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

Cautionary Statement Regarding Forward Looking Statements

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

Introduction

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

Critical Accounting Policies

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

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

New Accounting Pronouncements

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

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

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

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

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

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

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

Recent Events

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

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

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

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

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

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

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

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

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

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

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

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

* Less than 1%.

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

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

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

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

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

Net revenues of the telecommunications infrastructure services of SMC were $2.3 million for the three months ended October 31, 2008 compared with $2.6 million for the three months ended October 31, 2007, representing a decrease in the net revenues of SMC of approximately 11.1%. The net revenues of this business segment for the three months ended October 31, 2008 and 2007 were 5.7% and 5.3% of consolidated net revenues for the corresponding periods, respectively. Net revenues related to inside premises customers increased by approximately 28.9% for the three months ended October 31, 2008 compared with the corresponding three months of the prior year due to primarily to increased demand for our services from EDS and other ISP customers. However, this strong performance was more than offset by reduced net revenues related to outside plant jobs. Although SMC signed a new eighteen-month contract with Verizon during the current quarter and net revenues related to this customer increased during the current quarter compared to the first and second quarters, the level of business from outside plant customers has declined by 28.3% between years. The uncertain contract situation that existed earlier in the current year and Verizon's focus on its new FIOS transmission technology have adversely affected our business. Work performed for SMC's other large outside plant customer also decreased between years.

Cost of Revenues. The cost of revenues for the power industry services business of GPS decreased in the three months ended October 31, 2008 to $29.7 million from $35.5 million in the three months ended October 31, 2007. The cost of revenues as a percentage of corresponding net revenues was 81.7% in the current quarter compared with 84.6% in the third quarter of last year. Our gross profit . . .