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

Cautionary Statement Regarding Forward Looking Statements

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

Introduction

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

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make use of estimates and assumptions that affect the reported amount of assets and liabilities, net revenues, expenses, and certain financial statement disclosures. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. Estimates are used for, but not limited to, the Company's accounting for revenue recognition, allowance for doubtful accounts, inventory obsolescence, goodwill and other intangible assets with indefinite lives, long lived assets, contingent obligations, and deferred taxes. Actual results could differ from these estimates.

New Accounting Pronouncements

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

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

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133." This new standard requires enhanced disclosures about an entity's derivative and hedging activities with the intent of improving the transparency of financing reporting as the use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Currently, we use interest rate swap agreements to hedge the risks related to the variable interest paid on our term loans. The current effects of our hedging activities are not significant to our consolidated financial statements. However, the new standard will require us to provide an enhanced understanding of 1) how and why we use derivative instruments, 2) how we account for derivative instruments and the related hedged items, and 3) how derivatives and related hedged items affect our financial position, financial performance and cash flows. Adoption of this new accounting standard will first be required for our consolidated financial statements covering the quarter ending April 30, 2009.

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

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

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

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements." This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Certain provisions of this standard relating to financial assets and financial liabilities were also effective for us beginning February 1, 2008; they did not have a significant impact on the consolidated financial statements. Adoption of the other provisions of this new standard relating primarily to nonfinancial assets and nonfinancial liabilities will first be required for our consolidated financial statements covering the quarter ending April 30, 2009. The significant nonfinancial items included in our consolidated balance sheet include property and equipment, goodwill and other purchased intangible assets. Adoption of the new provisions is not expected to have a significant impact on our consolidated financial statements.

Recent Events

Construction Projects and Backlog. In May 2008, the Company announced that GPS signed an engineering, procurement and construction agreement with Pacific Gas & Electric Company ("PG&E") in the amount of $336 million for the design and construction of a natural gas-fired power plant in Colusa, California. This energy plant will be a 640 megawatt combined cycle facility and construction is expected to be completed in the summer of 2010. GPS commenced activity on this project in the fourth quarter ended January 31, 2008 under an interim notice to proceed that it received from PG&E in December 2007.

In July 2008, the Company announced that GPS signed an engineering, procurement and construction agreement and received a limited notice to proceed from Competitive Power Ventures Inc. ("CPV") to design and build the Sentinel Power Project. This project, valued at $211 million, consists of eight simple cycle gas-fired peaking plants with a total power rating of 800 megawatts to be located in southern California. The first phase of the project, including the construction of five units, is expected to be completed in the summer of 2010. The second phase includes the construction of the remaining three units and is expected to be completed in the spring of 2011. CPV has a power supply agreement with Southern California Edison covering five of the units.

The addition of these contracts increased our energy-plant construction contract backlog to approximately $530 million at July 31, 2008. The construction contract backlog of GPS was $122 million at January 31, 2008.

Under the terms of an amended agreement with a customer covering the engineering, procurement and construction of an ethanol production facility (the "EPC Agreement"), March 19, 2008 was the deadline for the customer to obtain financing for the completion of the project. Financing was not obtained and the EPC Agreement was terminated. GPS continues to cooperate with the customer in its efforts to obtain financing. GPS is uncertain as to the ultimate resolution of this matter. As of July 31, 2008 and January 31, 2008, our condensed consolidated balance sheets included assets and liabilities related to the terminated construction contract. We have classified these assets and liabilities as current assets and current liabilities in the accompanying condensed consolidated balance sheets due to the expectation that the assets will be realized and the liabilities will be extinguished. Although cash may be required to make payment on accounts payable to project subcontractors that are included in the condensed consolidated balance sheet at July 31, 2008, GPS does not anticipate any losses to arise from the resolution of this EPC Agreement. No net revenues were recorded in the six months ended July 31, 2008 related to this project.

Investment in Unconsolidated Subsidiary. In June 2008, the Company announced that GPS had entered into a business partnership with Invenergy Wind Management LLC, for the design and construction of wind farms located in the United States and Canada. The business partners each own 50% of a new company, Gemma Renewable Power, LLC ("GRP"). The Company expects that GRP will provide engineering, procurement and construction services for new wind farms generating electrical power including the design and construction of roads, foundations, and electrical collection systems, as well as the erection of towers, turbines and blades. It is expected that GRP will also assist with some of the ongoing servicing of the wind farms. During the start-up phase of this new business and pursuant to the formation document, GPS has contributed $600,000 cash to GRP. In accordance with the equity method of accounting for unconsolidated subsidiaries, the condensed consolidated statements of operations for the three and six months ended July 31, 2008 include our share of the net loss incurred to date by GRP in the amount of approximately $165,000.

Performance of VLI. VLI continued to report operating results that were below expected results. The loss of major customers and the reduction in the amounts of orders received from currently major customers have caused net revenues to continue to decline and this business to operate at a loss. VLI is actively pursuing opportunities to expand the volume of business related to current customers and secure business from new customers. However, there is no assurance that business will improve. Accordingly, during the current quarter, we conducted analyses in order to determine whether additional impairment losses have occurred related to the goodwill and the long-lived assets of VLI. The assessment analyses indicated that the carrying value of the business exceeded its fair value, that the carrying values of VLI's long-lived assets were not recoverable and that the carrying values of the long-lived assets exceeded their corresponding fair values. As a result, VLI recorded impairment losses related to goodwill, other purchased intangible assets, and fixed assets in the amounts of $921,000, $86,000 and $939,000, respectively, that were included in the condensed consolidated statements of operations for the three and six months ended July 31, 2008. These adjustments eliminated the remaining carrying value of VLI's goodwill and reduced the carrying values of VLI's other purchased intangible assets and fixed assets to approximately $8,000 and $135,000, respectively.

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

As described in Item 1 of Part II of this Form 10-Q and in Note 14 to the condensed consolidated financial statements, in March 2007, the United States District Court for the Central District of California granted our motion for summary judgment, thereby dismissing the civil action brought by Western Filter Corporation ("WFC") relating to WFC's purchase of the capital stock of Puroflow Incorporated ("Puroflow"), formerly our wholly-owned subsidiary. WFC appealed the District Court's decision. On August 25, 2008, the Ninth Circuit Court of Appeals reversed the summary judgment decision and remanded the case back to the District Court. We continue to believe that WFC's claims are without merit and intend to continue to defend this litigation vigously. It is possible, however, that the ultimate resolution of the WFC litigation could result in a material adverse effect on the results of operations of the Company for a particular future reporting period. The Company's condensed consolidated balance sheet at July 31, 2008 included an amount in accrued expenses reflecting the Company's estimate of the amount of future legal fees that it expects to be billed in connection with the completion of this litigation.

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

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

                                          Three Months Ended July 31,
                                        2008                         2007
Net revenues
Power industry services      $ 70,639,000         94.1 %  $ 45,599,000         85.8 %
Nutritional products            2,226,000          2.9 %     5,036,000          9.5 %
Telecommunications
infrastructure services         2,233,000          3.0 %     2,502,000          4.7 %
Net revenues                   75,098,000        100.0 %    53,137,000        100.0 %
Cost of revenues **
Power industry services        63,108,000         89.3 %    40,590,000         89.0 %
Nutritional products            2,395,000        107.6 %     4,122,000         81.9 %
Telecommunications
infrastructure services         1,875,000         84.0 %     1,858,000         74.3 %
Cost of revenues               67,378,000         89.7 %    46,570,000         87.6 %
Gross profit                    7,720,000         10.3 %     6,567,000         12.4 %
Selling, general and
administrative expenses         4,016,000          5.4 %     4,773,000          9.0 %
Impairment losses of VLI        1,946,000          2.6 %             -            - %
Income from operations          1,758,000          2.3 %     1,794,000          3.4 %
Interest expense                 (108,000 )          *        (185,000 )          *
Interest income                   432,000            *         657,000          1.2 %
Equity in the net loss of
unconsolidated subsidiary        (165,000 )          *               -            - %
Income from operations
before income taxes             1,917,000          2.6 %     2,266,000          4.3 %
Income tax expense             (1,111,000 )       (1.5 )%     (932,000 )       (1.8 )%
Net income                   $    806,000          1.1 %  $  1,334,000          2.5 %

* Less than 1%.

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

The following analysis provides information as to the results of our operations for the three month periods ended July 31, 2008 and 2007. As analyzed below, we reported net income of $806,000 for the three months ended July 31, 2008, or $0.07 per diluted share. For the three months ended July 31, 2007, we reported net income of $1.3 million, or $0.12 per diluted share.

Net Revenues. Net revenues increased by approximately 41.3% in the three months ended July 31, 2008 compared with the three months ended July 31, 2007 due to an increase in the net revenues of GPS, partially offset by a 55.8% reduction in the net revenues of VLI and 10.8% reduction in the net revenues of SMC.

The business of GPS represented 94.1% of consolidated net revenues for the quarter ended July 31, 2008. This business represented 85.8% of consolidated net revenues for the quarter ended July 31, 2007. The two significant customers of the power industry services business for the current quarter represented approximately 55.1% and 44.6% of the net revenues of this business segment for the current quarter, respectively, and represented approximately 51.8% and 42.1% of our consolidated net revenues for the current quarter, respectively. The net revenues were boosted in the current quarter by the effect of equipment purchases occurring during the early portion of the power plant project.

The four significant customers of the power industry services business for the quarter ended July 31, 2007 represented approximately 91.7% of its net revenues for the quarter ended July 31, 2007. The net revenues for these four customers represented approximately 26.7%, 22.3%, 21.5% and 8.2% of the Company's consolidated net revenues for the three months ended July 31, 2007, respectively.

The net revenues from the sale of nutritional products by VLI were $2.2 million for the three months ended July 31, 2008, and represented 2.9% of consolidated net revenues. The net revenues from the sale of nutritional products were $5.0 million for the three months ended July 31, 2007. This amount represented 9.5% of consolidated net revenues for the prior-year period. The decrease in the net revenues of nutritional products of $2.8 million, or 55.8%, primarily was due to the loss of several customers and declines in the sales of products to most of VLI's largest current customers.

Net revenues of the telecommunications infrastructure services of SMC were $2.2 million for the three months ended July 31, 2008 compared to $2.5 million for the three months ended July 31, 2007, representing a decrease in the net revenues of SMC of approximately 10.8%. The net revenues of this business segment for the three months ended July 31, 2008 and 2007 were 3.0% and 4.7% of consolidated net revenues for the corresponding periods, respectively. Net revenues related to inside premises customers increased by approximately 59.9% for the three months ended July 31, 2008 compared with the corresponding three months of the prior year. However, this strong performance was more than offset by a reduction in the net revenues related to outside plant jobs. Although SMC signed a new two-year contract with Verizon during the current quarter and net revenues related to this customer increased compared to the first quarter, the level of business from this customer has declined substantially between years. The uncertain contract situation and Verizon's focus on its new FIOS transmission technology have adversely affected our business. Work performed for SMC's other large outside plant customer also decreased between years.

Cost of Revenues. The cost of revenues for the power industry services business of GPS increased in the three months ended July 31, 2008 to $63.1 million from $40.6 million in the three months ended July 31, 2007. The cost of revenues as a percentage of corresponding net revenues remained constant between years; the percentage was 89.3% in the current quarter compared with 89.0% in the second quarter of last year. The portion of the loss on one significant project that was recorded in last year's second quarter was offset by the favorable profit performance of other large projects during the period.

Although the cost of revenues for the nutritional products business of VLI decreased in the three-month period ended July 31, 2008 to $2.4 million from $4.1 million in the three months ended July 31, 2007, the cost of revenues percentage increased to 107.6% of net revenues in the current quarter from a percentage of 81.9% in the corresponding quarter of the prior year. On an overall basis, raw material costs as a percentage of net revenues increased between quarters due primarily to product pricing pressure from customers and a $103,000 charge for inventory obsolescence recorded in the current quarter. Direct labor and related manufacturing overhead costs have been reduced between quarters. However, the reductions have not occurred in proportion to the reduction in net revenues.

Cost of revenues for the telecommunication infrastructure services business of SMC increased by $17,000, or approximately 1.0%, in the current quarter compared with the same quarter a year ago, but increased as a percentage of corresponding net revenues to 84.0% in the current quarter from 74.3% in the first quarter last year.

Primarily as a result of the improvement in the performance of GPS, our overall gross profit increased to $7.7 million for the three months ended July 31, 2008 from $6.6 million for the three months ended July 31, 2007. However, our gross profit percentage declined to 10.3% for the current quarter from a percentage of 12.4% in the corresponding period of the prior year due to the profitability declines experienced by VLI and SMC during the current quarter.

Selling, General and Administrative Expenses. These costs decreased to $4.0 million for the three months ended July 31, 2008 from $4.8 million for the three months ended July 31, 2007, a reduction of approximately $757,000, or 15.9%.

Amortization expense related to purchased intangible assets decreased by approximately $1.6 million in the current quarter compared with the second quarter of last year as the amortization expense related to contractual and other customer relationships decreased between quarters by approximately $1.4 million. Most of this decrease was scheduled and attributable to backlog for construction contracts completed by GPS last year. In addition, the impairment losses recorded by VLI last year served to reduce its amortization expense related to customer relationships and the noncompete agreement prospectively, and the amortization of propriety formulas was completed last year. Partially offsetting the favorable effects of the amortization expense reductions were increases in other selling, general and administrative expenses at each company, most significantly salary expense at GPS and corporate legal expenses.

Impairment Losses. During the current quarter and as described above, VLI recorded impairment losses related to goodwill, other purchased intangible assets, and fixed assets in the amounts of $921,000, $86,000 and $939,000, respectively.

. . .