the level of debt between periods.




- 25
-




Income Tax Expense. For the
nine months ended October 31, 2008, we incurred income tax expense of $3.1
million representing an effective income tax rate of 38.28%. The effective tax
rate for the current year differs from the expected federal income tax rate of
34% due primarily to the effect of state income taxes and the unfavorable net
effect of permanent differences. In addition, we established a valuation
allowance during the current year related to the deferred state taxes of VLI in
the amount of $57,000. The unfavorable effects of these factors was offset
partially in the current year by the favorable effect of a credit to the
deferred tax provision in the approximate amount of $116,000 reflecting the
effect of the current year change in state income tax rates applied to our
deferred tax items. Despite reporting a loss from operations before income taxes
of $1,387,000 for the nine months ended October 31, 2007, we incurred income tax
expense of $1,253,000 for the period. Last year, the Company was adversely
impacted by its inability to utilize certain current operating losses for state
income tax reporting purposes. In addition, the goodwill impairment loss of
$3,826,000 recorded last year was not deductible for income tax reporting
purposes, and represented a permanent difference between financial and income
tax reporting.





Liquidity and Capital
Resources as of October 31, 2008




Cash and
cash equivalents have increased during the current year by approximately $26.3
million to approximately $93.1 million as of October 31, 2008 compared to $66.8
million as of January 31, 2008 due primarily to the addition of the net proceeds
of the private placement sale of common stock completed in July 2008. We also
have an available balance of $4.3 million under our revolving line of credit
financing arrangement with our bank. The Company’s consolidated working capital
increased during the current year from approximately $16.5 million as of January
31, 2008 to approximately $47.6 million as of October 31, 2008. During the
current year, we reached agreement with the bank extending the availability of
the revolving line of credit to May 2010.




Net cash
provided by operations for the nine months ended October 31, 2008 was
approximately $6.3 million. We reported net income of
approximately $5.0 million and our net non-cash expenses were approximately $4.3
million including impairment losses and the amortization of purchased intangible
assets. In addition, cash in the amount of $4.1 million was released from escrow
accounts as described in Note 2 to the condensed consolidated financial
statements. Cash was used during the current year in connection with the net
increase of $7.1 million in the other working capital accounts.





For the
nine months ended October 31, 2007, despite a net loss of $2.6 million, net cash
provided by operations was $55.0 million. Billings in excess of cost and
earnings provided approximately $50.8 million in cash flow due primarily to an
increase in cash collections as a result of a growth in operating activity. In
addition, the Company reduced the amount of unbilled receivables during the
prior fiscal year by approximately $11.4 million. Cash was used to reduce the
level of accounts payable and accrued expenses by approximately $12.4 million
during the prior year. The net amount of non-cash expenses in the prior year
period, including impairment losses and the amortization of purchased intangible
assets, was approximately $9.2 million.





During
the nine months ended October 31, 2008, investing activities consisted of the
payment of $2,000,000 in contingent acquisition price to the former owners of
GPS (see Note 2 to the condensed consolidated financial statements) and the
capital contribution of $1,600,000 made to GRP in connection with the formation
and start-up of this unconsolidated subsidiary. We have also purchased equipment
for a net cost of $216,000 during the current year. Last year, net cash of
approximately $3.2 million was used in investing activities as the purchase of
investments and equipment used net cash amounts of $2.7 million and $463,000,
respectively.





Net cash
of approximately $23.8 million was provided by financing activities during the
nine months ended October 31, 2008. We completed the private placement sale of
2.2 million shares of our common stock in July 2008, providing net cash proceeds
of approximately $25.0 million, and issued approximately 120,000 shares of our
common stock in connection with the exercise of stock options and warrants,
providing net cash proceeds of approximately $786,000. We used cash to make debt
principal payments of $1.9 million. Last year, net cash of $1.9 million was used
in financing activities, primarily to make debt principal payments.





The
financing arrangements with our bank provide for the measurement at our fiscal
year-end and at each of our fiscal quarter-ends (using a rolling 12-month
period) of certain financial covenants, determined on a consolidated basis,
including requirements that the ratio of total funded debt to EBITDA not exceed
2 to 1, that the ratio of senior funded debt to EBITDA not exceed 1.50 to 1, and
that the fixed charge coverage ratio not be less than 1.25 to 1. At the end
of the fiscal year and at the end of the most recent fiscal quarter, the Company
was in compliance with each of these financial covenants. The Bank’s
consent is required for acquisitions and divestitures. The Company continues to
pledge the majority of the Company’s assets to secure the financing
arrangements.




- 26
-




The
amended financing arrangement contains an acceleration clause which allows the
bank to declare amounts outstanding under the financing arrangements due and
payable if it determines in good faith that a material adverse change has
occurred in the financial condition of any of our companies. We believe that the
Company will continue to comply with its financial covenants under the financing
arrangement. If the Company’s performance does not result in compliance with any
of its financial covenants, or if the bank seeks to exercise its rights under
the acceleration clause referred to above, we would seek to modify the financing
arrangement, but there can be no assurance that the bank would not exercise its
rights and remedies under the financing arrangement including accelerating
payment of all outstanding senior debt due and payable.





During
the current year, we demonstrated an ability to acquire growth capital despite
soft capital markets as we raised approximately $25.0 million in net cash
proceeds from the private placement sale of 2.2 million shares of our common
stock at a price of $12 per share. We will use these proceeds to maintain an
increased level of working capital liquidity in support of the growth of GPS,
particularly to meet the increasing liquidity requirements of construction bond
providers as the size of our construction contracts increases.





We
believe that cash on hand, cash generated from the Company’s future operations
and funds available under the Company’s line of credit will be adequate to meet
our future operating cash needs. Any future acquisition, or other significant
unplanned cost or cash requirement may require us to raise additional funds
through the issuance of debt and/or equity securities. Despite our success in
completing the private placement transaction in July 2008, there can be no
assurance that such future financing will be available on terms acceptable to
us, or at all. If additional funds are raised by issuing equity securities,
significant dilution to the existing stockholders may result.




Earnings before Interest,
Taxes, Depreciation and Amortization (Non-GAAP Measurement)




We
present Earnings before Interest, Taxes, Depreciation and Amortization
(“EBITDA”) to provide investors with a supplemental measure of our operating
performance. The following tables show our calculations of EBITDA for the three
and nine months ended October 31, 2008 and 2007:




Three Months Ended October 31,2008
                    
                    
                    2007Net
      income (loss), as reported
                    
                    $
                    2,624,000
                    
                    
                    $
                    (1,957,000
                    )Income
      tax expense
                    
                    
                    1,430,000
                    
                    
                    
                    1,259,000Depreciation
      and other amortization
                    
                    
                    159,000
                    
                    
                    
                    324,000Amortization
      of purchased intangible assets
                    
                    
                    115,000
                    
                    
                    
                    1,201,000Interest
      expense
                    
                    
                    108,000
                    
                    
                    
                    171,000Stock
      option compensation expense
                    
                    
                    60,000
                    
                    
                    
                    182,000Impairment
      losses of VLI
                    
                    
                    —
                    
                    
                    
                    4,666,000EBITDA
                    
                    $
                    4,496,000
                    
                    
                    $
                    5,846,000





Nine Months Ended October 31,2008
                  
                  
                  2007Net
      income (loss), as reported
                  
                  $
                  4,985,000
                  
                  
                  $
                  (2,640,000
                  )Income
      tax expense
                  
                  
                  3,092,000
                  
                  
                  
                  1,253,000Impairment
      losses of VLI
                  
                  
                  1,946,000
                  
                  
                  
                  4,666,000Amortization
      of purchased intangible assets
                  
                  
                  1,289,000
                  
                  
                  
                  5,290,000Stock
      option compensation expense
                  
                  
                  848,000
                  
                  
                  
                  282,000Depreciation
      and other amortization
                  
                  
                  842,000
                  
                  
                  
                  968,000Interest
      expense
                  
                  
                  336,000
                  
                  
                  
                  550,000EBITDA
                  
                  $
                  13,338,000
                  
                  
                  $
                  10,369,000





Management
uses EBITDA, a non-GAAP financial measure, for planning purposes, including the
preparation of operating budgets and to determine appropriate levels of
operating and capital investments. Management believes that EBITDA provides
additional insight for analysts and investors in evaluating the Company's
financial and operational performance and in assisting investors in comparing
the Company's financial performance to those of other companies in the Company's
industry. However, EBITDA is not intended to be an alternative to financial
measures prepared in accordance with GAAP and should not be considered in
isolation from our GAAP results of operations. Pursuant to the requirements of
SEC Regulation G, reconciliations between the Company's GAAP and non-GAAP
financial results for the three and nine months ended October 31, 2008 and 2007
are provided above and investors are advised to carefully review and consider
this information as well as the GAAP financial results that are disclosed in our
SEC filings.




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-




Seasonality




The
Company's telecommunications infrastructure service operations may have
seasonally weaker results in the first and fourth quarters of the year, and may
produce stronger results in the second and third quarters. This seasonality may
be due to the effect of winter weather on construction and outside plant
activities as well as reduced daylight hours and customer budgetary constraints.
Certain customers tend to complete budgeted capital expenditures before the end
of the year, and postpone additional expenditures until the subsequent fiscal
period.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
required for a smaller reporting company.




ITEM
4. CONTROLS AND PROCEDURES




Evaluation of disclosure controls and
procedures. Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
under the Exchange Act) as of October 31, 2008. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of October 31, 2008, our chief executive officer and
chief financial officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.




Changes in internal controls over
financial reporting. No change in our internal control over financial
reporting (as defined in Rules 13a-15 or 15d-15 under the Exchange Act) occurred
during the fiscal quarter ended October 31, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




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PART
II




OTHER
INFORMATION




ITEM 1.   LEGAL PROCEEDINGS




1)
            On
      March 22, 2005, WFC filed a civil action against the Company and its
      executive officers. The suit was filed in the Superior Court of the State
      of California for the County of Los Angeles. WFC purchased the capital
      stock of the Company's wholly-owned subsidiary, Puroflow Incorporated,
      pursuant to the terms of the Stock Purchase Agreement dated October 31,
      2003. WFC alleged that the Company and its executive officers breached the
      Stock Purchase Agreement between WFC and the Company and engaged in
      misrepresentations and negligent conduct with respect to the Stock
      Purchase Agreement. WFC sought declaratory relief, compensatory and
      punitive damages in an amount to be proven at trial as well as the
      recovery of attorney's fees. This action was removed to the United States
      District Court for the Central District of California. The Company and its
      officers denied that any breach of contract or that any misrepresentations
      or negligence occurred on their
part.





This case
was scheduled for trial on April 10, 2007. On March 15, 2007, the District Court
granted the Company and its executive officers' motion for summary judgment,
thereby dismissing WFC's lawsuit against the Company and its executive officers
in its entirety. WFC appealed the District Court’s decision.  The
parties filed their appellate briefs and oral arguments occurred on June 3,
2008.  On August 25, 2008, the Ninth Circuit Court of Appeals reversed
the summary judgment decision and remanded the case back to the District
Court.





The
parties have agreed to an out-of-court settlement of this litigation. Pursuant
to the corresponding agreement between the parties, the Company made a payment
to WFC in the amount of $750,000 in December 2008 in order to settle the
lawsuit. This payment was funded, in part, with $300,000 previously held in
escrow related to the sale of WFC. The Company expects that $250,000 of the
difference will be reimbursed by the Company’s insurance company.





2)
            On
      August 27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit
      against the Company, VLI and the Company’s Chief Executive Officer (the
      “CEO”) in the Circuit Court of Florida for Collier County. The Company
      acquired VLI by way of merger on August 31, 2004.  Mr. Thomas
      alleges that the Company, VLI and the CEO breached various agreements
      regarding his compensation and employment package that arose from the
      acquisition of VLI. Mr. Thomas has alleged contractual and tort-based
      claims arising from his compensation and employment agreements and seeks
      rescission of his covenant not to compete against VLI.  The
      Company, VLI and the CEO deny that any breach of contract or tortious
      conduct occurred on their part.  The Company and VLI have also
      asserted four counterclaims against Mr. Thomas for breach of the merger
      agreement, breach of his employment contract, breach of fiduciary duty and
      tortious interference with contractual relations for the violation of his
      non-solicitation, confidentiality and non-compete obligations after he
      left VLI (the “VLI Merger Litigation”). The Company intends to vigorously
      defend this lawsuit and prosecute its
  counterclaims.




3)
            On
      March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI
      and its current president in the Circuit Court of Florida for Collier
      County. VFI, which is owned by Kevin Thomas, supplied VLI with certain
      organic raw materials used in the manufacture of VLI products. VFI has
      asserted a breach of contract claim against VLI and alleges that VLI
      breached a supply agreement with VFI by acquiring the organic products
      from a different supplier.  VFI also asserted a claim for
      defamation against VLI’s president alleging that he made false statements
      regarding VFI’s organic certification to one of VLI's customers. VLI and
      its president filed their Answer and Affirmative Defenses on May 8, 2008.
      VLI and its president deny that VLI breached any contract or that its
      president defamed VFI. The defendants intend to continue to vigorously
      defend this lawsuit.





4)
            On
      March 4, 2008, Mr. Thomas filed a lawsuit against VLI's president in the
      Circuit Court of Florida for Collier County.  Mr. Thomas has
      filed this new lawsuit against VLI’s president for
      defamation.  Mr. Thomas alleges that VLI’s president made false
      statements to third-parties regarding Mr. Thomas' conduct that is the
      subject of counterclaims by the Company and VLI in the VLI Merger
      Litigation discussed above, and that these statements have caused damage
      to his business reputation. VLI’s president filed his answer with the
      court on May 8, 2008 denying that he defamed Mr. Thomas. He intends to
      continue to vigorously defend this
lawsuit.





In the
normal course of business, the Company has pending claims and legal proceedings.
It is our opinion, based on information available at this time, that none of the
other current claims and proceedings will have a material effect on our
condensed consolidated financial statements.




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ITEM 1A.   RISK
FACTORS




Investing
in our securities involves a high degree of risk. Our business, financial
position and future results of operations may be impacted in a materially
adverse manner by risks associated with the execution of our strategic plan and
the creation of a profitable and cash-flow positive business, our ability to
obtain capital or to obtain capital on terms acceptable to us, the successful
integration of acquired companies into our consolidated operations, our ability
to successfully manage diverse operations that are remotely located, our ability
to successfully compete in highly competitive industries, the successful
resolution of ongoing litigation, our dependence upon key managers and employees
and our ability to retain them, and potential fluctuations in quarterly
operating results, among other risks.





In
addition, we note the following risks related to our power industry services
business that provided approximately 92% of consolidated net revenues for the
nine months ended October 31, 2008.





Interruption
of power plant construction projects could adversely affect future results of
operations.




At any
time, GPS has a limited number of construction contracts. Should any unexpected
suspension, termination or delay of the work under such contracts occur, our
results of operations may be materially and adversely affected.




Investment
in the wind energy farm business partnership may not yield expected
returns.




In June
2008, we announced that GPS had formed a 50%-owned unconsolidated subsidiary
company with lnvenergy Wind Management LLC for the design and construction of
wind energy farms. As of October 31, 2008, the Company and its partner in this
business have each made cash investments of $1.6 million to the company. We
expect that the new company, Gemma Renewable Power, LLC (“GRP”) will annually
provide engineering, procurement and construction services for new wind energy
farms generating more than an estimated 300 megawatts of electrical power.
Should the future construction and other related services of GRP be at lower
revenue levels than expected, or should GRP fail to profitably execute the
projects that it may obtain, GPS may fail to receive returns from GRP as
anticipated which may adversely affect our future results of our
operations.




Our
dependence on large construction contracts may result in uneven quarterly
financial results.




Our power
industry service activities in any one fiscal quarter are typically concentrated
on a few large construction projects for which we use the
percentage-of-completion method to determine contract revenues.  To a
substantial extent, construction contract revenues are recognized as services
are provided based on the amount of costs incurred. As the timing of equipment
purchases, subcontractor services and other contract events may not be evenly
distributed over the lives of our contracts, the amount of total contract costs
may vary from quarter to quarter, creating uneven amounts of quarterly contract
revenues. In addition, the timing of contract commencements and completions may
exacerbate the uneven pattern.




As a
result of the foregoing, future amounts of consolidated net revenues, cash flow
from operations, net income and earnings per share reported on a quarterly basis
may vary in an uneven pattern and may not be indicative of the operating results
expected for any other quarter or for an entire fiscal year, thus rendering
consecutive quarter comparisons of our operating results a less meaningful way
to assess the growth of our business.





Before
investing in our securities, please consider the risks summarized in this Item
1A and those risks described in our Annual Report on Form 10-K for the year
ended January 31, 2008 (our “2008 Annual Report”). Should one or more of these
risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may vary in material respects from those projected in
any forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.





Our
future results may also be impacted by other risk factors listed from time to
time in our future filings with the SEC, including, but not limited to, our
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports
on Form 10-K. These documents are available free of charge from the SEC or from
our corporate headquarters. Access to these documents is also available on our
website. For more information about us and the announcements we make from time
to time, you may visit our website at www.arganinc.com
..





Our 2008
Annual Report, under Item 1A entitled “Risk Factors,” included an expanded
discussion of our risk factors. There have been no material revisions to the
risk factors that were described therein other than those described
above.




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-




ITEM 2.   UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS




None.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





None.




ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS




None.





ITEM 5.   OTHER INFORMATION




None.





ITEM 6.   EXHIBITS





Exhibit No.
                
                TitleExhibit:
      31.1
                
                Certification
      of Chief Executive Officer, pursuant to Rule 13a-14(c) under the
      Securities Exchange Act of 1934Exhibit:
      31.2
                
                Certification
      of Chief Financial Officer, pursuant to Rule 13a-14(c) under the
      Securities Exchange Act of 1934Exhibit:
      32.1
                
                Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section
    1350Exhibit:
      32.2
                
                Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section
    1350




SIGNATURES





Pursuant
to the requirements 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.





ARGAN,
      INC.December
      12, 2008
                By:
                /s/ Rainer H.
      BosselmannRainer
      H. BosselmannChairman
      of the Board and Chief Executive
Officer




December
      12, 2008
              By:
              /s/ Arthur F.
      TrudelArthur
      F. TrudelSenior
      Vice President, Chief Financial Officerand
      Secretary




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