The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2008. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Forward-Looking Statements" and Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended July 31, 2008.

OVERVIEW

We develop, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other sorbent materials. Our principal products include cat litter, industrial and automotive absorbents, bleaching clay and clarification aids, agricultural chemical carriers, animal health and nutrition and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end customer and those who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable segments, the Retail and Wholesale Products Group and the Business to Business Products Group, as described in Note 7 of the unaudited condensed consolidated financial statements.

RESULTS OF OPERATIONS

NINE MONTHS ENDED APRIL 30, 2009 COMPARED TO
NINE MONTHS ENDED APRIL 30, 2008

Consolidated net sales for the nine months ended April 30, 2009 were $180,311,000, an increase of 4% from net sales of $172,854,000 in the first nine months of fiscal 2008. Net income for the first nine months of fiscal 2009 was $7,034,000, an increase of 7% from net income of $6,586,000 in the first nine months of fiscal 2008. Diluted income per share for the first nine months of fiscal 2009 was $0.97 compared to $0.91 for the first nine months of fiscal 2008.

Net income for the first nine months of fiscal 2009 was positively impacted by a higher average net selling price and was negatively affected by higher costs and by lower tons sold compared to the first nine months of fiscal 2008. Selling prices were increased to contend with higher costs incurred throughout our business, and particularly in freight, packaging and materials. Freight costs were impacted by fuel prices which affect our truck, rail and ship distribution channels. Packaging costs were affected by prices for resin and paper commodities. Our fuel, paper and resin costs decreased during the later part of the first nine months of fiscal 2009; however, our overall freight and packaging costs were higher than in the first nine months of fiscal 2008. Material costs were similarly impacted by the cost of fuel used to dry our clay-based products and to transport raw materials. As described in Item 3. Quantitative and Qualitative Disclosure About Market Risk, we employ a forward purchase policy to mitigate the volatility of the cost of fuel used to dry our clay-based products. Under this policy, the impact of fuel cost increases may be lessened; however, the benefit of fuel cost decreases may also be moderated. Both the Business to Business Products Group and the Retail and Wholesale Products Group experienced improved operating income as higher net selling prices outweighed increased costs and decreased tons sold.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the first nine months of fiscal 2009 were $58,841,000, an increase of $3,039,000 from net sales of $55,802,000 in the first nine months of fiscal 2008. The net sales increase was attributed primarily to higher net selling prices that more than offset an overall 8% decrease in tons sold. Tons sold were down for all products, except for co-packaged cat litter products. Our co-packaged traditional coarse cat litter net sales increased 13% due primarily to an increase in net selling price accompanied by a 4% increase in tons sold. Net sales of agricultural chemical carriers increased 15% due primarily to higher net selling prices that overcame a 9% decrease in tons sold. Fewer tons were sold in the crop protection market due to greater use of genetically modified seed and in the lawn and garden market due to the weak economy and the increased use of engineered granules. Net sales of our flowability aid product increased 5% while tons sold decreased 21%. The demand for flowability aid products used in animal feed was reduced due to the protein content of the soybean crop which is a determining factor in feed formulations. Net sales of bleaching earth and fluid purification products increased 4% due primarily to a higher net selling price while tons sold declined 6%. A good quality soybean crop, which requires less bleaching clay to process the oil, a weak global economy and high export freight costs resulted in lower tons sold for bleaching earth products. Animal health and nutrition products reported a 10% increase in net sales with a 21% decline in tons sold. The increase in net sales of animal health and nutrition products was due primarily to increased net selling prices and the initial sales of new products. Tons sold declined during the first nine months of fiscal 2009 in part due to the transition of customers to these new products. Sports products experienced a 19% decline in net sales along with a 23% decline in tons sold. Sales of our baseball products suffered from the impact of the economic downturn on municipalities and other recreational baseball customers. Sales of golf products declined upon the loss of a golf products distributor.

The Business to Business Products Group's segment operating income increased 4% from $11,561,000 in the first nine months of fiscal 2008 to $11,991,000 in the first nine months of fiscal 2009. Higher net selling prices offset decreased tons sold and an approximately 11% increase in combined freight, materials and packaging costs. Freight costs increased approximately 14%. Although overall international freight costs and domestic diesel fuel prices declined during the later part of the first nine months of fiscal 2009, on average our freight costs were higher compared to the first nine months of fiscal 2008. Material costs were impacted by increased costs for fuel used to dry our clay-based products which resulted in approximately a 13% cost increase. See the discussion of manufacturing costs under Consolidated Results below. Conversely, packaging costs decreased approximately 7% due primarily to lower costs for resin. Selling, general and administrative expenses for the Group were up approximately 26% due primarily to increased product development and marketing costs associated with the launch of new animal health and nutrition products.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the first nine months of fiscal 2009 were $121,470,000, an increase of $4,418,000 from net sales of $117,052,000 reported in the first nine months of fiscal 2008. The net sales growth was driven by increased average net selling prices that more than offset a 2% decline in tons sold. The decline in total tons sold was driven by reductions in tons sold by our foreign subsidiaries and in sales of our industrial absorbents, while domestic cat litter tons sold were flat. Net sales of private label cat litter increased 9% due primarily to 3% more tons sold and a higher net selling price. The higher tons sold was the result of expanded distribution to existing customers, as well as distribution to new customers. Net sales of branded cat litter also increased 6% due to higher net selling prices that more than offset a 6% decline in tons sold. Our branded coarse cat litter tons sold declined; however, our branded scoopable cat litter tons sold increased as a result of new products and marketing programs. Net sales of domestic industrial absorbents also increased 4% due to a higher net selling price while tons sold were 2% lower due to poor economic conditions in the domestic manufacturing and automotive industries. Net sales of our foreign subsidiaries decreased 23% with a 14% decline in tons sold. Both our United Kingdom and Canadian subsidiaries have been negatively impacted by weak local currencies compared to the U.S. Dollar and the worldwide economic slowdown. See Foreign Operations below for further information regarding our foreign subsidiaries' results.

The Retail and Wholesale Products Group's segment operating income increased 4% to $11,908,000 in the first nine months of fiscal 2009 from $11,416,000 in the first nine months of fiscal 2008. A higher net selling price overcame an approximate 5% increase in combined freight, materials and packaging costs compared to the first nine months of fiscal 2008. Packaging costs increased approximately 7% due primarily to higher paper prices. Material costs increased approximately 6% due primarily to the higher cost for fuel used to dry our clay-based products compared to the prior fiscal year. Freight costs were even with the prior fiscal year as lower diesel prices have reduced domestic freight costs, particularly in the later part of the first nine months of fiscal 2009. Selling, general and administrative expenses for the Group increased approximately 10% due primarily to higher advertising costs.

CONSOLIDATED RESULTS

Our consolidated gross profit as a percentage of net sales for the first nine months of fiscal 2009 was 21% compared to 20% in the first nine months of fiscal 2008. Higher net selling prices outweighed increased fuel, manufacturing, freight, material and packaging costs. The cost of fuel used in the manufacturing process was 24% higher in the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. Non-fuel manufacturing costs, including depreciation and amortization, also increased 10% over the same period of the prior fiscal year. Significant manufacturing cost increases were in purchased materials, repairs, labor and non-kiln fuel.

We use natural gas, fuel oil and coal in the manufacturing process to operate kilns that dry our clay. As described below in Item 3. Quantitative and Qualitative Disclosures About Market Risk, we have contracted for a substantial portion of our planned fuel needs for fiscal 2009. Despite recent decreased market prices in some energy-related commodities, we anticipate that fuel costs incurred during fiscal 2009 will exceed costs in fiscal 2008.

Selling, general and administrative expenses as a percentage of net sales for the first nine months of fiscal 2009 were 15%, the same as in the first nine months of fiscal 2008. The discussions of the Groups' operating income above describe the fluctuation in the selling, general and administrative expenses that were allocated to the operating segments. The remaining unallocated corporate expenses were slightly lower due primarily to a lower estimated annual incentive plan bonus accrual. The lower incentive bonus expense was based on performance targets that are established for each year.

Interest expense was $243,000 less for the first nine months of fiscal 2009 compared to the same period in fiscal 2008 due to continued debt reduction. Interest income was $563,000 lower in the first nine months of fiscal 2009 due primarily to a lower average interest rate and a lower average investment balance.

Our effective tax rate was 27% of pre-tax income in the first nine months of fiscal 2009, the same as in the first nine months of fiscal 2008. The effective tax rate was based on the projected level and composition of our taxable income for fiscal 2009.

Total assets decreased $4,884,000 or 3% during the first nine months of fiscal 2009. Current assets decreased $11,350,000 or 14% from fiscal 2008 year-end balances due primarily to decreased investments in Treasury securities and accounts receivable. These decreases were partially offset by increased cash and cash equivalents, inventories and prepaid expenses. The changes in current assets are described below in Liquidity and Capital Resources. Property, plant and equipment, net of accumulated depreciation, increased $7,102,000 during the first nine months of fiscal 2009 due primarily to the capital projects related to new product development at our manufacturing facilities and the purchase of land.

Total liabilities decreased $8,660,000 or 14% during the first nine months of fiscal 2009. Current liabilities decreased $5,657,000 or 19% due primarily to decreased current maturities of notes payable, accounts payable, accrued salaries and accrued freight. Increased accrued trade promotions partially offset these decreases. The changes in current liabilities are described below in Liquidity and Capital Resources. Non-current liabilities decreased $3,003,000 or 10% due to lower notes payable partially offset by an increased deferred compensation liability. The decrease in notes payable is due to the reclassification from long-term to current. The increase in the deferred compensation liability is due to ongoing deferrals and accrued interest.

THREE MONTHS ENDED APRIL 30, 2009 COMPARED TO
THREE MONTHS ENDED APRIL 30, 2008

Consolidated net sales for the three months ended April 30, 2009 were $58,053,000, a decrease of 3% from net sales of $59,543,000 in the third quarter of fiscal 2008. Net income for the third quarter of fiscal 2009 was $2,416,000, an increase of 20% from net income of $2,013,000 in the third quarter of fiscal 2008. Diluted income per share for the third quarter of fiscal 2009 was $0.33 compared to $0.28 diluted net income per share for the third quarter of fiscal 2008.

Net income for the third quarter of fiscal 2009 was positively impacted by a higher average net selling price and generally flat costs for fuel used in the manufacturing process and combined materials, packaging and freight costs. To a lesser extent, net income was negatively affected by lower tons sold and higher non-fuel manufacturing costs, including depreciation and amortization. Operating income improved for both the Retail and Wholesale Products Group and for the Business to Business Products Group.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the third quarter of fiscal 2009 were $19,992,000, a decrease of $330,000 or 2% from net sales of $20,322,000 in the third quarter of fiscal 2008. This decrease was due primarily to a 14% decline in tons sold which prevailed over higher net selling prices. Net sales were down for sports products, bleaching earth and fluid filtration products. Net sales of sports products declined 24% with 26% lower tons sold. Sales of our baseball products declined due to the negative impact of economic conditions on municipalities and other recreational baseball customers. Sales of golf products decreased upon the loss of a distributor. Net sales of bleaching earth and fluid purification products were down 10% from the third quarter last year as a 17% decline in tons sold outweighed a higher net selling price. The lower tons sold for bleaching earth products were the result of a weak global economy and a good quality soybean crop, which requires less bleaching clay to process the oil. Net sales of our flowability aid product decreased 11% with 25% lower tons sold. The demand for flowability aid products used in animal feed was reduced due to the protein content of the soybean crop which is a determining factor in feed formulations. Net sales increased for agricultural chemical carriers, co-packaged products and animal health and nutrition products. Net sales of agricultural chemical carriers were up 15% due primarily to a higher net selling price that more than offset a 7% decrease in tons sold. Agricultural chemical carriers tons sold declined primarily in the lawn and garden market due to the increased use of engineered granules and the poor economy. A higher net selling price for our co-packaged traditional coarse cat litter and a 5% increase in tons sold resulted in an 11% net sales increase; however, under the terms of the agreement with our co-packaging partner, the net selling price was reduced at the end of the third quarter of fiscal 2009. Net sales of animal health and nutrition products were up 14% due primarily to increased net selling prices and the sales of new products.

The Business to Business Products Group's segment operating income increased 5% from $3,904,000 in the third quarter of fiscal 2008 to $4,085,000 in the third quarter of fiscal 2009. The income increase was due primarily to a higher net selling price that offset both lower tons sold and slightly higher combined freight, materials and packaging costs. Material costs increased approximately 10% due to higher costs associated with the mining and processing of our clay as described under Consolidated Results below. The Group's average freight cost was approximately 9% lower compared to the third quarter of fiscal 2008 as the result of lower international freight costs and lower domestic diesel fuel prices. Packaging costs decreased about 8% in the third quarter of fiscal 2009 due to lower costs for resin and paper. Selling, general and administrative expenses for the Group increased approximately 31% due primarily to increased marketing and other costs associated with the launch of new animal health and nutrition products.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the third quarter of fiscal 2009 were $38,061,000, a decrease of $1,160,000 or 3% from net sales of $39,221,000 reported in the third quarter of fiscal 2008. The net sales decline was driven by a 9% decrease in tons sold that outweighed increased net selling prices. Domestic industrial absorbents and cat litter products, as well as our foreign subsidiaries all experienced a reduction in tons sold. Net sales of our foreign subsidiaries decreased 31% with a 17% decline in tons sold. Both our United Kingdom and Canadian subsidiaries have been negatively impacted by weak local currencies compared to the U.S. Dollar and the worldwide economic slowdown. See Foreign Operations below for further information regarding our foreign subsidiaries' results. Total cat litter net sales were up 1% as a higher net selling price offset a decrease in tons sold of approximately 6%. Net sales of private label cat litter increased 1% due a higher net selling price that offset 4% lower tons sold. Net sales of branded cat litter also increased 1% due primarily to higher net selling prices that offset a 10% decline in tons sold. Sales of our branded coarse cat litter declined in dollars and tons sold; however, sales of our branded scoopable cat litter increased in dollars and tons sold due to improved sales to existing customers. Our industrial absorbents net sales were flat for the quarter with 7% lower tons sold. The continuing poor economic conditions in the manufacturing and automotive industries had a negative impact on industrial absorbent sales.

The Retail and Wholesale Products Group's segment operating income increased 47% to $4,693,000 in the third quarter of fiscal 2009 from $3,183,000 in the third quarter of fiscal 2008. Combined freight, materials and packaging costs decreased slightly compared to the third quarter of fiscal 2008. Freight costs declined approximately 9% due to lower diesel fuel prices. Material and packaging costs were flat with the third quarter of fiscal 2008. Selling, general and administrative expenses for the Group increased approximately 5% due primarily to higher advertising costs.

CONSOLIDATED RESULTS

Our consolidated gross profit as a percentage of net sales was 23% for the third quarter of fiscal 2009 compared to 19% in the third quarter of fiscal 2008. Higher net selling prices prevailed over an increase in non-fuel manufacturing costs, while the cost of fuel used in the manufacturing process and combined materials, packaging and freight were flat. Non-fuel manufacturing costs, including depreciation and amortization, increased 8%. Significant manufacturing cost increases were in purchased materials, repairs, labor and non-kiln fuel.

Selling, general and administrative expenses as a percentage of net sales were 17% for the third quarter of fiscal 2009 compared to 14% in the third quarter of fiscal 2008. The discussions of the Groups' operating income above describe the fluctuation in the selling, general and administrative expenses that were allocated to the operating segments. The remaining unallocated corporate expenses were higher due primarily to a higher quarterly estimated annual incentive plan bonus accrual. The incentive bonus accrual was based on performance targets that are established for each year and the estimated accrual is calculated quarterly based on actual results compared to these targets.

Interest expense was $82,000 lower for the third quarter of fiscal 2009 compared to the same period in fiscal 2008 due to continued debt reduction. Interest income was $172,000 lower in the third quarter of fiscal 2009 due primarily to a lower average interest rate and a lower average investment balance.

Our effective tax rate was 29% of pre-tax income in the third quarter of fiscal 2009 compared to 26% for the third quarter of fiscal 2008. The effective tax rate for the third quarter of fiscal 2009 included an adjustment to increase the nine month effective tax rate to 27% based on the projected level and composition of our taxable income for fiscal 2009. The effective tax rate for the third quarter of fiscal 2008 included an adjustment to decrease the nine month effective tax rate to 27% based on the projected level and composition of our taxable income for fiscal 2008.

FOREIGN OPERATIONS

Net sales by our foreign subsidiaries during the first nine months of fiscal 2009 were $10,206,000 or 6% of our consolidated net sales. This represents a decrease of 23% compared to foreign subsidiary net sales from the first nine months of fiscal 2008 of $13,186,000 or 8% of our consolidated net sales. Net sales and tons sold decreased in both our Canadian and United Kingdom subsidiaries. Industrial absorbent sales were down for both subsidiaries as the worldwide economic slowdown impacted sales through reduced orders. In addition, the British Pound was approximately 21% weaker and the Canadian Dollar was approximately 15% weaker against the U.S. Dollar for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008, which resulted in lower sales values after translation to U.S. Dollars for the first nine months of fiscal 2009. For the first nine months of fiscal 2009, our foreign subsidiaries reported a net loss of $496,000, a decrease of $1,432,000 from the $936,000 net income reported in the first nine months of fiscal 2008. The lower tons sold and currency impacts described above contributed to the net loss, along with increased material and packaging costs.

Identifiable assets of our foreign subsidiaries as of April 30, 2009 were $9,186,000 compared to $11,101,000 as of April 30, 2008. The decrease is due primarily to lower cash balances and the weaker value of both the British Pound and Canadian Dollar compared to the U.S. Dollar as of April 30, 2009 versus April 30, 2008. The exchange rate fluctuation resulted in lower asset values translated to U.S. Dollars as of April 30, 2009.

Net sales by our foreign subsidiaries during the third quarter of fiscal 2009 were $3,117,000 or 5% of our consolidated net sales. This represents a 31% decrease compared to foreign subsidiary net sales from with the third quarter of fiscal 2008 of $4,488,000 or 8% of our consolidated net sales. Net sales and tons sold decreased in both our Canadian and United Kingdom subsidiaries. Industrial absorbent sales were down for both subsidiaries due to the continued worldwide economic slowdown. Canadian cat litter sales also declined for the third quarter of fiscal 2009. The quarter's results were further impacted by the British Pound approximately 27% weaker and the Canadian Dollar approximately 19% weaker against the U.S. Dollar as described for the nine month period above. For the third quarter of fiscal 2009, our foreign subsidiaries reported a net loss of $63,000, a decrease of $510,000 from the $447,000 net income reported in the third quarter of fiscal 2008.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirements include funding working capital needs, the purchasing and upgrading of real estate, equipment and facilities, funding new product development and investing in infrastructure and potential acquisitions. We principally have used cash generated from operations and, to the extent needed, issuance of debt securities and borrowings under our credit facilities to fund these requirements. Cash and cash equivalents increased $4,832,000 during the first nine months of fiscal 2009 to $11,680,000 at April 30, 2009.

The following table sets forth certain elements of our unaudited condensed consolidated statements of cash flows (in thousands):

                                                                        Nine Months Ended
                                                                April 30, 2009      April 30, 2008
Net cash provided by operating activities                      $          8,307     $         6,123
Net cash provided by (used in) investing activities                       4,375              (4,749 )
Net cash used in financing activities                                    (8,740 )            (5,231 )
Effect of exchange rate changes                                             890                (111 )
Net increase (decrease) in cash and cash equivalents           $          4,832     $        (3,968 )

Net cash provided by operating activities

Net cash provided by operations was $8,307,000 for the first nine months of fiscal 2009, compared to $6,123,000 for the first nine months of fiscal 2008. The increase was due primarily to increased net income and changes in working capital. For the first nine months of fiscal years 2009 and 2008, the primary components of working capital that impacted operating cash flows were as follows:

Accounts receivable, less allowance for doubtful accounts, decreased by $2,623,000 in the first nine months of fiscal 2009 compared to an increase of $3,285,000 in the first nine months of fiscal 2008. Sales in the third quarter of fiscal 2009 were significantly less than in the fourth quarter of fiscal 2008, particularly in the comparison of the last month of each quarter. Sales in the third quarter of fiscal 2008 were greater than in the fourth quarter of fiscal 2007, again particularly in the comparison of the last month of each quarter. The change in both years is also subject to timing of sales and collections and ongoing efforts to improve collection procedures. We assessed our accounts receivable as of April 30, 2009 using various statistical measures and specific account reviews and believe the quality of our accounts receivable has not diminished compared to April 30, 2008.

Inventories increased $2,392,000 in the first nine months of fiscal 2009 compared to an increase of $1,704,000 in the same period in fiscal 2008. Finished goods inventories increased in the first nine months of fiscal 2009 due primarily to increased tons in inventory to cover downtime for planned maintenance. Finished goods and packaging inventories increased in the first nine months of fiscal 2008 due to normal operational fluctuations and higher costs.

Other assets increased $1,042,000 in the first nine months of fiscal 2009 compared to an increase of $790,000 in the first nine months of fiscal 2008. The . . .