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 ended
October 31, 2008                                             
|   |                                                                                             
|OR
|   |                                                                                             
|o  | TRANSITION REPORT PURSUANT
    TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|   |                                                                                             
|   | For
    the transition period from _________ to _________                                   

Commission File Number 001-09097




REX STORES CORPORATION  (Exact name of registrant as specified in its charter)




|Delaware                                             | 31-1095548            
|---------------------------------------------------- | ----------------------
|(State or other jurisdiction of                      | (I.R.S. Employer      
|incorporation or organization)                       | Identification Number)
|                                                     |                       
|2875 Needmore Road, Dayton, Ohio                     | 45414                 
|(Address of principal executive offices)             | (Zip Code)            
|                                                    
|(937) 276-3931                                      
|(Registrants telephone number, including area code)



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



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.


|Large accelerated filer ( )                                                 | Accelerated filer (X)        
|--------------------------------------------------------------------------- | -----------------------------
|Non-accelerated filer ( ) (Do not check if
    a smaller reporting company) | Smaller reporting company ( )

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

At the close of business on December 8, 2008, the registrant
had 9,541,310 shares of Common Stock, par value $.01 per share, outstanding.

---



REX STORES CORPORATION AND SUBSIDIARIES

INDEX

|         |  |                                                             |  | Page
|-------- |  | ----------------------------------------------------------- |  | ----
|PART I.  |  | FINANCIAL INFORMATION                                       |  |     
|         |  |                                                             |  |     
|Item 1.  |  | Financial Statements (Unaudited)                            |  |     
|         |  |                                                             |  |     
|         |  | Consolidated Condensed Balance Sheets                       |  | 3   
|         |  | Consolidated Condensed Statements of Income                 |  | 4   
|         |  | Consolidated Condensed Statements of Shareholders Equity   |  | 5   
|         |  | Consolidated Condensed Statements of Cash Flows             |  | 7   
|         |  | Notes to Consolidated Condensed Financial Statements        |  | 8   
|         |  |                                                             |  |     
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition |  |     
|         |  | and Results of Operations                                   |  | 30  
|         |  |                                                             |  |     
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk  |  | 45  
|         |  |                                                             |  |     
|Item 4.  |  | Controls and Procedures                                     |  | 45  
|        
|PART II. |  | OTHER INFORMATION                                           |  |     
|         |  |                                                             |  |     
|Item 1.  |  | Legal Proceedings                                           |  | 45  
|         |  |                                                             |  |     
|Item 1A. |  | Risk Factors                                                |  | 45  
|         |  |                                                             |  |     
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 46  
|         |  |                                                             |  |     
|Item 6.  |  | Exhibits                                                    |  | 46  

2

---



PART I. FINANCIAL INFORMATION

Item 1. Financial
Statements

REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
Unaudited

|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|--------------------------------------------------------------- |  | ------------------ | -------- | ------------------ | - | ------------------ | - | - | -------- | -
|                                                                |  | October
 31,
 2008 |          | January
 31,
 2008 |   | October
 31,
 2007 |  
|                                                                |  |                    |          |                    |   |                    |  
|                                                                |  | (In
 Thousands)    |         
|Assets                                                          |  |                    |          |                    |   |                    |   |   |          |  
|Current assets:                                                 |  |                    |          |                    |   |                    |   |   |          |  
|Cash and cash equivalents                                       |  | $                  | 66,215   |                    | $ | 127,716            |   | $ | 102,966  |  
|Restricted cash                                                 |  |                    | 1,318    |                    |   | -                  |   |   | -        |  
|Accounts receivable, net                                        |  |                    | 4,643    |                    |   | 1,877              |   |   | 1,317    |  
|Synthetic fuel receivable                                       |  |                    | -        |                    |   | 573                |   |   | 1,683    |  
|Inventory, net                                                  |  |                    | 56,554   |                    |   | 49,933             |   |   | 78,427   |  
|Prepaid expenses and other                                      |  |                    | 3,677    |                    |   | 2,492              |   |   | 1,550    |  
|Deferred taxes                                                  |  |                    | 9,801    |                    |   | 10,599             |   |   | 6,619    |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total current assets                                            |  |                    | 142,208  |                    |   | 193,190            |   |   | 192,562  |  
|Property and equipment, net                                     |  |                    | 221,967  |                    |   | 136,505            |   |   | 91,634   |  
|Assets held for sale, net                                       |  |                    | 92       |                    |   | -                  |   |   | 522      |  
|Other assets                                                    |  |                    | 12,861   |                    |   | 14,803             |   |   | 14,630   |  
|Goodwill                                                        |  |                    | -        |                    |   | 1,322              |   |   | 1,322    |  
|Deferred taxes                                                  |  |                    | 21,929   |                    |   | 21,929             |   |   | 25,943   |  
|Equity method investments                                       |  |                    | 41,549   |                    |   | 38,748             |   |   | 39,010   |  
|Investments in marketable equity securities                     |  |                    | -        |                    |   | -                  |   |   | 27,926   |  
|Restricted investments                                          |  |                    | 2,503    |                    |   | 2,481              |   |   | 2,462    |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total assets                                                    |  | $                  | 443,109  |                    | $ | 408,978            |   | $ | 396,011  |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Liabilities and shareholders equity                            |  |                    |          |                    |   |                    |   |   |          |  
|Current liabilities:                                            |  |                    |          |                    |   |                    |   |   |          |  
|Current portion of long-term debt and capital lease
obligations |  | $                  | 6,393    |                    | $ | 4,101              |   | $ | 3,741    |  
|Accounts payable, trade                                         |  |                    | 38,539   |                    |   | 27,253             |   |   | 35,411   |  
|Deferred income                                                 |  |                    | 12,485   |                    |   | 14,448             |   |   | 14,472   |  
|Deferred gain on sale and leaseback                             |  |                    | 1,655    |                    |   | 1,436              |   |   | 1,730    |  
|Other current liabilities                                       |  |                    | 6,715    |                    |   | 13,617             |   |   | 13,315   |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total current liabilities                                       |  |                    | 65,787   |                    |   | 60,855             |   |   | 68,669   |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Long-term liabilities:                                          |  |                    |          |                    |   |                    |   |   |          |  
|Long-term debt and capital lease
obligations                    |  |                    | 84,517   |                    |   | 35,224             |   |   | 24,218   |  
|Deferred income                                                 |  |                    | 14,250   |                    |   | 17,172             |   |   | 16,958   |  
|Deferred gain on sale and leaseback                             |  |                    | 3,886    |                    |   | 4,493              |   |   | 5,187    |  
|Derivative financial instruments                                |  |                    | 1,359    |                    |   | 2,601              |   |   | -        |  
|Other                                                           |  |                    | 1,176    |                    |   | 4,313              |   |   | 619      |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total long-term liabilities                                     |  |                    | 105,188  |                    |   | 63,803             |   |   | 46,982   |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Minority interest in consolidated subsidiaries                  |  |                    | 25,659   |                    |   | 27,729             |   |   | 28,568   |  
|Shareholders equity:                                           |  |                    |          |                    |   |                    |   |   |          |  
|Common stock                                                    |  |                    | 299      |                    |   | 298                |   |   | 298      |  
|Paid-in capital                                                 |  |                    | 142,310  |                    |   | 141,357            |   |   | 143,682  |  
|Retained earnings                                               |  |                    | 287,711  |                    |   | 285,629            |   |   | 279,772  |  
|Treasury stock                                                  |  |                    | (183,845 | )                  |   | (170,693           | ) |   | (171,960 | )
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total shareholders equity                                      |  |                    | 246,475  |                    |   | 256,591            |   |   | 251,792  |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  
|Total liabilities and shareholders equity                      |  | $                  | 443,109  |                    | $ | 408,978            |   | $ | 396,011  |  
|                                                                |  |                    |          |                    |   |                    |   |   |          |  

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

3

---



|                                           
|-------------------------------------------
|REX STORES CORPORATION AND SUBSIDIARIES    
|Consolidated Condensed Statements Of Income
|Unaudited                                  

|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | -------------------------------- | - | ------- | - | ---- | ------- | - | - | ------- | -
|                                                                                                                                      |  | Three
 Months
 Ended
 October 31,         |         | Nine
 Months
 Ended
 October 31, |  
|                                                                                                                                      |  |                                           |         |                                  |  
|                                                                                                                                      |  |                                           |         |                                  |  
|                                                                                                                                      |  | 2008                                      |         | 2007                             |   | 2008    |   | 2007 |        
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |        
|                                                                                                                                      |  | (In
 Thousands, Except Per Share Amounts) |        
|                                                                                                                                      |  |                                           |         |                                  |  
|Net sales and revenue                                                                                                                 |  | $                                         | 63,679  |                                  | $ | 53,402  |   | $    | 175,788 |   | $ | 146,852 |  
|Cost of sales (excluding
 retail segment depreciation)                                                                                |  |                                           | 54,038  |                                  |   | 38,210  |   |      | 140,032 |   |   | 101,933 |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Gross profit                                                                                                                          |  |                                           | 9,641   |                                  |   | 15,192  |   |      | 35,756  |   |   | 44,919  |  
|Selling, general and
 administrative expenses                                                                                         |  |                                           | (13,671 | )                                |   | (14,165 | ) |      | (40,505 | ) |   | (42,612 | )
|Interest income                                                                                                                       |  |                                           | 363     |                                  |   | 1,503   |   |      | 1,732   |   |   | 4,772   |  
|Interest expense                                                                                                                      |  |                                           | (1,074  | )                                |   | (47     | ) |      | (2,093  | ) |   | (147    | )
|Loss on early termination
 of debt                                                                                                    |  |                                           | (9      | )                                |   | -       |   |      | (9      | ) |   | (557    | )
|Gains on sale of real
 estate, net                                                                                                    |  |                                           | 2,279   |                                  |   | 125     |   |      | 2,279   |   |   | 876     |  
|Equity in income of
 unconsolidated ethanol affiliates                                                                                |  |                                           | 1,044   |                                  |   | 535     |   |      | 2,966   |   |   | 2,057   |  
|Realized and unrealized
 investment gains, net                                                                                        |  |                                           | -       |                                  |   | 17,118  |   |      | -       |   |   | 17,118  |  
|Income (loss) from
 synthetic fuel investments                                                                                        |  |                                           | 21      |                                  |   | (1,860  | ) |      | 691     |   |   | 8,279   |  
|Unrealized and realized
 (losses) gains on derivative financial instruments, net                                                      |  |                                           | (947    | )                                |   | -       |   |      | 481     |   |   | -       |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|(Loss) income from
 continuing operations before benefit (provision) for income taxes, minority
 interest and discontinued operations |  |                                           | (2,353  | )                                |   | 18,401  |   |      | 1,298   |   |   | 34,705  |  
|Benefit (provision) for
 income taxes                                                                                                 |  |                                           | 50      |                                  |   | (7,119  | ) |      | (970    | ) |   | (13,380 | )
|Minority interest                                                                                                                     |  |                                           | 1,878   |                                  |   | 32      |   |      | 2,070   |   |   | (12     | )
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|(Loss) income from continuing
 operations                                                                                             |  |                                           | (425    | )                                |   | 11,314  |   |      | 2,398   |   |   | 21,313  |  
|Loss from discontinued
 operations, net of tax                                                                                        |  |                                           | (225    | )                                |   | (535    | ) |      | (507    | ) |   | (2,171  | )
|Gain on disposal of
 discontinued operations, net of tax                                                                              |  |                                           | -       |                                  |   | 3,887   |   |      | 191     |   |   | 8,868   |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Net (loss) income                                                                                                                     |  | $                                         | (650    | )                                | $ | 14,666  |   | $    | 2,082   |   | $ | 28,010  |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Weighted average shares
 outstanding  basic                                                                                          |  |                                           | 9,937   |                                  |   | 10,433  |   |      | 10,389  |   |   | 10,509  |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Basic (loss) income per
 share from continuing operations                                                                             |  | $                                         | (0.05   | )                                | $ | 1.08    |   | $    | 0.23    |   | $ | 2.03    |  
|Basic loss per share from
 discontinued operations                                                                                    |  |                                           | (0.02   | )                                |   | (0.04   | ) |      | (0.05   | ) |   | (0.20   | )
|Basic income per share on
 disposal of discontinued operations                                                                        |  |                                           | -       |                                  |   | 0.37    |   |      | 0.02    |   |   | 0.84    |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Basic net (loss) income
 per share                                                                                                    |  | $                                         | (0.07   | )                                | $ | 1.41    |   | $    | 0.20    |   | $ | 2.67    |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Weighted average shares
 outstanding  diluted                                                                                        |  |                                           | 9,937   |                                  |   | 11,750  |   |      | 11,029  |   |   | 11,864  |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Diluted (loss) income per
 share from continuing operations                                                                           |  | $                                         | (0.05   | )                                | $ | 0.96    |   | $    | 0.22    |   | $ | 1.79    |  
|Diluted loss per share
 from discontinued operations                                                                                  |  |                                           | (0.02   | )                                |   | (0.04   | ) |      | (0.05   | ) |   | (0.18   | )
|Diluted income per share
 on disposal of discontinued operations                                                                      |  |                                           | -       |                                  |   | 0.33    |   |      | 0.02    |   |   | 0.75    |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  
|Diluted net (loss) income
 per share                                                                                                  |  | $                                         | (0.07   | )                                | $ | 1.25    |   | $    | 0.19    |   | $ | 2.36    |  
|                                                                                                                                      |  |                                           |         |                                  |   |         |   |      |         |   |   |         |  

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

4

---



|                                                          
|----------------------------------------------------------
|REX STORES CORPORATION AND SUBSIDIARIES                   
|Consolidated Condensed Statements
 Of Shareholders Equity
|Unaudited                                                 

|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|----------------------------------------------- |  | ---------------------- | ------ | -------- | - | ---------------- |  | ------------------ | ------ | ---------------------------- | - | -------- | - | - | ------- | - | - | ------- |  | - | ------- | -
|                                                |  | Common
 Shares
 Issued |        | Treasury |   | Paid-in
 Capital |  | Retained
 Earnings |        | Total
 Shareholders
 Equity |  
|                                                |  |                        |        |          |   |                  |  |                   
|                                                |  | Shares                 |        | Amount   |   | Shares           |  | Amount             |        |                              |   |         
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |        
|                                                |  |                        |        |          |   |                  |  | (In
 Thousands)    |        |                              |   |          |   |   |         |   |   |        
|Balance at January 31, 2008                     |  |                        | 29,813 |          | $ | 298              |  |                    | 19,094 |                              | $ | (170,693 | ) | $ | 141,357 |   | $ | 285,629 |  | $ | 256,591 |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|Net income                                      |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   | 2,082   |  |   | 2,082   |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|Treasury stock acquired                         |  |                        |        |          |   |                  |  |                    | 1,332  |                              |   | (15,496  | ) |   |         |   |   |         |  |   | (15,496 | )
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|Stock based compensation                        |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   | 967     |   |   |         |  |   | 967     |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|Stock options exercised and related tax effects |  |                        | 40     |          |   | 1                |  |                    | (259   | )                            |   | 2,344    |   |   | (14     | ) |   | -       |  |   | 2,331   |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  
|Balance at October 31, 2008                     |  |                        | 29,853 |          | $ | 299              |  |                    | 20,167 |                              | $ | (183,845 | ) | $ | 142,310 |   | $ | 287,711 |  | $ | 246,475 |  
|                                                |  |                        |        |          |   |                  |  |                    |        |                              |   |          |   |   |         |   |   |         |  |   |         |  

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

5

---



|                                                          
|----------------------------------------------------------
|REX STORES CORPORATION AND
 SUBSIDIARIES                  
|Consolidated Condensed Statements
 Of Shareholders Equity
|Unaudited                                                 

|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------- | ------ | -------- | - | ---------------- |  | ------------------ | ------ | ---------------------------------- | - | ---------------------------- | - | - | ------- |  | - | ------- | - | - | ------ | - | - | ------- | -
|                                                                              |  | Common
 Shares
 Issued |        | Treasury |   | Paid-in
 Capital |  | Retained
 Earnings |        | Accumulated
 Comprehensive
 Income |   | Total
 Shareholders
 Equity |  
|                                                                              |  |                        |        |          |   |                  |  |                    |       
|                                                                              |  | Shares                 |        | Amount   |   | Shares           |  | Amount             |        |                                    |   |                              |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|                                                                              |  |                        |        |          |   |                  |  | (In
 Thousands)    |        |                                    |   |                              |   |   |         |  |   |         |   |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Balance at January 31,
 2007                                                  |  |                        | 29,513 |          | $ | 295              |  |                    | 19,089 |                                    | $ | (161,092                     | ) | $ | 139,337 |  | $ | 252,249 |   | $ | -      |   | $ | 230,789 |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Net income                                                                    |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   | 28,010  |   |   |        |   |   | 28,010  |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Cumulative effect of
 adopting FIN 48                                         |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   | (287    | ) |   |        |   |   | (287    | )
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Treasury stock acquired                                                       |  |                        |        |          |   |                  |  |                    | 682    |                                    |   | (12,870                      | ) |   |         |  |   |         |   |   |        |   |   | (12,870 | )
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Stock based compensation                                                      |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   | 1,065   |  |   |         |   |   |        |   |   | 1,065   |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Stock options exercised
 and related tax effects                              |  |                        | 244    |          |   | 3                |  |                    | (234   | )                                  |   | 2,002                        |   |   | 3,280   |  |   |         |   |   |        |   |   | 5,285   |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Minority interest
 distribution                                               |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   | (200    | ) |   |        |   |   | (200    | )
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Unrealized holding gains,
 net of tax                                         |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   | 9,717  |   |   | 9,717   |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Reclassification
 adjustment for net gains included in net income, net of tax |  |                        | -      |          |   | -                |  |                    | -      |                                    |   | -                            |   |   | -       |  |   | -       |   |   | (9,717 | ) |   | (9,717  | )
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  
|Balance at October 31,
 2007                                                  |  |                        | 29,757 |          | $ | 298              |  |                    | 19,537 |                                    | $ | (171,960                     | ) | $ | 143,682 |  | $ | 279,772 |   | $ | -      |   | $ | 251,792 |  
|                                                                              |  |                        |        |          |   |                  |  |                    |        |                                    |   |                              |   |   |         |  |   |         |   |   |        |   |   |         |  

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

6

---



|                                                
|------------------------------------------------
|REX STORES CORPORATION AND
 SUBSIDIARIES        
|Consolidated Condensed Statements
 Of Cash Flows
|Unaudited                                       

|                                                                               |  |                                 |         |      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------- | ---- | - | ------- | -
|                                                                               |  | Nine
 Months Ended
 October 31, |        
|                                                                               |  |                                 |        
|                                                                               |  | 2008                            |         | 2007 |  
|                                                                               |  |                                 |         |      |  
|                                                                               |  | (In
 Thousands)                 |        
|Cash flows from operating
 activities:                                         |  |                                 |         |      |   |         |  
|Net income                                                                     |  | $                               | 2,082   |      | $ | 28,010  |  
|Adjustments to reconcile
 net income to net cash used in operating activities: |  |                                 |         |      |   |         |  
|Depreciation and amortization                                                  |  |                                 | 2,551   |      |   | 2,043   |  
|Income from equity method investments                                          |  |                                 | (2,966  | )    |   | (2,057  | )
|Income from synthetic fuel investments                                         |  |                                 | (691    | )    |   | (8,279  | )
|Realized and unrealized gains on
investments                                   |  |                                 | -       |      |   | (17,118 | )
|Gain on disposal of real estate and property and
equipment                     |  |                                 | (3,279  | )    |   | (15,182 | )
|Dividends received from equity method
investees                                |  |                                 | 400     |      |   | 525     |  
|Deferred income                                                                |  |                                 | (5,273  | )    |   | (4,577  | )
|Realized and unrealized gains on derivative
financial instruments,
 net        |  |                                 | (735    | )    |   | -       |  
|Other                                                                          |  |                                 | 369     |      |   | 1,128   |  
|Deferred income tax                                                            |  |                                 | 798     |      |   | 2,875   |  
|Changes in assets and
 liabilities:                                            |  |                                 |         |      |   |         |  
|Accounts receivable                                                            |  |                                 | (2,766  | )    |   | 658     |  
|Inventory                                                                      |  |                                 | (6,621  | )    |   | (8,349  | )
|Other assets                                                                   |  |                                 | 1,635   |      |   | 5,451   |  
|Accounts payable, trade                                                        |  |                                 | (1,490  | )    |   | 5,852   |  
|Other liabilities                                                              |  |                                 | (10,547 | )    |   | 4,916   |  
|                                                                               |  |                                 |         |      |   |         |  
|Net cash used in operating
 activities                                         |  |                                 | (26,533 | )    |   | (4,104  | )
|                                                                               |  |                                 |         |      |   |         |  
|Cash flows from investing
 activities:                                         |  |                                 |         |      |   |         |  
|Capital expenditures                                                           |  |                                 | (75,903 | )    |   | (26,194 | )
|Proceeds from sale of synthetic fuel
investments                               |  |                                 | 1,264   |      |   | 15,434  |  
|Purchase of investments                                                        |  |                                 | -       |      |   | (20,000 | )
|Repayment of note receivable                                                   |  |                                 | -       |      |   | 5,000   |  
|Acquisition, net of cash acquired                                              |  |                                 | -       |      |   | 8,546   |  
|Proceeds from sale of real estate and property and
equipment                   |  |                                 | 6,379   |      |   | 92,911  |  
|Proceeds from sale of investments                                              |  |                                 | -       |      |   | 4,782   |  
|Restricted cash and investments                                                |  |                                 | (1,340  | )    |   | (56     | )
|                                                                               |  |                                 |         |      |   |         |  
|Net cash (used in)
 provided by investing activities                           |  |                                 | (69,600 | )    |   | 80,423  |  
|                                                                               |  |                                 |         |      |   |         |  
|Cash flows from financing
 activities:                                         |  |                                 |         |      |   |         |  
|Payments of long-term debt and capital lease
obligations                       |  |                                 | (4,425  | )    |   | (22,646 | )
|Proceeds from long-term debt                                                   |  |                                 | 53,088  |      |   | 15,681  |  
|Stock options exercised                                                        |  |                                 | 1,453   |      |   | 3,445   |  
|Treasury stock acquired                                                        |  |                                 | (15,496 | )    |   | (12,870 | )
|Other                                                                          |  |                                 | 12      |      |   | 29      |  
|                                                                               |  |                                 |         |      |   |         |  
|Net cash provided by (used
 in) financing activities                           |  |                                 | 34,632  |      |   | (16,361 | )
|                                                                               |  |                                 |         |      |   |         |  
|Net (decrease) increase in
 cash and cash equivalents                          |  |                                 | (61,501 | )    |   | 59,958  |  
|Cash and cash equivalents,
 beginning of period                                |  |                                 | 127,716 |      |   | 43,008  |  
|                                                                               |  |                                 |         |      |   |         |  
|Cash and cash equivalents,
 end of period                                      |  | $                               | 66,215  |      | $ | 102,966 |  
|                                                                               |  |                                 |         |      |   |         |  
|Non cash investing
 activities  Accrued capital expenditures                  |  | $                               | 12,776  |      | $ | 4,446   |  
|Non cash investing
 activities  Assets acquired by capital leases             |  | $                               | 2,922   |      | $ | -       |  
|Non cash investing
 activities  Non cash proceeds from investment sale        |  | $                               | -       |      | $ | 38,194  |  

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

7

---



REX
STORES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTSOctober
31, 2008

Note 1. Consolidated
Condensed Financial Statements

The
consolidated condensed financial statements included in this report have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and include, in the opinion of
management, all adjustments necessary to state fairly the information set forth
therein. Any such adjustments were of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not mis­leading. Financial information as of
January 31, 2008 included in these financial statements has been derived from
the audited consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended January 31, 2008 (fiscal year 2007). It
is suggested that these unaudited consolidated condensed financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Companys Annual Report on Form 10-K for the year ended
January 31, 2008. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the year.

Basis
of Consolidation  The consolidated condensed financial statements in this
report include the operating results and financial position of REX Stores
Corporation and its wholly and majority owned subsidiaries and all variable
interest entities where the Company has been determined to be the primary
beneficiary. During the second quarter of fiscal year 2007, the Company
acquired additional membership units giving it a majority ownership interest in
Levelland Hockley County Ethanol, LLC (Levelland Hockley). Levelland Hockley
qualifies as a Variable Interest Entity (VIE), but not a Special Purpose
Entity under FASB Interpretation No. 46R (FIN 46R), Consolidation of
Variable Interest Entities. The Company is the primary beneficiary of
Levelland Hockley, and in accordance with FIN 46R, the Company consolidated
Levelland Hockley effective with the third quarter of fiscal year 2006. The
Company includes the results of operations of Levelland Hockley in its Consolidated
Condensed Statement of Income on a delayed basis of one month. Levelland
Hockley commenced operations during the first quarter of fiscal year 2008.

During the
third quarter of fiscal year 2007, the Company acquired a majority ownership
interest in One Earth Energy, LLC (One Earth). The Company includes the
results of One Earth in its Consolidated Condensed Statement of Income on a
delayed basis of one month.

Note 2. Accounting
Policies

The
interim consolidated condensed financial statements have been prepared in
accordance with the accounting policies described in the notes to the
consolidated financial statements included in the Companys 2007 Annual Report
on Form 10-K. While management believes that the procedures followed in the
preparation of interim financial information are reasonable, the accuracy

8

---



of some
estimated amounts is dependent upon facts that will exist or calculations that
will be accomplished at fiscal year end. Examples of such estimates include
management bonuses, inventory reserves, the fair value of derivative financial
instruments, reserves for litigation and the provision for income taxes. Any
adjustments pursuant to such estimates during the quarter were of a normal
recurring nature. Actual results could differ from those estimates.

Revenue Recognition

The
Company recognizes sales of retail products upon receipt by the customer. The
Company will honor returns from retail customers within seven days from the
date of sale. The Company establishes liabilities for estimated returns at the
point of sale. Such liabilities are immaterial for all periods presented. The
Company sells retail product service contracts covering periods beyond the
normal manufacturers warranty periods, usually with terms of coverage
(including manufacturers warranty periods) of between 12 to 60 months.
Contract revenues and sales commissions are deferred and amortized on a
straight-line basis over the life of the contracts after the expiration of
applicable manufacturers warranty periods. Amortization of deferred contract
revenues is included in net sales and revenue while amortization of deferred
sales commissions is included in selling, general and administrative expenses.
The Company retains the obligation to perform warranty service and such costs
are charged to operations as incurred.

The
Company recognizes sales from the production of ethanol and distillers grains
when title transfers to customers, generally upon shipment from our plant.
Shipping and handling charges to ethanol customers are included in net sales
and revenue.

The
Company recognized income from synthetic fuel partnership sales as production
was completed and collectibility of receipts was reasonably assured. The
Company was paid for actual tax credits earned as the synthetic fuel was
produced with the exception of production at the Pine Mountain (Gillette)
facility. The Company estimated the impact of oil prices and the likelihood of
any phase out of Section 29/45K credits and the resulting reduction of
synthetic fuel income quarterly. See Note 11 for a further discussion of
synthetic fuel partnership sales.

Cost of Sales

Retail
cost of sales includes the cost of merchandise (net of vendor allowances),
markdowns and inventory shrink, receiving, warehousing and freight charges to
deliver merchandise to retail stores, service repair bills as well as cash
discounts and rebates. The Company classifies purchasing costs as selling,
general and administrative expenses. As a result of this classification, the
Companys retail gross margins may not be comparable to those of other
retailers that include costs related to their distribution network in selling,
general and administrative expense.

Ethanol
cost of sales includes depreciation, costs of raw materials, inbound freight
charges, purchasing and receiving costs, inspection costs, shipping costs,
other distribution expenses, warehousing costs, plant management, certain
compensation costs, and general facility overhead charges.

9

---



Vendor Allowances and Advertising Costs

Vendors
often fund, up front, certain advertising costs and exposure to general changes
in pricing to customers due to technological change. Allowances are deferred as
received from vendors and recognized into income as an offset to the cost of
merchandise sold or advertising expense when the related product is sold or
expense incurred. Advertising costs are expensed as incurred.

Selling, General and Administrative Expenses

The
Company includes store expenses from its retail segment (such as payroll and
occupancy costs), as well as advertising, purchasing, depreciation, insurance
and overhead costs in selling, general and administrative expenses.

The
Company includes non-production related costs from its alternative energy
segment such as utilities, property taxes and certain payroll in selling,
general and administrative expenses.

Interest Cost

Interest
expense of $2,093,000 for the nine months ended October 31, 2008 is net of approximately
$736,000 of interest capitalized. Interest expense of $147,000 for the nine
months ended October 31, 2007 is net of approximately $1,261,000 of interest
capitalized. Cash paid for interest for the nine months ended October 31, 2008
and 2007 was approximately $1,592,000 and $1,624,000, respectively.

Financial Instruments

Forward
grain purchase and ethanol and distiller grain sale contracts are accounted for
under the normal purchases and normal sales scope exemption of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133)
because these arrangements are for purchases of grain that will be delivered in
quantities expected to be used by the Company and sales of ethanol and
distiller grain quantities expected to be produced by the Company over a
reasonable period of time in the normal course of business. The Company uses
derivative financial instruments to manage its balance of fixed and variable
rate debt. The Company does not hold or issue derivative financial instruments
for trading or speculative purposes. Interest rate swap agreements involve the
exchange of fixed and variable rate interest payments and do not represent an
actual exchange of the notional amounts between the parties. The swap agreements
were not designated for hedge accounting pursuant to SFAS 133. The interest
rate swaps are recorded at their fair values and the changes in fair values are
recorded as gain or loss on derivative financial instruments in the
Consolidated Condensed Statements of Income.

Income Taxes

The
Company applies an effective tax rate to interim periods that is consistent
with the Companys estimated annual tax rate. The Company provides for deferred
tax liabilities and assets for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and tax

10

---



credit
carryforwards. The Company provides for a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. The Company paid income taxes of
approximately $0.7 million and $9.4 million for the nine months ended October
31, 2008 and 2007, respectively. See Note 13 for a discussion of FIN 48.

Restricted Cash

Cash
of $1.3 million has been deposited into an escrow account for payment of
retainage and other related liabilities associated with the construction of the
Levelland Hockley ethanol plant. The Company expects to pay these amounts from
the escrow account within the next twelve months.

Inventories

Inventories
are carried at the lower of cost or market on a first-in, first-out (FIFO)
basis. Retail segment inventory includes certain costs associated with
purchasing, warehousing and transporting merchandise. Reserves are established
for estimated technological obsolescence. The market value of inventory is
often dependent upon changes in technology resulting in significant changes in
customer demand. Alternative energy segment inventory includes direct
production costs and certain overhead costs such as depreciation, property
taxes and utilities related to producing ethanol and related by products. The components of inventory at October 31,
2008, January 31, 2008 and October 31, 2007 are as follows (amounts in
thousands):

|                                      |  |                    |        |                   |   |                    |  |   |        | 
|------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------------------ |  | - | ------ | 
|                                      |  | October 31, 
 2008 |        | January 31,
 2008 |   | October 31, 
 2007 | 
|                                      |  |                    |        |                   |   |                    | 
|                                      |  |                    |        |                   |   |                    | 
|Retail merchandise, net               |  | $                  | 54,730 |                   | $ | 49,933             |  | $ | 78,427 | 
|Ethanol and other finished goods, net |  |                    | 453    |                   |   | -                  |  |   | -      | 
|Work in process, net                  |  |                    | 533    |                   |   | -                  |  |   | -      | 
|Grain and other raw materials         |  |                    | 838    |                   |   | -                  |  |   | -      | 
|                                      |  |                    |        |                   |   |                    |  |   |        | 
|Total                                 |  | $                  | 56,554 |                   | $ | 49,933             |  | $ | 78,427 | 
|                                      |  |                    |        |                   |   |                    |  |   |        | 

Investments

The
Company periodically evaluates its investments for impairment due to declines
in market value considered to be other than temporary. Such impairment
evaluations include, in addition to persistent declining market prices, general
economic and company-specific evaluations. If the Company determines that a
decline in market value is other than temporary, then a charge to earnings is
recorded in investment and other income (expense), net in the accompanying
Consolidated Condensed Statements of Income for all or a portion of the
unrealized loss, and a new cost basis in the investment is established.

Goodwill

Pursuant
to SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142),
goodwill and certain intangible assets are deemed to have indefinite lives and
are reviewed at least annually for impairment. SFAS 142 requires that goodwill
be tested for impairment annually using the fair

11

---



value
methodology. Goodwill impairment is determined using a two-step process. The
first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with the carrying
amount, including goodwill. If the fair value of the reporting unit exceeds the
carrying amount, goodwill of the reporting unit is considered not impaired and
the second step of the impairment test is unnecessary. If the carrying amount
of the reporting unit exceeds the fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting units goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit.

As
a result of continuing losses incurred by Levelland Hockley and the decreasing
spread between ethanol and grain prices, which negatively impacted
profitability, the Company performed an interim goodwill impairment analysis
during the third quarter of fiscal year 2008. Based upon this interim review of
goodwill, the Company recorded an impairment charge of $1.3 million during the
third quarter of fiscal year 2008, which represented the entire goodwill
balance. The impairment charge is included in selling, general and
administrative expenses in the Consolidated Condensed Statement of Income and
relates to the Companys alternative energy segment.

Recently Issued Accounting Standards

During
the nine months ended October 31, 2008, the Company did not change any of its
existing accounting policies with the exception of adopting SFAS No. 157,
Fair Value Measurements (SFAS 157) and SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115 (SFAS 159) on February 1, 2008.

SFAS
157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement does not require any
new fair value measurements; rather, it applies to other accounting
pronouncements that require or permit fair value measurements. The provisions
of this statement are to be applied prospectively as of the beginning of the
fiscal year in which this statement initially applies, with any transition
adjustment recognized as a cumulative-effect adjustment to the opening balance
of retained earnings. The Company elected to defer application of SFAS 157 for
non-recurring fair value measurements of non financial assets and liabilities,
consistent with FSP FAS 157-2.

SFAS
159 permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. There was no impact on the Companys financial
statement as a result of adopting SFAS 159 because the Company did not elect to
apply the fair value option to eligible financial assets or financial
liabilities at that time.

12

---



Effective
February 1, 2008, the Company determined the fair market values of its
financial instruments based on the fair value hierarchy established in SFAS 157
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair values which
are provided below. The Company carries cash equivalents and derivative assets
and liabilities at fair value.

Level
1  Quoted prices in active markets for identical assets or liabilities. Level
1 assets and liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well as certain U.S.
Treasury securities that are highly liquid and are actively traded in
over-the-counter markets.

Level
2  Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities. Level 2 assets
and liabilities include derivative contracts whose value is determined using a
pricing model with inputs that are observable in the market or can be derived
principally or corroborated by observable market data.

Level
3  Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methods, or similar techniques, as
well as instruments for which the determination of fair value requires
significant management judgment or estimation. Unobservable inputs shall be
developed based on the best information available, which may include the
Companys own data.

The
fair values of derivative assets and liabilities traded in the over-the-counter
market are determined using quantitative models that require the use of
multiple market inputs including interest rates, prices and indices to generate
pricing and volatility factors, which are used to value the position. The
predominance of market inputs are actively quoted and can be validated through
external sources, including brokers, market transactions and third-party
pricing services. Estimation risk is greater for derivative asset and liability
positions that are either option-based or have longer maturity dates where
observable market inputs are less readily available or are unobservable, in
which case interest rate, price or index scenarios are extrapolated in order to
determine the fair value. The fair values of derivative assets and liabilities
include adjustments for market liquidity, counterparty credit quality, the
Companys own credit standing and other specific factors, where appropriate. To
ensure the prudent application of estimates and management judgment in
determining the fair value of derivative assets and liabilities, various
processes and controls have been adopted, which include: model validation that
requires a review and approval for pricing, financial statement fair value
determination and risk quantification; periodic review and substantiation of
profit and loss reporting for all derivative instruments. For more information
on the fair value of the Companys financial instruments see Note 5.

In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations (SFAS 141 (R)), replacing SFAS No. 141,
Business Combinations (SFAS 141), and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements  an
Amendment of

13

---



ARB
No. 51 (SFAS 160). SFAS 141(R) retains the fundamental
requirements of SFAS 141, broadens its scope by applying the acquisition method
to all transactions and other events in which one entity obtains control over
one or more other businesses, and requires, among other things, that assets
acquired and liabilities assumed be measured at fair value as of the
acquisition date, that liabilities related to contingent consideration be
recognized at the acquisition date and remeasured at fair value in each
subsequent reporting period, that acquisition-related costs be expensed as
incurred, and that income be recognized if the fair value of the net assets
acquired exceeds the fair value of the consideration transferred. SFAS 160
establishes accounting and reporting standards for noncontrolling interests
(i.e., minority interests) in a subsidiary, including changes in a parents
ownership interest in a subsidiary and requires, among other things, that
noncontrolling interests in subsidiaries be classified as a separate component
of equity. Except for the presentation and disclosure requirements of SFAS 160,
which are to be applied retrospectively for all periods presented, SFAS 141 (R)
and SFAS 160 are to be applied prospectively in financial statements issued for
fiscal years beginning after December 15, 2008. The Company has not
determined the effect, if any, the adoption of this statement will have on its
financial condition or results of operations.

In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities  An Amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 requires enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. The adoption of this statement will not have a significant effect on its
financial condition or results of operations.

In
June 2008, the FASB Issued EITF No. 08-3, Accounting by Lessees for
Nonrefundable Maintenance Deposits. EITF 08-3 requires that nonrefundable
maintenance deposits paid by a lessee under an arrangement accounted for as a
lease be accounted for as a deposit asset until the underlying maintenance is
performed. When the underlying maintenance is performed, the deposit may be
expensed or capitalized in accordance with the lessees maintenance accounting
policy. Upon adoption entities must recognize the effect of the change as a
change in accounting principle. EITF 08-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company does not
expect the adoption of EITF 08-3 to have a material impact on its financial
condition or results of operations.

Note 3. Comprehensive
(Loss) Income

Comprehensive
(loss) income includes net (loss) income and unrecognized gains on securities
classified as available for sale (net of the related tax effects), and are reported
separately in

14

---



shareholders
equity. The components of comprehensive (loss) income are as follows (amounts
in thousands):

|                                                                                         |  |                    |      |                    |   |                   |   |                   |       |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ---- | ------------------ | - | ----------------- | - | ----------------- | ----- |  | - | ------ | -
|                                                                                         |  | Three Months Ended |      | Nine Months Ended  |  
|                                                                                         |  | October 31, 
 2008 |      | October 31, 
 2007 |   | October 31,
 2008 |   | October 31,
 2007 |      
|                                                                                         |  |                    |      |                    |   |                   |   |                   |      
|                                                                                         |  |                    |      |                    |   |                   |   |                   |      
|Net (loss)
 income                                                                       |  | $                  | (650 | )                  | $ | 14,666            |   | $                 | 2,082 |  | $ | 28,010 |  
|Unrealized
 holding gains on available for sale securities (net of $5,956 of tax)        |  |                    | -    |                    |   | -                 |   |                   | -     |  |   | 9,717  |  
|Reclassification
 adjustment for net gains included in net income (net of $5,956 of tax) |  |                    | -    |                    |   | (9,717            | ) |                   | -     |  |   | (9,717 | )
|                                                                                         |  |                    |      |                    |   |                   |   |                   |       |  |   |        |  
|Total
 comprehensive (loss) income                                                       |  | $                  | (650 | )                  | $ | 4,949             |   | $                 | 2,082 |  | $ | 28,010 |  
|                                                                                         |  |                    |      |                    |   |                   |   |                   |       |  |   |        |  

Note 4. Sale and Leaseback Transaction and Other Leases

On
September 16, 2008, the Company
completed a transaction for the sale and partial leaseback of its Cheyenne,
Wyoming distribution center under a three year lease term. A pre-tax
gain, classified as continuing operations, of approximately $1.6 million (net
of expenses) resulted from this sale. The Company has also deferred
approximately $0.8 million of the gain at October 31, 2008, based upon the
present value of the minimum lease payments and will amortize this deferred
gain as a reduction to lease expense over the lease term. The lease has been
accounted for as an operating lease.

On April
30, 2007, the Company completed a transaction for the sale of 86 of its current
and former retail store locations to KLAC REX, LLC (Klac), formerly referred
to as Coventry Real Estate Investments, LLC (Coventry) for $74.5 million in
cash, before selling expenses. The Company also entered into leases to
leaseback 40 of the properties from Klac for initial lease terms expiring
January 31, 2010, with renewal options for up to 15 additional years. Either
the Company or Klac may terminate a lease after the initial six months of the
initial lease term (with two months notice) on 28 of the leases, 14 of which
were terminated in fiscal year 2007 and two of which were terminated in fiscal
year 2008. The Company also entered into license agreements with Klac for 15 of
the properties that allowed the Company to occupy the properties for up to 90
days rent free. Upon the expiration of the license period, the Company vacated
the properties. The Company and Klac modified the lease agreement during fiscal
year 2008 for one store which eliminated the two month early termination
clause.

This
transaction resulted in a gain (realized and deferred) of $14.8 million. Of
this gain, $0.3 million and $1.3 million was recognized in the third quarter of
fiscal years 2008 and 2007, respectively. During the first nine months of
fiscal years 2008 and 2007, the Company recognized $1.1 million and $8.4
million, respectively of the gain. The Company had a deferred gain of $4.4
million and $6.4 million at October 31, 2008 and 2007, respectively, based upon
the present value of the remaining minimum lease payments. The deferred gain
will be amortized as a reduction to lease

15

---



expense over the lease periods or recognized as gain on disposal at the
end of the lease period. The leases have been accounted for as operating
leases. The following table summarizes the pre-tax gains recognized for the
periods presented (amounts in thousands):

|                        |  |                    |     |                   |   |                   |  |                   |       |  |   |       | 
|----------------------- |  | ------------------ | --- | ----------------- | - | ----------------- |  | ----------------- | ----- |  | - | ----- | 
|                        |  | Three Months Ended |     | Nine Months Ended |  
|Classification of Gain  |  | October 31,
 2008  |     | October 31,
 2007 |   | October 31,
 2008 |  | October 31,
 2007 |      
|                        |  |                    |     |                   |   |                   |  |                   |      
|                        |  |                    |     |                   |   |                   |  |                   |      
|Continuing Operations   |  | $                  | 323 |                   | $ | 491               |  | $                 | 971   |  | $ | 1,357 | 
|Discontinued Operations |  |                    | -   |                   |   | 825               |  |                   | 97    |  |   | 7,086 | 
|                        |  |                    |     |                   |   |                   |  |                   |       |  |   |       | 
|                        |  |                    |     |                   |   |                   |  |                   |       |  |   |       | 
|Total Pre-Tax Gain      |  | $                  | 323 |                   | $ | 1,316             |  | $                 | 1,068 |  | $ | 8,443 | 
|                        |  |                    |     |                   |   |                   |  |                   |       |  |   |       | 

The
following table summarizes the components of the sale and leaseback transaction
at October 31, 2008 (dollar amounts in thousands):

|                                                             |  |                        |    |               |   |                 |  |   |        | 
|------------------------------------------------------------ |  | ---------------------- | -- | ------------- | - | --------------- |  | - | ------ | 
|Property
 Category                                           |  | Number of 
 Properties |    | Deferred Gain |   | Recognized Gain | 
|                                                             |  |                        |    |               |   |                 | 
|                                                             |  |                        |    |               |   |                 |  |   |        | 
|Vacated                                                      |  |                        | 62 |               | $ | -               |  | $ | 7,711  | 
|Leased until
 January 31, 2010                               |  |                        | 13 |               |   | 3,529           |  |   | 876    | 
|Leased until
 January 31, 2010 (2 month
 termination clause) |  |                        | 11 |               |   | 829             |  |   | 1,860  | 
|                                                             |  |                        |    |               |   |                 |  |   |        | 
|                                                             |  |                        |    |               |   |                 |  |   |        | 
|Total                                                        |  |                        | 86 |               | $ | 4,358           |  | $ | 10,447 | 
|                                                             |  |                        |    |               |   |                 |  |   |        | 

Future
amortization of the deferred gain is as follows (amounts in thousands):

| |                           |  |              |       | 
| | ------------------------- |  | ------------ | ----- | 
| | Years Ended 
 January 31, |  | Amortization |      
| |                           |  |              |      
| |                           |  |              |       | 
| | Remainder of
 2009        |  | $            | 324   | 
| | 2010                      |  |              | 1,294 | 
| | 2011                      |  |              | 539   | 
| | 2012                      |  |              | 539   | 
| | 2013                      |  |              | 539   | 
| | Thereafter                |  |              | 1,123 | 
| |                           |  |              |       | 
| | Total                     |  | $            | 4,358 | 
| |                           |  |              |       | 

On
July 28, 2006, the Company completed a transaction for the sale and leaseback
of one store under an initial three-year lease term. A pre-tax gain, classified
as continuing operations, of approximately $1.7 million (net of expenses)
resulted from this sale. The Company has also deferred approximately $0.4 million
of the gain at October 31, 2008, based upon the present value of the

16

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minimum lease
payments and will amortize this deferred gain as a reduction to lease expense
over the lease term. The lease has been accounted for as an operating lease.

In
addition to the leaseback transactions described above, the Company is
committed under operating leases for certain retail store locations. The lease
agreements are for varying terms through fiscal year 2011 and contain renewal
options for additional periods. Real estate taxes, insurance and maintenance
costs are generally paid by the Company. Contingent rentals based on sales
volume are not significant. Certain leases contain scheduled rent increases and
rent expense is recognized on a straight-line basis over the term of the
leases.

The
following table is a summary of future rental activity under operating leases
(amounts in thousands):

|                               |  |                   |        |                     |   |                   |   |       |      |   |   |        | 
|------------------------------ |  | ----------------- | ------ | ------------------- | - | ----------------- | - | ----- | ---- | - | - | ------ | 
|Years Ended 
 January 31       |  | Minimum 
 Rentals |        | Gain 
 Amortization |   | Sublease 
 Income |   | Total |     
|                               |  |                   |        |                     |   |                   |   |       |     
|                               |  |                   |        |                     |   |                   |   |       |     
|Remainder of
 January 31, 2009 |  | $                 | 1,567  |                     | $ | (415              | ) | $     | (50  | ) | $ | 1,102  | 
|2010                           |  |                   | 4,695  |                     |   | (1,662            | ) |       | (134 | ) |   | 2,899  | 
|2011 (a)                       |  |                   | 3,141  |                     |   | (906              | ) |       | (70  | ) |   | 2,165  | 
|2012 (a)                       |  |                   | 2,591  |                     |   | (795              | ) |       | (5   | ) |   | 1,791  | 
|2013 (a)                       |  |                   | 2,214  |                     |   | (640              | ) |       | -    |   |   | 1,574  | 
|Thereafter
 (a)                |  |                   | 4,163  |                     |   | (1,123            | ) |       | -    |   |   | 3,040  | 
|                               |  |                   |        |                     |   |                   |   |       |      |   |   |        | 
|Total                          |  | $                 | 18,371 |                     | $ | (5,541            | ) | $     | (259 | ) | $ | 12,571 | 
|                               |  |                   |        |                     |   |                   |   |       |      |   |   |        | 

| |     |                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Amounts
 include minimum rentals related to lease renewal options assumed to be
 exercised in the amounts of $2,214,000 for the fiscal years ended January 31,
 2011, 2012 and 2013 and $4,163,000 for the thereafter category.

Note 5. Fair
Value

Effective
February 1, 2008, the Company adopted SFAS 157, which provides a framework
for measuring fair value under GAAP. SFAS 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also eliminated the deferral of gains and losses at
inception of certain derivative contracts whose fair value was not evidenced by
market observable data. SFAS 157 requires that the impact of this change in
accounting for derivative contracts be recorded as an adjustment to beginning
retained earnings in the period of adoption. There was no impact on the
beginning balance of retained earnings as a result of adopting SFAS 157 because
the Company held no financial instruments in which a gain or loss at inception
was deferred. For additional information on how the Company measures fair
value, see Note 2. Financial
assets and liabilities measured at fair

17

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value at
October 31, 2008 on a recurring basis are summarized below (amounts in
thousands):

|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|----------------------- |  | ------- | ------ | ------- | - | ------- |  | ---------------- | - |  | - | ------ | 
|                        |  | Level 1 |        | Level 2 |   | Level 3 |  | Total Fair Value |  
|                        |  |         |        |         |   |         |  |                  |  
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|Cash
 Equivalents       |  | $       | 65,284 |         | $ | -       |  | $                | - |  | $ | 65,284 | 
|Restricted
 Investments |  |         | 1,571  |         |   | -       |  |                  | - |  |   | 1,571  | 
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|Total Assets            |  | $       | 66,855 |         | $ | -       |  | $                | - |  | $ | 66,855 | 
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|Derivative
 Liabilities |  | $       | -      |         | $ | 1,866   |  | $                | - |  | $ | 1,866  | 
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 
|Total
 Liabilities      |  | $       | -      |         | $ | 1,866   |  | $                | - |  | $ | 1,866  | 
|                        |  |         |        |         |   |         |  |                  |   |  |   |        | 

Note 6. Business
Combinations

On
October 30, 2007, the Company acquired 74% of the outstanding membership units
of One Earth Energy, LLC (One Earth). The results of One Earths operations
have been included in the consolidated financial statements subsequent to the
acquisition date and are included in the Companys alternative energy segment.
The aggregate purchase price was $50.8 million, all of which was cash. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (amounts in thousands):

|                               |  |   |         |  
|------------------------------ |  | - | ------- | -
|Cash                           |  | $ | 59,313  |  
|Property,
 plant and equipment |  |   | 9,899   |  
|Prepaid
 expenses              |  |   | 307     |  
|Prepaid loan
 fees             |  |   | 1,012   |  
|                               |  |   |         |  
|Total assets acquired          |  |   | 70,531  |  
|Current
 liabilities           |  |   | (1,922  | )
|Long term
 debt                |  |   | (1,010  | )
|Minority
 interest             |  |   | (16,832 | )
|                               |  |   |         |  
|Net purchase
 price            |  | $ | 50,767  |  
|                               |  |   |         |  

Prepaid
loan fees have an estimated useful life of 6 years. One Earth is a development
stage entity that has commenced construction of an ethanol production facility
in Gibson City, Illinois, which has a design capacity of 100 million gallons of
ethanol annually. The Company expects One Earth to begin ethanol production by
the second quarter of fiscal year 2009.

The
unaudited financial information in the table below summarizes the combined
results of operations of the Company and One Earth, on a pro forma basis, as
though the companies had been combined as of the beginning of the period
presented. The pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would
have been achieved if the acquisitions had taken place at the beginning of the
period presented. The pro forma financial information for the period presented
includes adjustments to interest income and

18

---



expense and
related income tax effects (in thousands, except per share data):

|                              |  |                                      |        |                                     |   |         | 
|----------------------------- |  | ------------------------------------ | ------ | ----------------------------------- | - | ------- | 
|                              |  | Three Months Ended
 October 31, 2007 |        | Nine Months Ended
 October 31, 2007 |  
|                              |  |                                      |        |                                     |  
|                              |  |                                      |        |                                     |   |         | 
|Net sales
 and revenue        |  | $                                    | 53,402 |                                     | $ | 146,852 | 
|Net income                    |  | $                                    | 14,582 |                                     | $ | 27,804  | 
|Basic net
 income per share   |  | $                                    | 1.40   |                                     | $ | 2.65    | 
|Diluted net
 income per share |  | $                                    | 1.24   |                                     | $ | 2.34    | 

Note 7. Other
Assets

The
components of other assets at October 31, 2008, January 31, 2008 and October
31, 2007 are as follows (amounts in thousands):

|                     |  |                   |        |                   |   |                   |  |   |        | 
|-------------------- |  | ----------------- | ------ | ----------------- | - | ----------------- |  | - | ------ | 
|                     |  | October 31,
 2008 |        | January 31,
 2008 |   | October 31,
 2007 | 
|                     |  |                   |        |                   |   |                   | 
|                     |  |                   |        |                   |   |                   |  |   |        | 
|Prepaid loan
 fees   |  | $                 | 4,761  |                   | $ | 5,187             |  | $ | 5,071  | 
|Prepaid
 commissions |  |                   | 7,896  |                   |   | 9,208             |  |   | 9,221  | 
|Equipment
 deposit   |  |                   | -      |                   |   | 293               |  |   | -      | 
|Other                |  |                   | 204    |                   |   | 115               |  |   | 338    | 
|                     |  |                   |        |                   |   |                   |  |   |        | 
|Total                |  | $                 | 12,861 |                   | $ | 14,803            |  | $ | 14,630 | 
|                     |  |                   |        |                   |   |                   |  |   |        | 

Prepaid
loan fees represent amounts paid to obtain mortgage debt, borrowings under the
Companys line of credit and ethanol construction loans. Such amounts are
amortized as interest expense.

Prepaid
commissions represent sales commissions paid in connection with extended
warranties sold by the Companys retail sale staff. Such amounts are
capitalized and amortized ratably over the life of the extended warranty plan
sold.

Note 8. Long
TermDebt and Interest Rate Swaps

During
the first nine months of fiscal year 2008, Levelland Hockley borrowed $19.8
million under its construction loan agreement to fund construction of its
ethanol plant. During the second quarter of fiscal year 2008, pursuant to the
terms of the construction loan agreement, Levelland Hockley converted the
construction loan into a permanent term loan. Beginning with the first monthly
payment on June 30, 2008, payments will be due in 59 equal monthly payments of
principal plus accrued interest with the principal portion calculated based on
a 120 month amortization schedule. One final installment will be required on
the maturity date (June 30, 2013) for the remaining unpaid principal balance
with accrued interest. The term loan bears interest at a floating rate of 400
basis points above LIBOR (7.1% at October 31, 2008), adjusted monthly through
the maturity date.

19

---



Levelland
Hockley entered into a forward interest rate swap in the notional amount of
$43.7 million during fiscal year 2007. The swap effectively fixed the variable
interest rate, for the first two years, of the term loan subsequent to the plant
completion date at 7.89%. The swap settlements commenced as of May 31, 2008 and
terminate on May 31, 2010. At October 31, 2008, the Company has recorded a
liability of $407,000 related to the fair value of the swap. The change in fair
value was recorded in the Consolidated Condensed Statements of Income.

During
the first nine months of fiscal year 2008, One Earth borrowed $32.8 million
under its construction loan agreement to fund construction of its ethanol
plant.

One
Earth entered into a forward interest rate swap in the notional amount of $50.0
million during fiscal year 2007. The swap effectively fixed a portion of the
variable interest rate of the term loan subsequent to the plant completion date
at 7.9%. The swap settlements commence as of July 31, 2009 and terminate on
July 8, 2014. At October 31, 2008, the Company has recorded a liability of
$1,459,000 related to the fair value of the swap. The change in fair value was
recorded in the Consolidated Condensed Statements of Income.

Note 9. Stock
Option Plans

The
Company has stock-based compensation plans under which stock options have been
granted to directors, officers and key employees at the market price on the
date of the grant.

No
options have been granted since fiscal year 2004. The fair values of options
granted were estimated as of the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the fiscal year ended January 31, 2005: risk-free interest rate of 4.7%,
expected volatility of 65.4% and a weighted average stock option life of nine
years for all grants.

The
total intrinsic value of options exercised during the nine months ended October
31, 2008 and 2007 was approximately $2.2 million and $4.9 million,
respectively, resulting in tax deductions of approximately $0.9 million and
$1.7 million, respectively. The following table summarizes options exercised
and canceled or expired during the nine months ended October 31, 2008:

|                                 |  |        |           |                                  |   |                                               |  |                                            |     |  |   |       | 
|-------------------------------- |  | ------ | --------- | -------------------------------- | - | --------------------------------------------- |  | ------------------------------------------ | --- |  | - | ----- | 
|                                 |  | Shares |           | Weighted Average
 Exercise Price |   | Weighted Average
 Remaining
 Contractual Term |  | Aggregate
 Intrinsic Value
 (in thousands) |    
|                                 |  |        |           |                                  |   |                                               |  |                                            |    
|Outstanding
 at January 31, 2008 |  |        | 3,016,422 |                                  | $ | 9.16                                          |  |                                            |     |  |   |       | 
|Exercised                        |  |        | (299,021  | )                                | $ | 4.86                                          |  |                                            |     |  |   |       | 
|Forfeited                        |  |        | (2,400    | )                                | $ | 12.64                                         |  |                                            |     |  |   |       | 
|                                 |  |        |           |                                  |   |                                               |  |                                            |     |  |   |       | 
|Outstanding
 at October 31, 2008 |  |        | 2,715,001 |                                  | $ | 9.63                                          |  |                                            | 3.0 |  | $ | 1,548 | 
|Exercisable
 at October 31, 2008 |  |        | 2,661,033 |                                  | $ | 9.57                                          |  |                                            | 2.9 |  | $ | 1,548 | 

20

---



At
October 31, 2008, there was approximately $0.4 million (pre-tax) of
unrecognized compensation cost related to nonvested stock options, which is
expected to be recognized over a weighted average period of 0.6 years.

Note 10. (Loss)
Income Per Share from Continuing Operations

The
following table reconciles the computation of basic and diluted net income per
share from continuing operations for each period presented (in thousands,
except per share amounts):

|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|----------------------------------------------------------- |  | ------------------------------------ | ------ | ----------------------------------- |  | ---------- |  | ------ | ----- | ------ | - | ---------- |  |  | ------ |  | - | ---- | 
|                                                            |  | Three Months Ended
 October 31, 2008 |        | Nine Months Ended
 October 31, 2008 | 
|                                                            |  |                                      |        |                                     | 
|                                                            |  | (Loss)                               |        | Shares                              |  | Per
 Share |  | Income |       | Shares |   | Per
 Share | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            | 
|Basic (loss)
 income per share from continuing operations   |  | $                                    | (425   | )                                   |  | 9,937      |  | $      | (0.05 | )      | $ | 2,398      |  |  | 10,389 |  | $ | 0.23 | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|Effect of
 stock options                                    |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  | 640    |  |   |      | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|Diluted
 (loss) income per share from continuing operations |  | $                                    | (425   | )                                   |  | 9,937      |  | $      | (0.05 | )      | $ | 2,398      |  |  | 11,029 |  | $ | 0.22 | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|                                                            |  | Three Months Ended
 October 31, 2007 |        | Nine Months Ended
 October 31, 2007 | 
|                                                            |  |                                      |        |                                     | 
|                                                            |  | Income                               |        | Shares                              |  | Per
 Share |  | Income |       | Shares |   | Per
 Share | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            | 
|Basic income
 per share from continuing operations          |  | $                                    | 11,314 |                                     |  | 10,433     |  | $      | 1.08  |        | $ | 21,313     |  |  | 10,509 |  | $ | 2.03 | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|Effect of
 stock options                                    |  |                                      |        |                                     |  | 1,317      |  |        |       |        |   |            |  |  | 1,355  |  |   |      | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 
|Diluted
 income per share from continuing operations        |  | $                                    | 11,314 |                                     |  | 11,750     |  | $      | 0.96  |        | $ | 21,313     |  |  | 11,864 |  | $ | 1.79 | 
|                                                            |  |                                      |        |                                     |  |            |  |        |       |        |   |            |  |  |        |  |   |      | 

For
the three months ended October 31, 2008 and 2007, a total of 2,715,001 shares
and 165,119 shares, respectively, and for the nine months ended October 31,
2008 and 2007, a total of 286,536 shares and 165,119 shares, respectively,
subject to outstanding options were not included in the common equivalent
shares outstanding calculation as the effect from these shares is antidilutive.

Note 11. Synthetic
Fuel

Income
from continuing operations for the first nine months of fiscal year 2008
includes approximately $0.7 million of pre-tax investment income from the sales
of the Companys entire partnership interests in Colona SynFuel Limited
Partnership, L.L.L.P., (Colona) and Somerset Synfuel, L.P. (Somerset). This
income represents the estimated final settlements for calendar year 2007
production as all synthetic fuel production ceased during fiscal year 2007. As
the Section 29/45K program expired December 31, 2007, the Company does not
expect significant additional income from these sales. During the third quarter
and first nine months of fiscal year 2007, the Company recorded approximately
$1.9 million of loss and $8.3 million of income, respectively, from these
sales.

21

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The
Company also sold its membership interest in the limited liability company that
owned a synthetic fuel facility in Gillette, Wyoming. The plant was
subsequently sold and during the third quarter of fiscal year 2006, the Company
modified its agreement with the owners and operators of the synthetic fuel
facility. Based on the terms of the modified agreement, the Company currently
is not able to determine the likelihood and timing of collecting payments
related to production occurring after September 30, 2006. Thus, the Company
cannot currently determine the timing of income recognition, if any, related to
production occurring subsequent to September 30, 2006. The Company did not
recognize any income from this sale during the first nine months of fiscal
years 2008 or 2007.

Below
is a table summarizing the income (loss) from the sales, net of certain
expenses, of the Companys interests in synthetic fuel entities (in thousands):

|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 
|------------------------------ |  | ------------------------------- | -- | ------------------------------ | - | ------ | - | ---- | --- |  | - | ----- | 
|                               |  | Three Months Ended
 October 31, |    | Nine Months Ended
 October 31, |  
|                               |  | 2008                            |    | 2007                           |   | 2008   |   | 2007 |    
|                               |  |                                 |    |                                |   |        |   |      |    
|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 
|February 1,
 1999 Colona sale  |  | $                               | -  |                                | $ | (738   | ) | $    | 186 |  | $ | 2,156 | 
|July 31,
 2000 Colona sale     |  |                                 | -  |                                |   | (589   | ) |      | 149 |  |   | 1,720 | 
|May 31, 2001
 Colona sale      |  |                                 | -  |                                |   | (523   | ) |      | 132 |  |   | 1,529 | 
|October 1,
 2005 Somerset sale |  |                                 | 21 |                                |   | (10    | ) |      | 224 |  |   | 2,874 | 
|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 
|                               |  | $                               | 21 |                                | $ | (1,860 | ) | $    | 691 |  | $ | 8,279 | 
|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 

22

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Note 12. Investments

The
following tables summarize investments at October 31, 2008, January 31, 2008
and October 31, 2007 (amounts in thousands):

|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|--------------------------------- |  | ----------- | ---- | -------- | ---------- | -------------- | ------------------ | ------------------- | - | ----------------- |  | - | ----- |  |  | 
|Debt
 Securities October 31, 2008 |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|Investment                        |  | Coupon Rate |      | Maturity |            | Classification |                    | Fair Market 
 Value |   | Carrying 
 Amount | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   | 
|United
 States Treasury Bill      |  |             | 1.55 | %        | 12/11/2008 |                | Held to 
 Maturity |                     | $ | 1,571             |  | $ | 1,571 | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|Debt
 Securities January 31, 2008 |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|Investment                        |  | Coupon Rate |      | Maturity |            | Classification |                    | Fair Market 
 Value |   | Carrying 
 Amount | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|United
 States Treasury Bill      |  |             | 2.82 | %        | 2/28/2008  |                | Held to 
 Maturity |                     | $ | 1,548             |  | $ | 1,548 | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|Debt
 Securities October 31, 2007 |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|Investment                        |  | Coupon Rate |      | Maturity |            | Classification |                    | Fair Market 
 Value |   | Carrying 
 Amount | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       |  |  | 
|United
 States Treasury Bill      |  |             | 4.24 | %        | 11/29/2007 |                | Held to 
 Maturity |                     | $ | 1,530             |  | $ | 1,530 | 
|                                  |  |             |      |          |            |                |                    |                     |   |                   |  |   |       | 

There
were no unrealized holding gains or losses in fiscal year 2008. On August 29,
2007, US BioEnergy Corporation completed the acquisition of Millennium Ethanol,
LLC (Millennium). In connection with the acquisition, the Company received
3,693,858 shares of US BioEnergy Common Stock and approximately $4.8 million of
cash as total consideration for its interest in Millennium based upon the
conversion of the Companys $14 million convertible secured promissory note,
accrued interest and related purchase rights. The Company recorded a realized
gain (pre-tax) of $27.4 million as a result of this transaction. During the
remainder of the third quarter of fiscal year 2007, the Company recorded an
unrealized loss (pre-tax) of $10.3 million related to its holdings of US
BioEnergy common stock.

The
Company has approximately $933,000 at October 31, 2008, January 31, 2008 and
October 31, 2007 on deposit with the Florida Department of Financial Services
to secure its obligation to fulfill future obligations related to extended
warranty contracts sold in the state of Florida. The deposits earned 3.1%, 6.3%
and 5.5% at October 31, 2008, January 31, 2008 and October 31, 2007,
respectively.

23

---



The
following table summarizes the carrying value of equity method investments at
October 31, 2008, January 31, 2008 and October 31, 2007 (amounts in thousands):

|                                 |  |                  |        |                  |   |                  |  |   |        | 
|-------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ------ | 
|Entity                           |  | October 31, 2008 |        | January 31, 2008 |   | October 31, 2007 | 
|                                 |  |                  |        |                  |   |                  | 
|                                 |  |                  |        |                  |   |                  | 
|Big River Resources,
 LLC        |  | $                | 25,357 |                  | $ | 22,353           |  | $ | 21,936 | 
|Patriot
 Renewable Fuels, LLC    |  |                  | 16,192 |                  |   | 16,395           |  |   | 17,074 | 
|                                 |  |                  |        |                  |   |                  |  |   |        | 
|Total Equity
 Method Investments |  | $                | 41,549 |                  | $ | 38,748           |  | $ | 39,010 | 
|                                 |  |                  |        |                  |   |                  |  |   |        | 

The
Company owns 10% of Big River and 23% of Patriot based upon its capital
investment of $20 million in Big River and $16 million in Patriot.

During
the third quarter of fiscal years 2008 and 2007, the Company recorded income of
$1,598,000 and $583,000, respectively as its share of earnings from Big River.
During the first nine months of fiscal years 2008 and 2007, the Company
recorded income of approximately $3.4 million and $2.0 million, respectively,
as its share of earnings from Big River.

The
Company has capitalized interest included in equity method investments of
$1,408,000 and $980,000 at October 31, 2008 and 2007, respectively, as Patriot
completed the construction of its ethanol plant and commenced production
operations during the second quarter of fiscal year 2008. During the third
quarter of fiscal years 2008 and 2007, the Company recorded a loss of $554,000
(including a $149,000 unrealized loss on interest rate swaps) and $48,000,
respectively, as its share of earnings from Patriot. During the first nine
months of fiscal years 2008 and 2007, the Company recorded a loss of $439,000
(including a $119,000 unrealized gain on interest rate swaps) and income of
$94,000, respectively, as its share of earnings from Patriot. Undistributed
earnings of equity method investees totaled approximately $5.0 million and $2.0
million at October 31, 2008 and 2007, respectively.

Note 13. Income Taxes

The
Company files a U.S. federal income tax return and income tax returns in
various states. In general, the Company is no longer subject to U.S. federal,
state or local income tax examinations by tax authorities for years ended
January 31, 2004 and prior. Included in the Companys federal and state income
tax returns is its proportionate share of the taxable income or loss of incorporated
limited liability companies that have been elected to be treated as
partnerships for tax purposes (pass-through entities.) The Companys
financial statements do not include any provision or benefit for income taxes
on the income or loss of pass-through entities attributable to the
non-controlling interests.

The
effective tax rate on consolidated pre-tax income from continuing operations
was 74.7% for the nine months ended October 31, 2008, 36.9% for the year ended
January 31, 2008 and 38.6% for the nine months ended October 31, 2007. An
adjustment for recognizing the benefit of certain statutes of limitations
expiring relating to uncertain tax positions of (16.9)% is reflected in the

24

---



effective rate
for the nine months ended October 31, 2008. In addition, a benefit of (32.5)%
was recognized for a federal tax credit which is earned by Levelland Hockley as
a small ethanol producer. The provision for state taxes is approximately 7.0%
and 5.0% for the nine months ended October 31, 2008 and 2007, respectively. The
provision for state taxes was approximately 2% for the year ended January 31,
2008. The effective tax rate was increased for the first nine months of fiscal
year 2008 by approximately 66.9% from the net loss of pass-through entities
(Levelland Hockley and One Earth) that is allocated to non-controlling
interests.

The
Company adopted the provisions of FIN 48 on February 1, 2007. As a result of
the adoption of FIN 48, the Company recorded a $287,000 decrease to retained earnings.
As of October 31, 2008, total unrecognized tax benefits were $1,012,000 and
accrued penalties and interest were $163,000. If the company were to prevail on
all unrecognized tax benefits recorded, approximately $258,000 of the reserve
would benefit the effective tax rate. In addition, the impact of penalties and
interest would also benefit the effective tax rate. Interest and penalties
associated with unrecognized tax benefits are recorded within income tax
expense.

On
a quarterly and annual basis, the Company accrues for the effects of open
uncertain tax positions and the related potential penalties and interest. The
Company recognized a benefit of approximately $277,000 during the first nine
months of fiscal year 2008, related to statutes of limitations expiring in
certain states.

It
is reasonably possible that the amount of the unrecognized tax benefit with
respect to certain unrecognized tax positions will increase or decrease during
the next 12 months; however, the Company does not expect the change to have a
significant effect on results of operations or financial position. A
reconciliation of the beginning and ending amount of unrecognized tax benefits,

25

---



including
interest and penalties, is as follows (amounts in thousands):

|                                                |  |   |       |  
|----------------------------------------------- |  | - | ----- | -
|Unrecognized
 tax benefits, February 1, 2008    |  | $ | 1,394 |  
|Changes for
 tax positions for prior years, net |  |   | (219  | )
|Changes for
 current year tax positions         |  |   | -     |  
|                                                |  |   |       |  
|Unrecognized
 tax benefits, October 31, 2008    |  | $ | 1,175 |  
|                                                |  |   |       |  

Note 14. Discontinued
Operations and Assets Held for Sale

During
the first nine months of fiscal year 2008, the Company closed eight stores in
which the Company vacated the market or will not have a further continuing
involvement with the related property. These stores, and certain other stores
closed in previous periods, were classified as discontinued operations for all
periods presented. Vacant land adjacent to a closed store is classified as held
for sale. The net assets of the land at October 31, 2008 were approximately
$0.1 million. The Company expects to sell the land within the next 12 months
through normal real estate channels.

Below
is a table reflecting certain items of the income statement that were
reclassified as discontinued operations for the period indicated:

|                            |  |                                  |       |                                |   |        |   |      |       |   |   |        |  
|--------------------------- |  | -------------------------------- | ----- | ------------------------------ | - | ------ | - | ---- | ----- | - | - | ------ | -
|                            |  | Three Months Ended 
 October 31, |       | Nine Months Ended
 October 31, |  
|                            |  |                                  |       |                                |  
|                            |  | 2008                             |       | 2007                           |   | 2008   |   | 2007 |      
|                            |  |                                  |       |                                |   |        |   |      |      
|                            |  | (In Thousands)                   |      
|                            |  |                                  |      
|Net sales
 and revenue      |  | $                                | 1,007 |                                | $ | 10,659 |   | $    | 4,211 |   | $ | 48,033 |  
|Cost of
 sales              |  |                                  | 1,056 |                                |   | 8,593  |   |      | 3,614 |   |   | 37,797 |  
|Loss before
 income taxes   |  |                                  | (428  | )                              |   | (814   | ) |      | (846  | ) |   | (3,174 | )
|Benefit for
 income taxes   |  |                                  | 203   |                                |   | 279    |   |      | 339   |   |   | 1,003  |  
|Gain on
 disposal           |  |                                  | -     |                                |   | 6,041  |   |      | 305   |   |   | 13,802 |  
|Provision
 for income taxes |  |                                  | -     |                                |   | (2,154 | ) |      | (114  | ) |   | (4,934 | )
|Net income
 (loss)          |  | $                                | (225  | )                              | $ | 3,352  |   | $    | (316  | ) | $ | 6,697  |  

Note 15. Commitments
and Contingencies

Levelland Hockley County Ethanol, LLC (Levelland Hockley) entered into a lease agreement with Layne Christensen Company (Layne) for certain water treatment equipment for its ethanol plant. Levelland
Hockley filed a lawsuit against Layne in the District Court, Hockley County, Texas on April 30, 2008, generally alleging that Layne was negligent in its design and construction of the water treatment facility and breached its various process
guaranties and warranties. On May 28, 2008, the lawsuit filed by Levelland Hockley was removed to the United States District Court for the Northern District of Texas, Lubbock Division. On May 14, 2008, Layne filed a lawsuit against Levelland in the
United States District Court of Kansas at Kansas City, Mo. On May 19, 2008, Layne amended its original complaint. Layne is suing Levelland Hockley for interest on late lease payments, repossession of the water treatment facility that is the subject
of the lease and that all lease payments due under the lease should be accelerated and be immediately due and payable. The Company believes that Levelland Hockley has meritorious defenses to the claims and that Levelland Hockley intends to
vigorously defend against them.

26

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In
July 2002, Levelland Hockley entered into an agreement with RIO Technical
Services, Inc. (RIO) regarding the planning, financing, design, construction,
and operation of Levellands ethanol plant. RIO is a related party, as certain
officers of RIO own equity interests in Levelland Hockley. The Company
estimates that fees for these services will be approximately $2.8 million, of
which approximately $2.3 million has been spent through October 31, 2008. The
Company expects to pay the remaining amount due from a restricted cash account
held in escrow. In addition, Levelland Hockley paid RIO approximately $3.6
million as compensation for RIOs evaluation and assistance for Levelland
Hockley to obtain financing. These costs are recorded as either prepaid loan
fees or equity issuance costs.

Levelland
Hockley has forward purchase contracts for approximately 863,000 bushels of
sorghum, the principal raw material for its ethanol plant. Levelland Hockley
expects to take delivery of the sorghum through October 2008. The unrealized
gain of such contracts was approximately $25,000 at September 30, 2008.

Levelland
Hockley has sales commitments for approximately 1,227,000 gallons of ethanol
and approximately 36,000 tons of distiller grains. Levelland Hockley expects to
deliver the ethanol and distiller grains through October 2008. The unrealized
gain of such contracts was approximately $0.3 million at September 30, 2008.

In
May 2007, One Earth entered into an agreement with a designer/builder for the
construction of One Earths ethanol plant. The designer/builder is responsible
for all engineering, labor, materials and equipment to design, construct,
startup and achieve guaranteed performance criteria of the plant. The contract
price is approximately $120.2 million, subject to adjustments as provided by
the general conditions of the agreement, of which approximately $85.8 million
has been spent through October 31, 2008. One Earth has also entered into other
construction and facility related contracts. Some of these contracts have been
completed and all required funds have been expended as of October 31, 2008. The
total of other incomplete construction and facility related contracts is
approximately $11.6 million, of which approximately $9.6 million has been spent
through October 31, 2008.

Note 16. Segment
Reporting

The
Company has two reportable segments, consumer electronics and appliance
retailing (retail) and alternative energy. The Company evaluates the
performance of each reportable segment based on segment profit. Segment profit
excludes income taxes, certain interest expense, discontinued operations,
certain interest income and certain other items that are included in net income
determined in accordance with accounting principles generally accepted in the
United States of America. Segment profit includes realized and unrealized gains
and losses on derivative financial instruments.

27

---



The
following tables summarize segment business activities in the periods presented
(amounts in thousands):

|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                                                    |  | Three Months Ended 
 October 31, |        | Nine Months Ended 
 October 31, |  
|                                                                                    |  |                                  |        |                                 |  
|                                                                                    |  | 2008                             |        | 2007                            |   | 2008   |   | 2007 |        
|                                                                                    |  |                                  |        |                                 |   |        |   |      |        
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Net sales
 and revenue:                                                             |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Retail                                                                              |  | $                                | 41,235 |                                 | $ | 53,402 |   | $    | 127,320 |   | $ | 146,852 |  
|Alternative
 energy                                                                 |  |                                  | 22,444 |                                 |   | -      |   |      | 48,468  |   |   | -       |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Total net
 sales and revenues                                                       |  | $                                | 63,679 |                                 | $ | 53,402 |   | $    | 175,788 |   | $ | 146,852 |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Segment gross
 profit (loss):                                                       |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Retail                                                                              |  | $                                | 12,084 |                                 | $ | 15,192 |   | $    | 37,509  |   | $ | 44,919  |  
|Alternative
 energy                                                                 |  |                                  | (2,443 | )                               |   | -      |   |      | (1,753  | ) |   | -       |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Total gross
 profit                                                                 |  | $                                | 9,641  |                                 | $ | 15,192 |   | $    | 35,756  |   | $ | 44,919  |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Segment
 profit (loss):                                                             |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Retail
 segment profit                                                              |  | $                                | 2,833  |                                 | $ | 2,522  |   | $    | 4,582   |   | $ | 6,753   |  
|Alternative
 energy segment (loss) profit                                           |  |                                  | (4,957 | )                               |   | 16,896 |   |      | (3,527  | ) |   | 19,032  |  
|Corporate
 expense                                                                  |  |                                  | (484   | )                               |   | (328   | ) |      | (1,597  | ) |   | (1,701  | )
|Interest
 expense                                                                   |  |                                  | (111   | )                               |   | (47    | ) |      | (332    | ) |   | (704    | )
|Interest
 income                                                                    |  |                                  | 345    |                                 |   | 1,218  |   |      | 1,481   |   |   | 3,046   |  
|Income
 (loss) from synthetic fuel investments                                      |  |                                  | 21     |                                 |   | (1,860 | ) |      | 691     |   |   | 8,279   |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  
|Income
 (loss) from continuing operations before income taxes and minority interest |  | $                                | (2,353 | )                               | $ | 18,401 |   | $    | 1,298   |   | $ | 34,705  |  
|                                                                                    |  |                                  |        |                                 |   |        |   |      |         |   |   |         |  

28

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|                                                    |  |                    |         |                    |   |                    |  |   |         | 
|--------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ------------------ |  | - | ------- | 
|                                                    |  | October 31, 
 2008 |         | January 31, 
 2008 |   | October 31, 
 2007 | 
|                                                    |  |                    |         |                    |   |                    | 
|                                                    |  |                    |         |                    |   |                    | 
|Assets:                                             |  |                    |         |                    |   |                    |  |   |         | 
|Retail                                              |  | $                  | 112,083 |                    | $ | 120,711            |  | $ | 140,351 | 
|Alternative
 energy                                 |  |                    | 233,941 |                    |   | 167,070            |  |   | 178,664 | 
|Corporate                                           |  |                    | 97,085  |                    |   | 121,197            |  |   | 76,996  | 
|                                                    |  |                    |         |                    |   |                    |  |   |         | 
|Total assets                                        |  | $                  | 443,109 |                    | $ | 408,978            |  | $ | 396,011 | 
|                                                    |  |                    |         |                    |   |                    |  |   |         | 
|                                                    |  |                    |         |                    |   |                    |  |   |         | 
|Long-term
 debt and capital lease obligations:      |  |                    |         |                    |   |                    |  |   |         | 
|Retail                                              |  | $                  | -       |                    | $ | -                  |  | $ | -       | 
|Alternative
 energy                                 |  |                    | 73,089  |                    |   | 22,072             |  |   | 8,618   | 
|Corporate                                           |  |                    | 11,428  |                    |   | 13,152             |  |   | 15,600  | 
|                                                    |  |                    |         |                    |   |                    |  |   |         | 
|Total
 long-term debt and capital lease obligations |  | $                  | 84,517  |                    | $ | 35,224             |  | $ | 24,218  | 
|                                                    |  |                    |         |                    |   |                    |  |   |         | 

|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|---------------------------------------------- |  | -------------------------------- | --- | ------------------------------- |  | ---- | - | ---- | --- | - |  | --- | -
|                                               |  | Three Months Ended 
 October 31, |     | Nine Months Ended 
 October 31, | 
|                                               |  |                                  |     |                                 | 
|                                               |  | 2008                             |     | 2007                            |  | 2008 |   | 2007 |    
|                                               |  |                                  |     |                                 |  |      |   |      |    
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Sales of
 products retail segment:             |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Televisions                                    |  |                                  | 53  | %                               |  | 53   | % |      | 51  | % |  | 50  | %
|Appliances                                     |  |                                  | 30  | %                               |  | 30   | % |      | 31  | % |  | 31  | %
|Audio                                          |  |                                  | 7   | %                               |  | 7    | % |      | 6   | % |  | 6   | %
|Video                                          |  |                                  | 2   | %                               |  | 2    | % |      | 2   | % |  | 2   | %
|Other                                          |  |                                  | -   | %                               |  | 1    | % |      | 2   | % |  | 4   | %
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Total                                          |  |                                  | 92  | %                               |  | 93   | % |      | 92  | % |  | 93  | %
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Sales of
 services retail segment:             |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Extended
 service contracts                    |  |                                  | 8   | %                               |  | 7    | % |      | 8   | % |  | 7   | %
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Total retail
 segment sales                    |  |                                  | 100 | %                               |  | 100  | % |      | 100 | % |  | 100 | %
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Sales of
 products alternative energy segment: |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  
|Ethanol and
 related by products               |  |                                  | 100 | %                               |  | -    |   |      | 100 | % |  | -   |  
|                                               |  |                                  |     |                                 |  |      |   |      |     |   |  |     |  

Certain
corporate costs and expenses, including information technology, employee
benefits and other shared services are allocated to the business segments. The
allocations are generally amounts agreed upon by management, which may differ
from amounts that would be incurred if such services were purchased separately
by the business segment. Corporate assets are primarily cash and equivalents,
synthetic fuel accounts receivable and deferred income tax benefits.

Cash,
except for cash held by Levelland Hockley and One Earth, is considered to be
fungible and available for both corporate and segment use dependent on
liquidity requirements. Cash of

29

---



approximately
$0.3 million held by Levelland Hockley will be used to fund remaining
construction costs and provide working capital.

Note 17. Subsequent
Events

On
November 28, 2008, the Company funded a $933,000 convertible promissory note
with Patriot Renewable Fuels, LLC. The promissory note bears interest at an
annual rate of 16% and is for a term of three years.

Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations.

We
are a specialty retailer in the consumer electronics/appliance industry. As of
October 31, 2008, we operated 105 stores in 32 states, predominantly in small
to medium-sized markets under the trade name REX. We recently initiated a
strategic alternative review process for our retail segment. We expect to
consider and evaluate a broad range of alternatives during this process.

In
fiscal year 2006, we entered the alternative energy industry by investing in
several entities organized to construct and, subsequently operate, ethanol
producing plants. As we continue to seek to diversify sources of revenue and
earnings, we have current investments in four entities as of October 31, 2008,
utilizing both debt and equity investments.

Since
fiscal year 1998, we invested in three entities which owned facilities
producing synthetic fuel. These entities earned federal income tax credits
under Section 29/45K of the Internal Revenue Code based on the tonnage and
content of solid synthetic fuel produced and sold to unrelated parties. We have
sold our entire ownership interest in these entities in prior years, and as a
result, receive payments in connection with production of synthetic fuel. These
entities are no longer eligible to receive Section 29/45K income tax credits
subsequent to December 31, 2007 and the facilities have permanently ceased
operations.

Fiscal Year

All
references in this report to a particular fiscal year are to REXs fiscal year
ended January 31. For example, fiscal year 2008 means the period February 1,
2008 to January 31, 2009.

30

---



Results of Operations

The following
table sets forth, for the periods indicated, the relative percentages that
certain income and expense items bear to net sales and revenue:

|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ----- | - | ---- | ----- | - |  | ----- | -
|                                                                                                                            |  | Three Months
 Ended
 October 31, |       | Nine Months
 Ended
 October 31, | 
|                                                                                                                            |  | 2008                             |       | 2007                            |  | 2008  |   | 2007 |      
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |      
|Net sales
 and revenue                                                                                                      |  |                                  | 100.0 | %                               |  | 100.0 | % |      | 100.0 | % |  | 100.0 | %
|Cost of
 sales                                                                                                              |  |                                  | 84.9  |                                 |  | 71.6  |   |      | 79.7  |   |  | 69.4  |  
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  
|Gross profit                                                                                                                |  |                                  | 15.1  |                                 |  | 28.4  |   |      | 20.3  |   |  | 30.6  |  
|Selling,
 general and administrative expenses                                                                               |  |                                  | (21.4 | )                               |  | (26.5 | ) |      | (23.1 | ) |  | (29.0 | )
|Interest
 income                                                                                                            |  |                                  | 0.6   |                                 |  | 2.8   |   |      | 1.0   |   |  | 3.2   |  
|Interest
 expense                                                                                                           |  |                                  | (1.7  | )                               |  | (0.1  | ) |      | (1.2  | ) |  | (0.1  | )
|Loss on
 early termination of debt                                                                                          |  |                                  | -     |                                 |  | -     |   |      | -     |   |  | (0.4  | )
|Gains on
 sale of real estate, net                                                                                          |  |                                  | 3.6   |                                 |  | 0.2   |   |      | 1.3   |   |  | 0.6   |  
|Equity in
 income of unconsolidated ethanol affiliates                                                                      |  |                                  | 1.6   |                                 |  | 1.0   |   |      | 1.7   |   |  | 1.4   |  
|Realized and
 unrealized investment gains, net                                                                              |  |                                  | -     |                                 |  | 32.1  |   |      | -     |   |  | 11.7  |  
|Income
 (loss) from synthetic fuel investments                                                                              |  |                                  | -     |                                 |  | (3.5  | ) |      | 0.4   |   |  | 5.6   |  
|Unrealized
 and realized (losses) gains on derivative financial instruments, net                                            |  |                                  | (1.5  | )                               |  | -     |   |      | 0.3   |   |  | -     |  
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  
|(Loss) income from continuing operations
 before provision for income taxes, minority interest and discontinued
 operations |  |                                  | (3.7  | )                               |  | 34.4  |   |      | 0.7   |   |  | 23.6  |  
|Benefit
 (provision) for income taxes                                                                                       |  |                                  | 0.1   |                                 |  | (13.3 | ) |      | (0.5  | ) |  | (9.1  | )
|Minority
 interest                                                                                                          |  |                                  | 2.9   |                                 |  | 0.1   |   |      | 1.2   |   |  | -     |  
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  
|(Loss)
 income from continuing operations                                                                                   |  |                                  | (0.7  | )                               |  | 21.2  |   |      | 1.4   |   |  | 14.5  |  
|Loss from
 discontinued operations, net of tax                                                                              |  |                                  | (0.3  | )                               |  | (1.0  | ) |      | (0.3  | ) |  | (1.4  | )
|Gain on
 disposal of discontinued operations, net of tax                                                                    |  |                                  | -     |                                 |  | 7.3   |   |      | 0.1   |   |  | 6.0   |  
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  
|Net (loss)
 income                                                                                                          |  |                                  | (1.0  | )%                              |  | 27.5  | % |      | 1.2   | % |  | 19.1  | %
|                                                                                                                            |  |                                  |       |                                 |  |       |   |      |       |   |  |       |  

Business Segment Results

As
discussed in Note 16, our chief operating decision maker (as defined by SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information)
evaluates the operating performance of our business segments using a measure we
call segment profit (loss). Segment profit (loss) includes realized and
unrealized gains and losses on derivative financial instruments. Segment profit
(loss) excludes income taxes, certain interest expense, discontinued
operations, certain interest income and certain other items that are included in
net income determined in accordance with accounting principles generally
accepted in the United States of America. Management believes these are useful
financial measures; however, they should not be construed as being more
important than other comparable GAAP measures.

31

---



Items
excluded from segment profit (loss) generally result from decisions made by
corporate executives. Financing, divestiture and tax structure decisions are
generally made by corporate executives. Excluding these items from our business
segment performance measure enables us to evaluate business segment operating
performance based upon current economic conditions.

The
following table sets forth, for the periods indicated, sales, profits and
losses by segment (amounts in thousands):

|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                                             |  | Three Months Ended
 October 31, |        | Nine Months Ended
 October 31, |  
|                                                                             |  |                                 |        |                                |  
|                                                                             |  | 2008                            |        | 2007                           |   | 2008   |   | 2007 |        
|                                                                             |  |                                 |        |                                |   |        |   |      |        
|                                                                            
|Net sales
 and revenue:                                                      |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Retail                                                                       |  | $                               | 41,235 |                                | $ | 53,402 |   | $    | 127,320 |   | $ | 146,852 |  
|Alternative
 energy                                                          |  |                                 | 22,444 |                                |   | -      |   |      | 48,468  |   |   | -       |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Total net
 sales and revenues                                                |  | $                               | 63,679 |                                | $ | 53,402 |   | $    | 175,188 |   | $ | 146,852 |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Segment
 gross profit (loss):                                                |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Retail                                                                       |  | $                               | 12,084 |                                | $ | 15,192 |   | $    | 37,509  |   | $ | 44,919  |  
|Alternative
 energy                                                          |  |                                 | (2,443 | )                              |   | -      |   |      | (1,753  | ) |   | -       |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Total gross
 profit                                                          |  | $                               | 9,641  |                                | $ | 15,192 |   | $    | 35,756  |   | $ | 44,919  |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Segment
 profit (loss):                                                      |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Retail
 segment profit                                                       |  | $                               | 2,883  |                                | $ | 2,522  |   | $    | 4,582   |   | $ | 6,753   |  
|Alternative
 energy segment (loss) profit                                    |  |                                 | (4,957 | )                              |   | 16,896 |   |      | (3,527  | ) |   | 19,032  |  
|Corporate
 expense                                                           |  |                                 | (484   | )                              |   | (328   | ) |      | (1,597  | ) |   | (1,701  | )
|Interest
 expense                                                            |  |                                 | (111   | )                              |   | (47    | ) |      | (332    | ) |   | (704    | )
|Interest
 income                                                             |  |                                 | 345    |                                |   | 1,218  |   |      | 1,481   |   |   | 3,046   |  
|Income (loss)
 from synthetic fuel investments                               |  |                                 | 21     |                                |   | (1,860 | ) |      | 691     |   |   | 8,279   |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  
|Income from
 continuing operations before income taxes and minority interest |  | $                               | (2,353 | )                              | $ | 18,401 |   | $    | 1,298   |   | $ | 34,705  |  
|                                                                             |  |                                 |        |                                |   |        |   |      |         |   |   |         |  

Retail

The
retail segment includes all of our store and distribution center operations,
our real estate sales and leasing activities and certain administrative
expenses. It excludes results from discontinued operations.

The
net sales and revenue from our retail segment are discussed in the Comparison
of Three Months and Nine Months Ended October 31, 2008 and 2007 discussion
below.

32

---



Retail
segment profit increased $0.4 million (14.3%) to $2.9 million in the third
quarter of fiscal year 2008 from $2.5 million in the third quarter of fiscal
year 2007. The increase in segment profit was primarily related to gains from
the sale of vacant land and the sale and leaseback of our Cheyenne, Wyoming
distribution center of $2.3 million. We had lower gross profit of approximately
$3.1 million, generally reflecting lower sales. The sales decline is a result
of a combination of lower unit volume and lower price points of merchandise
sales. Gross profit percentages were 29.3% and 28.4% for the quarters ended October
31, 2008 and 2007, respectively. The lower gross profit was partially offset by
lower payroll expenses of approximately $0.6 million and lower advertising
expenses of approximately $0.4 million. The decline in sales led to lower sales
commissions paid during the third quarter of fiscal year 2008. Advertising
expenses were lower in the third quarter as a result of our continuing emphasis
to decrease spending in response to the lower sales.

Retail
segment profit decreased $2.2 million (32.1%) to $4.6 million in the first nine
months of fiscal year 2008 from $6.8 million in the first nine months of fiscal
year 2007. The decrease in segment profit was primarily related to lower gross
profit of approximately $7.4 million, generally reflecting lower sales. The
sales decline is a result of a combination of lower unit volume and lower price
points of merchandise sales. Gross profit percentages were 29.5% and 30.6% for
the nine months ended October 31, 2008 and 2007, respectively. The lower gross
profit was partially offset by lower occupancy related expenses of
approximately $1.3 million, payroll expenses of approximately $2.0 million and
lower advertising expenses of approximately $0.8 million. Lower store counts
during fiscal year 2008, primarily from the sale and leaseback transaction with
Klac and other store closings, were the primary reasons for the decline in
occupancy related expenses. The restructuring of our retail operations in
fiscal year 2007 and lower sales commissions caused payroll expenses to decline
during fiscal year 2008. Advertising expenses were lower as a result of our
continuing emphasis to decrease spending in response to the lower sales. In
addition, we recognized gains on sales of real estate of $2.3 million during
the first nine months of fiscal year 2008 compared to $0.9 million during the
first nine months of fiscal year 2007.

Alternative Energy

The
alternative energy segment includes the financial statements of Levelland
Hockley and One Earth, our other equity investments in ethanol facilities, the
income related to those investments and certain administrative expenses.

Levelland
Hockley commenced production operations late in the first quarter of fiscal
year 2008, resulting in net sales and revenue in the third quarter of fiscal
year 2008 increasing to approximately $22.4 million. We had negative gross
profit from these sales of approximately $2.4 million during the third quarter
of fiscal year 2008. Gross profit was negatively affected by high grain prices.
In addition, the spread between ethanol and grain prices was lower than
expected. We expect that commodity price volatility will continue to have a significant impact on
gross profit, possibly negative, the remainder of fiscal year 2008.

Net
sales and revenue for the first nine months of fiscal year 2008 were
approximately $48.5 million. We had negative gross profit from these sales of
approximately $1.8 million.

33

---



Gross profit
was negatively affected by high grain prices. In addition, the spread between
ethanol and grain prices was lower than expected. Levelland Hockley is
currently attempting to develop improved grain purchasing opportunities during
the fourth quarter of fiscal year 2008.

The
following table summarizes sales from Levelland Hockley by product group
(amounts in thousands):

|                        |  |                                 |        |                                |   |      |  |      |        |  |   |   | 
|----------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ---- |  | ---- | ------ |  | - | - | 
|                        |  | Three Months Ended
 October 31, |        | Nine Months Ended
 October 31, |  
|                        |  | 2008                            |        | 2007                           |   | 2008 |  | 2007 |       
|                        |  |                                 |        |                                |   |      |  |      |       
|                        |  |                                 |        |                                |   |      |  |      |       
|Ethanol                 |  | $                               | 18,766 |                                | $ | -    |  | $    | 40,356 |  | $ | - | 
|Dried
 distiller grains |  |                                 | 1,936  |                                |   | -    |  |      | 4,674  |  |   | - | 
|Wet
 distiller grains   |  |                                 | 1,622  |                                |   | -    |  |      | 3,287  |  |   | - | 
|Other                   |  |                                 | 120    |                                |   | -    |  |      | 151    |  |   | - | 
|                        |  |                                 |        |                                |   |      |  |      |        |  |   |   | 
|Total                   |  | $                               | 22,444 |                                | $ | -    |  | $    | 48,468 |  | $ | - | 
|                        |  |                                 |        |                                |   |      |  |      |        |  |   |   | 

The
following table summarizes certain operating data from Levelland Hockley:

|                                                         |  |                                 |        |                                |   |      |  |      |        |  |   |   | 
|-------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ---- |  | ---- | ------ |  | - | - | 
|                                                         |  | Three Months Ended
 October 31, |        | Nine Months Ended
 October 31, |  
|                                                         |  | 2008                            |        | 2007                           |   | 2008 |  | 2007 |       
|                                                         |  |                                 |        |                                |   |      |  |      |       
|                                                         |  |                                 |        |                                |   |      |  |      |       
|Average
 selling price per gallon of ethanol             |  | $                               | 2.32   |                                | $ | -    |  | $    | 2.31   |  | $ | - | 
|Average
 selling price per ton of dried distiller grains |  | $                               | 188.00 |                                | $ | -    |  | $    | 188.00 |  | $ | - | 
|Average
 selling price per ton of wet distiller grains   |  | $                               | 50.00  |                                | $ | -    |  | $    | 53.00  |  | $ | - | 
|Average cost
 per bushel of grain                        |  | $                               | 6.13   |                                | $ | -    |  | $    | 5.95   |  | $ | - | 
|Average cost
 of natural gas (per mmbtu)                 |  | $                               | 11.30  |                                | $ | -    |  | $    | 10.76  |  | $ | - | 

Segment
profit (loss) decreased $21.9 million in the third quarter of fiscal year 2008
from approximately $16.9 million in the third quarter of fiscal year 2007 to a
loss of approximately $5.0 million in the third quarter of fiscal year 2008.
The decrease in segment profit was primarily related to the US BioEnergy
Corporation acquisition of Millennium Ethanol, LLC (Millennium) which
occurred in the third quarter of fiscal year 2007. In connection with the
acquisition, we received 3,693,858 shares of US BioEnergy Common Stock and
approximately $4.8 million of cash as total consideration for our interest in
Millennium based upon the conversion of our $14 million convertible secured
promissory note, accrued interest and related purchase rights. As a result of
the acquisition, we recorded a realized gain (pre-tax) of $27.4 million and an
unrealized loss (pre-tax) of $10.3 million related to our holdings of US
BioEnergy common stock during the third quarter of fiscal year 2007.

During
the quarter ended October 31, 2008, we incurred an impairment charge of $1.3
million related to the write off of goodwill associated with the Levelland
Hockley acquisition.

34

---



Interest
expense increased by $1.0 million in the third quarter of fiscal year 2008; as
Levelland Hockley ceased capitalizing interest on its construction loan upon
the commencement of operations in fiscal year 2008.

During
the quarter ended October 31, 2008, we incurred a realized and unrealized loss
of $0.9 million on derivative financial instruments related to interest rate
swaps at Levelland Hockley and One Earth Energy.

Segment
profit (loss) decreased $22.6 million in the first nine months of fiscal year
2008 from approximately $19.0 million in the first nine months of fiscal year
2007 to a loss of approximately $3.5 million in the first nine months of fiscal
year 2008. The decrease in segment profit was primarily related to the US
BioEnergy Corporation acquisition of Millennium Ethanol, LLC (Millennium) which
occurred in the third quarter of fiscal year 2007 as discussed above.

During
the first nine months of fiscal year 2008, we incurred an impairment charge of
$1.3 million related to the write off of goodwill associated with the Levelland
Hockley acquisition. Interest expense increased by $1.8 million in the first
nine months of fiscal year 2008; as Levelland Hockley ceased capitalizing
interest on its construction loan upon the commencement of operations in fiscal
year 2008.

During
the first nine months of fiscal year 2008, we incurred a realized and
unrealized gain of $0.5 million on derivative financial instruments related to
interest rate swaps at Levelland Hockley and One Earth Energy.

Corporate and Other

Corporate
and other includes certain administrative expenses of the corporate
headquarters, interest expense and interest income not directly allocated to
the retail or alternative energy segments and income from synthetic fuel
investments.

We
recognized income of approximately $21,000 from synthetic fuel investments in
the third quarter of fiscal year 2008 compared to a loss of approximately
$1,860,000 in the third quarter of fiscal year 2007. The current year income
results from an estimated final settlement of monies due from our Somerset
synthetic fuel investment. The loss in the third quarter of fiscal year 2007
resulted from our change in the estimate of the phase out of synthetic fuel
income related to oil prices.

We
sold our entire membership interest in an entity that operated a synthetic fuel
facility in Gillette, Wyoming. During the third quarter of fiscal year 2006, we
modified our agreement with the owners and operators of the synthetic fuel
facility in Gillette, Wyoming. Based on the terms of the modified agreement, we
are not currently able to determine the likelihood and timing of collecting
payments related to production occurring after September 30, 2006. Thus, we
cannot currently determine the timing of income recognition, if any, related to
production occurring subsequent to September 30, 2006. We did not recognize any
income from this sale during the third quarter of fiscal years 2008 or 2007.

Corporate
selling, general and administrative expenses were $0.5 million in the third
quarter

35

---



of fiscal year
2008, consistent with the $0.3 million in the third quarter of fiscal year
2007.

Interest
income was $0.3 million in the third quarter of fiscal year 2008 compared to
$1.2 million in the third quarter of fiscal year 2007. The decline generally
results from lower levels of excess cash in the current year compared to the
prior year and lower interest rates earned on our excess cash.

Interest
expense was $111,000 in the third quarter of fiscal year 2008, consistent with
the $47,000 in the third quarter of fiscal year 2007.

Income
from synthetic fuel investments declined to $0.7 million in the first nine
months of fiscal year 2008 from $8.3 million in the first nine months of fiscal
year 2007. Current year income represents the estimated final settlements as
all synthetic fuel production ceased during fiscal year 2007. As the Section
29/45K program expired December 31, 2007, we do not expect significant
additional income from these sales.

Corporate
selling, general and administrative expenses were $1.6 million in the first
nine months of fiscal year 2008, consistent with the $1.7 million in the first
nine months of fiscal year 2007.

Interest
income was $1.5 million in the first nine months of fiscal year 2008 compared
to $3.0 million in the first nine months of fiscal year 2007. The decline
generally results from lower levels of excess cash in the current year compared
to the prior year and lower interest rates earned on our excess cash.

Interest
expense was $0.3 million in the first nine months of fiscal year 2008 compared
to $0.7 million in the first nine months of fiscal year 2007. The decline
generally results from charges incurred with the early termination of debt in
fiscal year 2007.

Comparison of Three Months and Nine Months
Ended October 31, 2008 and 2007

Net
sales and revenue in the quarter ended October 31, 2008 were $63.7 million
compared to $53.4 million in the prior years third quarter, representing an
increase of $10.3 million or 19.3%. Net sales and revenue do not include sales
from retail stores classified as discontinued operations.

The
increase was primarily caused by $22.4 million of sales from our alternative
energy segment as Levelland Hockley commenced operations late in the first
quarter of fiscal year 2008. This positive trend was partially offset by a
decrease in sales at closed retail stores that are classified as continuing
operations. Sales from these retail stores declined by $1.8 million in the
third quarter of fiscal year 2008 compared to fiscal year 2007. In addition, we
experienced a decrease in comparable retail store sales of 13.6% for the third
quarter of fiscal year 2008. We consider a retail store to be comparable after
it has been open six full fiscal quarters. Comparable retail store sales do not
include sales of extended service contracts. We expect comparable retail store
sales to be equal to or worse than the third quarter of fiscal year 2008
performance during the fourth quarter of fiscal year 2008.

The
television category negatively impacted comparable retail store sales by 7.9%.
The television category performance was primarily due to declines in projection
and analog television sets

36

---



outpacing the
gains we made in plasma and LCD television sets. The appliance category
negatively impacted comparable retail store sales by 4.0%. The appliance
category performance was primarily due to lower sales of air conditioners and a
general decline in sales of a majority of our appliance products. The audio
category negatively impacted comparable retail store sales by 1.0%. The video
category negatively impacted comparable retail store sales by 0.7%. Both the
audio and video categories have been impacted by lower price points of their
respective products, as these products are continuing to become more of a
commodity item with very high levels of competition.

Net
sales and revenue for the first nine months of fiscal year 2008 were $175.8
million compared to $146.9 million for the first nine months of fiscal year
2007. This represents an increase of $28.9 million or 19.7%. This increase was
primarily caused by $48.5 million of sales from our alternative energy segment
as Levelland Hockley commenced operations late in the first quarter of fiscal
year 2008. This positive trend was partially offset by a decrease in sales at
closed stores that are classified as continuing operations. Sales from these
stores declined by $6.6 million in the first nine months of fiscal year 2008
compared to fiscal year 2007. In addition, we experienced a decrease in
comparable retail store sales of 6.1% for the first nine months of fiscal year
2008. We consider a retail store to be comparable after it has been open six full
fiscal quarters. Comparable retail store sales do not include sales of extended
service contracts.

The
television category performance negatively impacted comparable retail store
sales for the first nine months of fiscal 2008 by 2.6%. The television category
performance was primarily due to declines in projection and analog television
sets outpacing the gains we made in plasma and LCD television sets. The
appliance product category negatively impacted comparable retail store sales
for the first nine months of fiscal 2008 by 1.7%. The appliance category
performance was primarily due to lower sales of air conditioners and laundry
products. The audio and video categories negatively impacted comparable store
sales for the first nine months of fiscal year 2008 by 1.0% and 0.8%,
respectively. The audio and video categories results reflect a continuing trend
of lower price points of the respective products, as these products are
becoming more of a commodity item with very high levels of competition.

As
of October 31, 2008, we operated 105 stores compared to 124 stores one year
earlier. We did not open any stores and closed 10 stores during the first nine
months of fiscal year 2008. We did not open any stores and closed 69 stores
during the first nine months of fiscal year 2007.

At
October 31, 2008, we had lease agreements, as landlord/sub landlord, for all or
parts of 12 properties. We own nine of these properties and are the tenant/sub
landlord for three of the properties. In two of the owned locations, we operate
a store and lease a portion of the property to another party. We do not operate
a store in seven of the owned properties. We have six owned properties that are
vacant at October 31, 2008. We are marketing these vacant properties to lease
or sell.

Gross
profit in the third quarter of fiscal year 2008 was $9.6 million (15.1% of net
sales and revenue) compared to $15.2 million (28.4% of net sales and revenue)
recorded in the third quarter of fiscal year 2007. This represents a decrease
of $5.6 million or 36.8%. Gross profit for the quarter ended October 31, 2008,
from our retail segment was 29.3% of retail segment sales compared to 28.5% for
the quarter ended October 31, 2007. We incurred negative gross profit for the
quarter

37

---



ended October
31, 2008 from our alternative energy segment of 10.9%. Gross profit for the
first nine months of fiscal year 2008 was $35.8 million (20.3% of net sales and
revenue) compared to $44.9 million (30.6% of net sales and revenue) for the
first nine months of fiscal year 2007. Gross profit for the nine months ended
October 31, 2008 from our retail segment was 29.5% of retail segment sales
compared to 30.6% for the nine months ended October 31, 2007. We incurred
negative gross profit for the nine months ended October 31, 2008 from our
alternative energy segment of 3.6%. Gross profit from our alternative energy
segment has been lower than expected as a result of the spread between ethanol
and grain prices. Gross profit for the third quarter and first nine months of
fiscal year 2008 was negatively impacted by approximately $0.2 million and $1.4
million, respectively, as a result of having nine net fewer stores compared to
the prior year. Extended service contracts contributed gross profit of $2.4
million in the third quarter of fiscal year 2008 compared to $2.6 million in
the third quarter of fiscal year 2007. Extended service contracts contributed
gross profit of $7.5 million in the first nine months of fiscal year 2008
compared to $8.4 million in the first nine months of fiscal year 2007. Our
direct warranty repair costs were approximately 24% and 19% of extended service
contract revenue in the first nine months of fiscal years 2008 and 2007,
respectively. Warranty repair costs increased during fiscal year 2008, as
fiscal year 2007 results include reductions to warranty reserves which fiscal
year 2008 results do not include and lower levels of vendor support during the
current fiscal year.

Selling,
general and administrative expenses for the third quarter of fiscal year 2008
were $13.7 million (21.5% of net sales and revenue), a decrease of $0.5 million
or 3.5% from $14.2 million (26.5% of net sales and revenue) for the third
quarter of fiscal year 2007. Selling, general and administrative expenses were
$40.5 million (23.0% of net sales and revenue) for the first nine months of
fiscal year 2008 representing a decrease of $2.1 million or 4.9% from $42.6
million (29.0% of net sales and revenue) for the first nine months of fiscal year
2007. The decrease in expenses was primarily a result of lower retail segment
expenses of $3.8 million and lower energy segment payroll expenses of $1.0
million, reflecting lower executive compensation associated with the overall
decline in profitability. Retail segment payroll expenses declined $2.0
million, reflecting the restructuring of our retail operations in fiscal year
2007 and lower sales commissions associated with the sales decline. Retail
professional fees declined $0.9 million primarily related to fees incurred in
connection with the sale and leaseback transaction we completed during the
first quarter of fiscal year 2007. Retail advertising expense declined $0.8
million, reflecting our continued emphasis on cost reduction. In addition, we
had higher energy segment (non payroll) expenses of $2.8 million, primarily a
result of a goodwill impairment charge related to the acquisition of Levelland
Hockley and the commencement of operations at the Levelland Hockley plant.

Interest
income was $363,000 and $1,503,000 for the third quarter of fiscal years 2008
and 2007 respectively. Lower levels of excess cash and lower interest rates
earned on our excess cash accounted for approximately $787,000 of the decrease
while our disposition in the third quarter of fiscal year 2007 of our
convertible note receivable in Millennium Ethanol, LLC accounted for
approximately $185,000 of the decrease.

Interest
income was $1,732,000 and $4,772,000 for the first nine months of fiscal years
2008 and 2007 respectively. Lower levels of excess cash and lower interest
rates earned on our excess cash accounted for approximately $1,529,000 of the
decrease while our disposition in the third quarter of

38

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fiscal year
2007 of our convertible note receivable in Millennium Ethanol, LLC accounted
for approximately $1,334,000 of the decrease.

Interest
expense was $1,074,000 for the third quarter of fiscal year 2008 compared to
$47,000 for the third quarter of fiscal year 2007. The quarterly increase primarily
results from the interest on the Levelland Hockley credit facility subsequent
to the commencement of operations at that plant. Interest expense was
$2,093,000 for the first nine months of fiscal year 2008 compared to $147,000
for the first nine months of fiscal year 2007. Interest expense for the first
nine months of fiscal year 2008 has increased primarily from the interest on
the Levelland Hockley credit facility subsequent to the commencement of
operations at that plant.

We
paid off approximately $15.6 million of debt in connection with the real estate
sale and leaseback transaction with Klac. As a result, we incurred prepayment
penalties and the write off of prepaid loan fees totaling approximately
$557,000 during the first nine months of fiscal year 2007.

On
September 16, 2008, we completed a transaction for the sale and leaseback of
our Cheyenne, Wyoming distribution center under a three year lease term. A
pre-tax gain, classified as continuing operations, of approximately $1.6
million (net of expenses) resulted from this sale. We also deferred
approximately $0.8 million of the gain at October 31, 2008, based upon the
present value of the minimum lease payments, and will amortize this deferred
gain as a reduction to lease expense over the lease term. The lease has been
accounted for as an operating lease. We also sold vacant land adjacent to the
Cheyenne, Wyoming distribution center for a gain of $0.7 million.

On
April 30, 2007, we completed a transaction for the sale of 86 of our current
and former store locations to Klac for $74.5 million in cash, before selling
expenses. We also entered into agreements to leaseback 40 of the properties
from Klac for initial lease terms expiring January 31, 2010, with renewal options
for up to 15 additional years. Either Klac or REX may terminate a lease after
the initial six months of the initial lease term (with two months advance
notice) on 28 of the leases, 14 of which were terminated in fiscal year 2007
and two of which were terminated in fiscal year 2008. We also entered into
license agreements with Klac for 15 of the properties that allowed us to occupy
the properties for up to 90 days rent free. Upon the expiration of the license
period, we vacated the 15 properties. We modified the lease agreement with Klac
during fiscal year 2008 for one store which eliminated the two month early
termination clause.

This
transaction resulted in a gain (realized and deferred) of $14.8 million. Of
this gain, $0.3 million and $1.3 million was recognized in the third quarter of
fiscal years 2008 and 2007, respectively. During the first nine months of
fiscal years 2008 and 2007, we recognized $1.1 million and $8.4 million,
respectively of the gain. We had a deferred gain of $4.4 million and $6.4
million at October 31, 2008 and 2007, respectively, based upon the present
value of the remaining minimum lease payments. The deferred gain will be
amortized as a reduction to lease expense over the lease periods or recognized
as gain on disposal at the end of the lease period. The leases have been
accounted for as operating leases. The following table summarizes the pre-tax
gains recognized

39

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during the
third quarter and first nine months of fiscal years 2008 and 2007 (amounts in
thousands):

|                         |  |                    |                    |                   |                    |       |                    |   |                  |  |   |       |  | 
|------------------------ |  | ------------------ | ------------------ | ----------------- | ------------------ | ----- | ------------------ | - | ---------------- |  | - | ----- |  | 
|                         |  | Three Months Ended |                    | Nine Months Ended |                   
|Classification
 of Gain  |  |                    | October 31, 
 2008 |                   | October 31, 
 2007 |       | October 31, 
 2008 |   | October 31, 2007 | 
|                         |  |                    |                    |                   |                    |       |                    |   |                  | 
|                         |  |                    |                    |                   |                    |       |                    |   |                  | 
|Continuing
 Operations   |  | $                  | 323                |                   | $                  | 491   |                    | $ | 971              |  | $ | 1,357 | 
|Discontinued
 Operations |  |                    | -                  |                   |                    | 825   |                    |   | 97               |  |   | 7,086 | 
|                         |  |                    |                    |                   |                    |       |                    |   |                  |  |   |       | 
|                         |  |                    |                    |                   |                    |       |                    |   |                  |  |   |       | 
|Total
 Pre-Tax Gain      |  | $                  | 323                |                   | $                  | 1,316 |                    | $ | 1,068            |  | $ | 8,443 | 
|                         |  |                    |                    |                   |                    |       |                    |   |                  |  |   |       | 

The
following table summarizes the components of the sale and leaseback transaction
(amounts in thousands):

|                                                              |  |  |                       |  |               |       |                 |   |        |  | 
|------------------------------------------------------------- |  |  | --------------------- |  | ------------- | ----- | --------------- | - | ------ |  | 
|Property
 Category                                            |  |  | Number of
 Properties |  | Deferred Gain |       | Recognized Gain |  
|                                                              |  |  |                       |  |               |       |                 |  
|                                                              |  |  |                       |  |               |       |                 |  
|Vacated                                                       |  |  | 62                    |  | $             | -     |                 | $ | 7,711  | 
|                                                              |  |  |                       |  |               |       |                 |   |        | 
|Leased until
 January 31, 2010                                |  |  | 13                    |  |               | 3,529 |                 |   | 876    | 
|                                                              |  |  |                       |  |               |       |                 |   |        | 
|Leased until
 January 31, 2010   (2 month termination clause) |  |  | 11                    |  |               | 829   |                 |   | 1,860  | 
|                                                              |  |  |                       |  |               |       |                 |   |        | 
|Total                                                         |  |  | 86                    |  | $             | 4,358 |                 | $ | 10,447 | 
|                                                              |  |  |                       |  |               |       |                 |   |        | 

During
the third quarter of fiscal years 2008 and 2007, we recognized income of
approximately $1,044,000 and $535,000 from our equity investments in Big River
Resources, LLC and Patriot Renewable Fuels, LLC, respectively. During the first
nine months of fiscal years 2008 and 2007, we recognized income of
approximately $2,966,000 and $2,057,000 from our equity investments in Big
River Resources, LLC and Patriot Renewable Fuels, LLC, respectively.

On
August 29, 2007, US BioEnergy Corporation completed the acquisition of Millennium
Ethanol, LLC (Millennium). In connection with the acquisition, we received
3,693,858 shares of US BioEnergy Common Stock and approximately $4.8 million of
cash as total consideration for our interest in Millennium Ethanol, LLC based
upon the conversion of our $14 million convertible secured promissory note,
accrued interest and related purchase rights. We recorded a realized gain
(pre-tax) of $27.4 million and an unrealized loss (pre-tax) of $10.3 million
related to our holdings of US BioEnergy common stock during the third quarter
of fiscal year 2007.

Income
from continuing operations for the first nine months of fiscal year 2008
includes approximately $0.7 million of income from the sales of our entire
partnership interests in Colona SynFuel Limited Partnership, L.L.L.P., (Colona)
and Somerset Synfuel, L.P. (Somerset). This income represents the estimated
final settlements related to Colona and Somerset as all synthetic fuel
production ceased during fiscal year 2007. As the Section 29/45K program
expired December 31, 2007, we do not expect additional income from these sales.
During the third quarter and first nine

40

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months of
fiscal year 2007, we recorded a loss of approximately $1.9 million and income
of approximately $8.3 million, respectively, from these sales.

We
also sold our membership interest in the limited liability company that owned a
synthetic fuel facility in Gillette, Wyoming. The plant was subsequently sold
and during the third quarter of fiscal year 2006, we modified our agreement
with the owners and operators of the synthetic fuel facility. Based on the
terms of the modified agreement, we currently are not able to determine the
likelihood and timing of collecting payments related to production occurring after
September 30, 2006. Thus, we cannot currently determine the timing of income
recognition, if any, related to production occurring subsequent to September
30, 2006. We did not recognize any income from this sale during the first nine
months of fiscal years 2008 or 2007.

Below
is a table summarizing the income (loss) recognized from the sales, net of
certain expenses, of our interests in synthetic fuel entities.

|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 
|------------------------------ |  | ------------------------------- | -- | ------------------------------ | - | ------ | - | ---- | --- |  | - | ----- | 
|                               |  | Three Months Ended
 October 31, |    | Nine Months Ended
 October 31, |  
|                               |  |                                 |    |                                |  
|                               |  | 2008                            |    | 2007                           |   | 2008   |   | 2007 |    
|                               |  |                                 |    |                                |   |        |   |      |    
|                              
|February 1,
 1999 Colona sale  |  | $                               | -  |                                | $ | (738   | ) | $    | 186 |  | $ | 2,156 | 
|July 31,
 2000 Colona sale     |  |                                 | -  |                                |   | (589   | ) |      | 149 |  |   | 1,720 | 
|May 31, 2001
 Colona sale      |  |                                 | -  |                                |   | (523   | ) |      | 132 |  |   | 1,529 | 
|October 1,
 2005 Somerset sale |  |                                 | 21 |                                |   | (10    | ) |      | 224 |  |   | 2,874 | 
|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 
|                               |  | $                               | 21 |                                | $ | (1,860 | ) | $    | 691 |  | $ | 8,279 | 
|                               |  |                                 |    |                                |   |        |   |      |     |  |   |       | 

We
recognized a realized and unrealized loss of $947,000 during the third quarter
of fiscal year 2008, related to interest rate swap agreements that Levelland
Hockley and One Earth entered into during fiscal year 2007. Levelland Hockleys
loss was $131,000 and One Earths loss was $816,000. We recognized a realized
and unrealized gain of $481,000 during the first nine months of fiscal year
2008 from these interest rate swaps. Levelland Hockleys gain was $252,000 and
One Earths gain was $229,000.

Our
effective tax rate was 2.1% and 38.7% for the third quarter of fiscal years
2008 and 2007, respectively. Our effective tax rate was 74.7% and 38.6% for the
first nine months of fiscal years 2008 and 2007, respectively. The fluctuation
is primarily a result of the effective tax rate calculated gross of minority
interest. An adjustment for recognizing the benefit of certain statutes of
limitations expiring relating to uncertain tax positions of (16.9)% is
reflected in the effective rate for the nine months ended October 31, 2008. In
addition, a benefit of (32.5)% was recognized for the nine months ended October
31, 2008 for a federal tax credit which is earned by Levelland Hockley as a
small ethanol producer. We expect our effective tax rate (net of minority
interest) to be in a range between 20% and 35% for the remainder of fiscal year
2008.

Minority
interest of $1,878,000 and $32,000 for the quarters ended October 31, 2008 and
2007, respectively and $2,070,000 and ($12,000) for the nine months ended
October 31, 2008 and 2007, respectively, represents the owners (other than
REX) share of the income or loss of Levelland Hockley County Ethanol, LLC and
One Earth Energy, LLC.

41

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During
the quarter and nine months ended October 31, 2008, we closed three and eight
stores, respectively, that were classified as discontinued operations. As a
result of these closings and certain other store closings from prior periods,
we had a loss from discontinued operations, net of tax benefit, of $225,000 for
the third quarter of fiscal year 2008 compared to $535,000 for the third
quarter of fiscal year 2007. We had a loss from discontinued operations, net of
tax benefit, of $507,000 for the first nine months of fiscal year 2008 compared
to $2,171,000 for the first nine months of fiscal year 2007.

One
property classified as discontinued operations was sold during the first nine
months of fiscal year 2008, resulting in a gain, net of tax expense, of $0.2
million. Primarily as a result of the previously discussed sale and leaseback
with Klac we had a gain from discontinued operations, net of tax expense, of
approximately $3.9 million for the third quarter of fiscal year 2007 and
approximately $8.9 million for the first nine months of fiscal year 2007.

As
a result of the foregoing, net loss for the third quarter of fiscal year 2008
was $0.7 million, a decrease of $15.4 million from net income of $14.7 million
for the third quarter of fiscal year 2007. Net income for the first nine months
of fiscal year 2008 was $2.1 million, a decrease of $25.9 million from $28.0
million for the first nine months of fiscal year 2007.

Liquidity and Capital
Resources

Net
cash used in operating activities was approximately $26.5 million for the first
nine months of fiscal year 2008, compared to $4.1 million for the first nine
months of fiscal year 2007. For the first nine months of fiscal year 2008, cash
was provided by net income of $2.1 million, adjusted for the impact of $0.7
million for gains on our sales of synthetic fuel investments, the gain on the
disposal of real estate and property and equipment of $3.3 million and non-cash
items of $(5.4) million, which consisted of depreciation and amortization,
income from equity method investments, deferred income, realized and unrealized
gains on derivative financial instruments, other items and the deferred income
tax provision. In addition, other assets provided cash of $1.6 million,
primarily a result of reductions in our levels of prepaid commissions
associated with the sale of extended service contracts. The increase in
accounts receivable of $2.8 million is primarily a result of Levelland Hockley
commencing operations in the current fiscal year. The increase in inventory of
$6.6 million was primarily due to seasonal fluctuations in our retail segment
and Levelland Hockley commencing operations in the current fiscal year. The
decrease in accounts payable is primarily a result of our modification of
payment terms with one of our retail product vendors. The primary use of cash
was a decrease in other liabilities of $10.5 million; primarily a result of
payments related to synthetic fuel obligations, incentive compensation and
other payroll and sales tax payments being made in the first quarter of fiscal
year 2008.

Net
cash used in operating activities was approximately $4.1 million for the first
nine months of fiscal year 2007. For the first nine months of fiscal year 2007,
cash was provided by net income of $28.0 million, adjusted for the impact of
$8.3 million for gains on our sales of synthetic fuel investments, $17.1
million for realized and unrealized gains on investments, the gain on the
disposal of real estate and property and equipment of $15.2 million, dividends
received from equity method investees of $0.4 million and non-cash items of
$0.7 million, which consisted of depreciation and amortization, stock based
compensation expense, impairment charges, income from equity method
investments, deferred income and the deferred income tax provision. In
addition, accounts payable

42

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provided cash
of $5.9 million, primarily a result of changes in inventory levels and extended
terms from certain vendors. The primary use of cash was an increase in
inventory of $8.3 million primarily due to seasonal fluctuations. The inventory
increase from January 31, 2007 primarily results from higher television and air
conditioner levels. The other sources of cash were a decrease in other assets
of $5.4 million, a decrease in accounts receivable of $0.7 million and an
increase in other current liabilities of $4.9 million.

At
October 31, 2008, working capital was $76.4 million compared to $132.3 million
at January 31, 2008. This decrease is primarily a result of the ethanol plant
construction expenditures at the Levelland Hockley and One Earth facilities and
treasury stock purchases. The ratio of current assets to current liabilities
was 2.2 to 1 and 3.2 to 1 at October 31, 2008 and January 31, 2008,
respectively.

Cash
of $69.6 million was used in investing activities for the first nine months of
fiscal year 2008, compared to cash provided of $80.4 million for the first nine
months of fiscal year 2007. During the first nine months of fiscal year 2008,
we received proceeds of $1.3 million from the sales of our synthetic fuel
investments and $6.4 million from the sale of real estate and property and
equipment. We had capital expenditures of approximately $75.9 million during
the first nine months of fiscal year 2008, primarily related to construction at
the Levelland Hockley and One Earth ethanol plants. We deposited $1.3 million
in escrow accounts (restricted cash) in connection with the final draw on
Levelland Hockleys construction loan.

Cash
of $80.4 million was provided by investing activities for the first nine months
of fiscal year 2007. During the first nine months of fiscal year 2007, we
received proceeds of $92.9 million from the sale and leaseback transaction with
Klac and other real estate sales, $15.4 million from the installment sales of
our ownership interests in synthetic fuel entities and $4.8 million from the
sale of our interest in Millennium. The acquisition of One Earth provided cash
of $8.6 million as One Earths cash balance of $59.3 million exceeded the
purchase price of $50.7 million. We purchased an equity investment in Big River
of $15.0 million during the first nine months of fiscal year 2007. We had
capital expenditures of approximately $26.2 million during the first nine
months of fiscal year 2007, primarily related to Levelland/Hockley ethanol
plant construction.

Cash
provided by financing activities totaled approximately $34.6 million for the
first nine months of fiscal year 2008 compared to cash used of $16.4 million
for the first nine months of fiscal year 2007. Cash of approximately $4.4
million was used to repay debt and capital lease obligations. Cash was provided
by new debt borrowings at Levelland Hockley and One Earth of $53.1 million.
Cash of approximately $15.5 million was also used to acquire 1,322,000 shares
of our common stock. As of October 31, 2008, we had approximately 383,000
authorized shares remaining available for purchase under the stock buy-back
program.

Cash
used in financing activities totaled approximately $16.4 million for the first
nine months of fiscal year 2007. Cash of approximately $22.6 million was used
to repay mortgage debt. Cash was provided by new debt borrowings of $15.7
million and stock option activity of $3.4 million. We also recorded a tax
benefit of approximately $1.8 million during the first nine months of fiscal
year 2007 from the exercise of non-qualified stock options as an increase in
additional paid-in capital. Cash of approximately $12.9 million was also used
to acquire 682,000 shares of our common stock.

43

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On
July 25, 2002, Levelland Hockley entered into an agreement with RIO Technical
Services, Inc., (RIO) regarding the planning, financing, design and
construction of Levellands ethanol plant. RIO is a related party, as certain
officers of RIO own equity interests in Levelland Hockley. We estimate that
fees for these services will be approximately $2.8 million, of which approximately
$2.3 million has been spent through October 31, 2008. We expect to pay the
remaining amounts due from our restricted cash which is deposited in an escrow
account.

We
expect to fund, in the fourth quarter of fiscal year 2008, a convertible promissory note
payable from Levelland Hockley of between $2 and $4 million in order to provide
working capital and to enhance Levelland Hockleys grain purchasing abilities.

In
May 2007, One Earth entered into an agreement with a designer/builder for the construction
of One Earths ethanol plant. The designer/builder is responsible for all
engineering, labor, materials and equipment to design, construct, startup and
achieve guaranteed performance criteria of the plant. The contract price is
approximately $120.2 million, subject to adjustments as provided by the general
conditions of the agreement, of which approximately $85.8 million has been
spent through October 31, 2008. One Earth has also entered other construction
and facility related contracts. Some of these contracts have been completed and
all required funds have been expended as of October 31, 2008. The total of
other incomplete construction and facility related contracts is approximately
$11.6 million, of which approximately $9.5 million has been spent through
October 31, 2008.

We
believe One Earth has sufficient working capital and credit availability to
fund these commitments.

Forward-Looking Statements

This
Form 10-Q contains or may contain forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Such statements can be
identified by use of forward-looking terminology such as may, expect,
believe, estimate, anticipate or continue or the negative thereof or
other variations thereon or comparable terminology. Readers are cautioned that
there are risks and uncertainties that could cause actual events or results to
differ materially from those referred to in such forward-looking statements.
These risks and uncertainties include the risk factors set forth from time to
time in the Companys filings with the Securities and Exchange Commission and
include among other things: the highly competitive nature of the consumer
electronics retailing industry, changes in the national or regional economies,
weather, the effects of terrorism or acts of war on consumer spending patterns,
the availability of certain products, technological changes and changes in real
estate market conditions, the fluctuating amount of quarterly payments received
by the Company with respect to sales of its partnership interest in its
synthetic fuel investments, and the variability of income received from time to
time from the Companys synthetic fuel investments. As it relates to ethanol
investments, risks and uncertainties include among other things: the
uncertainty of constructing plants on time and on budget, the price volatility
of corn, sorghum, distiller grains, ethanol, gasoline and natural gas and the
plants operating efficiently and according to forecasts and projections. Other
factors that could cause actual results to differ materially from those in the
forward-looking statements are set forth in Item 1A of the Companys Annual
Report on Form 10-K for the fiscal year ended January 31, 2008 (File No.
001-09097).

44

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Item 3. Quantitative
and Qualitative Disclosures About Market Risk

No
material changes since January 31, 2008.

Item 4. Controls and
Procedures

Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures, as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.

There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting
other than the implementation of controls at Levelland Hockley related to
production commencing in the first quarter of fiscal year 2008.

PART
II. OTHER INFORMATION

Item 1. Legal
Proceedings

Levelland Hockley County Ethanol, LLC (Levelland Hockley) entered into a lease agreement with Layne Christensen Company (Layne) for certain water treatment equipment
for its ethanol plant. Levelland Hockley filed a lawsuit against Layne in the District Court, Hockley County, Texas on April 30, 2008, generally alleging that Layne was negligent in its design and construction of the water treatment facility and
breached its various process guaranties and warranties. On May 28, 2008, the lawsuit filed by Levelland Hockley was removed to the United States District Court for the Northern District of Texas, Lubbock Division. On May 14, 2008, Layne filed a
lawsuit against Levelland in the United States District Court of Kansas at Kansas City, Mo. On May 19, 2008, Layne amended its original complaint. Layne is suing Levelland Hockley for interest on late lease payments, repossession of the water
treatment facility that is the subject of the lease and that all lease payments due under the lease should be accelerated and be immediately due and payable. The Company believes that Levelland Hockley has meritorious defenses to the claims and that
Levelland Hockley intends to vigorously defend against them.

Item 1A. Risk Factors

During
the quarter ended October 31, 2008, there have been no material changes to the
risk factors discussed in our Annual Report on Form 10-K for the year ended
January 31, 2008.

45

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

Issuer Purchases of
Equity Securities

|                      |  |                                    |         |                                |   |                                                                                         |  |                                                                                      |         |  |  |         |  | 
|--------------------- |  | ---------------------------------- | ------- | ------------------------------ | - | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ | ------- |  |  | ------- |  | 
|Period                |  | Total
 Numberof Shares 
 Purchased |         | Average
 PricePaid per 
 Share |   | Total
 Number of 
 Shares Purchasedas Part of Publicly 
 Announced Plansor Programs (1) |  | Maximum
 Numberof Shares that May 
 Yet Be Purchased
 Under the Plansor Programs (1) |        
|                      |  |                                    |         |                                |   |                                                                                         |  |                                                                                      |         | 
|August 1-31,
 2008    |  |                                    | 119,875 |                                | $ | 12.36                                                                                   |  |                                                                                      | 119,875 |  |  | 389,264 | 
|September
 1-30, 2008 |  |                                    | 246,500 |                                | $ | 11.58                                                                                   |  |                                                                                      | 246,500 |  |  | 142,764 | 
|October
 1-31, 2008   |  |                                    | 259,506 |                                | $ | 8.12                                                                                    |  |                                                                                      | 259,506 |  |  | 383,258 | 
|                      |  |                                    |         |                                |   |                                                                                         |  |                                                                                      |         |  |  |         | 
|Total                 |  |                                    | 625,881 |                                | $ | 10.30                                                                                   |  |                                                                                      | 625,881 |  |  | 383,258 | 
|                      |  |                                    |         |                                |   |                                                                                         |  |                                                                                      |         |  |  |         | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(1) | During the
 third quarter of fiscal year 2008, we completed the purchase of our common
 stock under a previously announced authorization. On October 21, 2008, we
 announced our Board of Directors had authorized the repurchase of up to an
 additional 500,0000 shares from time to time in private or market
 transactions at prevailing market prices. At October 31, 2008, a total of
 383,258 shares remained available to purchase under this authorization.

Item 6. Exhibits.

| |                                                     |                                         
| | --------------------------------------------------- | ----------------------------------------
| | The
 following exhibits are filed with this report:
| |                                                     |                                         
| | 31                                                  | Rule
 13a-14(a)/15d-14(a) Certifications
| |                                                     |                                         
| | 32                                                  | Section 1350
 Certifications            

46

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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.

| |                        
| | -----------------------
| | REX STORES
 CORPORATION
| | Registrant             

|                          |  |                                       |  |                  |  |  |  |  |  | 
|------------------------- |  | ------------------------------------- |  | ---------------- |  |  |  |  |  | 
|Signature                 |  | Title                                 |  | Date            
|                          |  |                                       |  |                  |  | 
|                         
|/s/
 Stuart A. Rose       |  | Chairman of the Board                 |  | December 9, 2008
|                          |  |                                       |  |                  |  | 
|(Stuart A. Rose)          |  | (Chief Executive Officer)             |  |                 
|                          |  |                                       |  |                 
|/s/
 Douglas L. Bruggeman |  | Vice President, Finance and Treasurer |  | December 9, 2008
|                          |  |                                       |  |                  |  | 
|(Douglas L.
 Bruggeman)   |  | (Chief Financial Officer)             |  |                 

47

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