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 elsewhere herein. 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 in Item 1A "Risk Factors" in this Annual Report on Form 10-K.

OVERVIEW

We develop, mine, 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 floor absorbents, fluids purification and filtration bleaching clays, agricultural chemical carriers, animal health and nutrition products 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 operating segments based on the different characteristics of our two primary customer groups: Retail and Wholesale Products Group and Business to Business Products Group. Each operating segment is discussed individually below. Additional detailed descriptions of the operating segments are included in Item 1 "Business" above.

We had net income of $9,586,000, or $1.32 per diluted share, for the year ended July 31, 2009, a 6% increase over net income of $9,039,000, or $1.25 per diluted share, for the year ended July 31, 2008. Net income was positively impacted by a higher average net selling price due to strategic pricing and the mix of products sold, with some products contributing more to net income than others. Net income was negatively impacted by higher costs of natural gas and recycled fuel oil used to dry our clay and resin materials used to package our products.

The global effect of the economic downturn during fiscal 2009 impacted demand for products in both our domestic and foreign markets and resulted in a decrease in total tons sold. In our Retail and Wholesale Products Group, competition for our consumer products increased as consumer spending declined. The downturn in the manufacturing and automotive industries reduced demand for our industrial absorbents. In our Business to Business Products Group, our agricultural chemical carrier sales declined in both the agricultural and the lawn and garden markets. Sales of our sports products declined due to the negative impact of economic conditions on municipalities and other recreational baseball customers. The weak global economy along with a good quality soybean crop resulted in lower tons sold for our bleaching earth products. Our continued focus on our corporate strategy to create value from sorbent minerals helped us contend with these challenging times. We introduced new products in both Groups and continued our commitment to research and development to create new products and to improve existing products.

Consolidated net sales for the year ended July 31, 2009 were $236,245,000, an increase of 2% from net sales of $232,359,000 in fiscal 2008. Both our Retail and Wholesale Products Group and our Business to Business Products Group contributed to the net sales increase. Net income for the year was $9,586,000, an increase of 6% from net income of $9,039,000 in fiscal 2008. The Retail and Wholesale Products Group contributed to the improved net income as higher average net selling prices overcame lower volume and increased costs; however, in the Business to Business Products Group the lower volume and higher costs prevailed over higher average net selling prices.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for fiscal 2009 were $76,049,000, an increase of $1,001,000, or 1%, from net sales of $75,048,000 in fiscal 2008. Higher average net selling prices and a favorable product sales mix provided for increased sales in fiscal 2009 despite 9% lower tons sold for the Group compared to fiscal 2008. Net sales of co-packaged cat litter, animal health and nutrition and agricultural chemical carrier products all increased, while net sales of fluids purification and sports-related products decreased. Our co-packaged traditional coarse cat litter net sales were up 8% in fiscal 2009. A 4% increase in tons sold due to product improvements and a higher average net selling price more than offset the loss of a small co-package customer during fiscal 2009. Net sales of animal health and nutrition products rose 2% due primarily to increased average net selling prices and the introduction of new mycotoxin binder products. Net sales of agricultural chemical carriers were up approximately 12% due primarily to a higher average net selling price that more than offset approximately 11% lower tons sold. Agricultural chemical carriers tons sold declined in the agricultural and the lawn and garden markets due primarily to the poor economy. Net sales of bleaching earth and fluid purification products were down 3% from fiscal 2008 as a 9% decline in tons sold outweighed a higher average net selling price. The lower tons sold for bleaching earth products resulted from a weak global economy and a good quality soybean crop, which required less bleaching clay to process the oil. Sales of our baseball-related products declined 7% due to the negative impact of economic conditions on municipalities and other recreational baseball customers. Sales of golf-related products decreased 83% upon the loss of a distributor.

The Business to Business Products Group's operating income decreased 5% to $14,948,000 in fiscal 2009 from $15,782,000 in fiscal 2008. Approximately 8% higher combined materials, packaging and freight costs more than offset a higher average net selling price. Materials costs increased approximately 11% due to the higher cost for fuel used to dry our clay-based products compared to the prior fiscal year. Freight costs were approximately 5% higher compared to fiscal 2008. Although diesel fuel and ocean freight prices declined, particularly in the later part of fiscal 2009, the average cost for fiscal 2009 was greater than for fiscal 2008. Conversely, packaging costs declined approximately 8% due primarily to lower costs of paper used in packaging. Selling and administrative expenses were 21% higher in fiscal 2009 compared to fiscal 2008 due primarily to marketing and promotional activities for our new mycotoxin binder product.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for fiscal 2009 were $160,196,000, an increase of $2,885,000, or 2%, from net sales of $157,311,000 in fiscal 2008. The Group's net sales growth was driven by increased average net selling prices and a favorable product sales mix that overcame a 4% decrease in tons sold. Net sales of cat litter products increased approximately 6% in fiscal 2009. Private label cat litter net sales increased approximately 7% due to higher average net selling prices accompanied by a 1% increase in tons sold. Branded cat litter net sales also increased approximately 5% due to a higher average net selling price that offset a 7% decline in tons sold. Branded coarse cat litter tons sold declined; however, our branded scoopable cat litter tons sold increased as a result of new natural products and marketing programs. Wal-Mart, our largest customer, informed us in June 2009 that its stores will carry a reduced number of cat litter brands beginning in August 2009, the first month of our fiscal year 2010. We expect to maintain a private label relationship with this customer. As disclosed in our June 2009 press release regarding this development, we believe this change will have a material negative impact on fiscal 2010 net sales and net income. Our intention is to moderate the impact on our consolidated financial results of the expected reduction in sales to Wal-Mart through expanded distribution to other customers, new product introductions, cost saving initiatives and product sales mix improvement. Net sales of domestic industrial absorbents were flat as a higher average net selling price offset a 7% decline in tons sold due to poor economic conditions in the manufacturing and automotive industries. Net sales of our foreign subsidiaries decreased 24% with a 16% decline in tons sold. Both our United Kingdom and Canadian subsidiaries have been negatively impacted by unfavorable local currency fluctuations compared to the U.S. Dollar and the worldwide economic slowdown. See Foreign Operations below for further information regarding our foreign subsidiaries' results.

CONSOLIDATED RESULTS

Consolidated gross profit as a percentage of net sales in fiscal 2009 increased to 21% from 20% in fiscal 2008. Cost of sales for fiscal 2008 was reduced by $831,000 as a result of the sale of emission reduction credits, as described in Note 2 of the Notes to the Consolidated Financial Statements, which increased our consolidated gross profit as a percentage of net sales for fiscal 2008 by approximately 1%. Gross profit improved in fiscal 2009 due primarily to a higher average net selling price which overcame increased manufacturing and packaging costs. The cost of fuel used in the manufacturing process was 19% higher in fiscal 2009 compared to fiscal 2008. Non-fuel manufacturing costs, including depreciation and amortization, increased 13% over the same period of the prior fiscal year. 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 increased in fiscal 2009 to 15% from 14% in fiscal 2008. The discussion of the Groups' operating income above describes the increased selling and administrative expenses that were allocated to our operating segments. The remaining unallocated corporate expenses were lower in fiscal 2009 due primarily to lower expenses for the estimated incentive bonus, research and development and stock option compensation. The lower fiscal 2009 incentive bonus expense was based on performance targets that are established for each year. Research and development costs were lower as we moved further through the development cycle for several new products. Stock option compensation was lower as more stock options became fully vested and no new options were issued. These lower expenses were partially offset by higher pension and rent expense.

Interest expense in fiscal 2009 decreased $279,000 from fiscal 2008 due to a reduction in debt outstanding. Interest income in fiscal 2009 decreased $705,000 from fiscal 2008 due to lower average interest rates and lower average investment balances.

Other income in fiscal 2009 increased $195,000 from fiscal 2008. Other income in fiscal 2009 included income relating to a lease arrangement with a co-packaging partner. Other income in fiscal 2008 included expenses associated with examinations by regulatory agencies.

Our effective tax rate was 28% of pre-tax income in fiscal 2009 compared to 26% in fiscal 2008. The effective tax rate was higher in fiscal 2009 due to increased income, a lower deduction for mining depletion due to reduced tonnage and an unfavorable tax impact from the results of foreign operations.

Total assets increased $273,000 during fiscal 2009. Current assets decreased $8,934,000, or 11%, from the fiscal 2008 year-end balances primarily due to decreased investments in Treasury securities and accounts receivable. These decreases were partially offset by increased cash and cash equivalents and prepaid expenses. These changes are described in the Liquidity and Capital Resources section below. Property, plant and equipment, net of accumulated depreciation, increased $8,045,000 due primarily to capital projects related to new product development at our manufacturing facilities and the purchase of land. Other noncurrent assets increased $1,162,000 from fiscal 2008 due to a higher deferred tax asset partially offset by a decrease in a lease receivable with a co-packaging partner.

Total liabilities decreased $1,664,000, or 3%, during fiscal 2009. Current liabilities decreased $6,333,000, or 21%, during fiscal 2009. The changes in current liabilities are described in the Liquidity and Capital Resources section below. Noncurrent liabilities increased $4,669,000 due primarily to higher accruals for pension and post-retirement benefits and deferred compensation partially offset by a reduction in long term debt due to scheduled payments. The increased pension and post-retirement benefit accruals were driven by the actuarially calculated benefit obligations and lower pension asset values as of July 31, 2009. See Note 9 of the Notes to the Consolidated Financial Statements for more information on employee benefit plans. Deferred compensation accruals increased due to new deferrals and earnings on deferred balances in excess of payouts.

Consolidated net sales for the year ended July 31, 2008 were $232,359,000, an increase of 10% from net sales of $212,117,000 in fiscal 2007. Both our Retail and Wholesale Products Group and our Business to Business Products Group contributed to the sales improvement. Our focus on strategic pricing company-wide to contend with rising costs resulted in an increased average net selling price. In addition, total tons sold for fiscal year 2008 increased 5%. Net income for the year was $9,039,000, an increase of 18% from net income of $7,660,000 in fiscal 2007. Net income was positively impacted by higher average net selling prices, increased tons sold and an $831,000 reduction in cost of sales from the sale of emission reduction credits, as described in Note 2 of the Notes to the Consolidated Financial Statements. Net income was negatively affected by higher freight, materials and packaging costs. Freight costs increased significantly due to record high fuel prices which impacted our truck, rail and ship distribution channels. Materials costs were driven upward by the high cost of fuel used to dry our clay-based products and to transport raw materials. The cost of purchased packaging materials increased due to price increases in the resin and paper markets. The Business to Business Products Group contributed to the improved net income as higher net selling prices overcame lower volume and increased costs; however, in the Retail and Wholesale Products Group the higher costs prevailed over increases in both net selling prices and volume.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for fiscal 2008 were $75,048,000, an increase of $5,436,000, or 8%, from net sales of $69,612,000 in fiscal 2007. Total tons sold for the Group were down 3% compared to fiscal 2007; however, higher average net selling prices provided for increased sales in fiscal 2008. Net sales of fluids purification products, co-packaged cat litter products and animal health and nutrition products all increased. Net sales of bleaching earth and fluids purification products increased 22% due to higher average net selling prices and 8% more tons sold. The increased tonnage was the result of additional business opportunities in both domestic and export markets and in the biodiesel production industry. Our co-packaged traditional coarse cat litter net sales were up 4% in fiscal 2008. Selling price increases and a new co-packaging customer offset a 4% decline in tons sold. Tons sold decreased as coarse cat litter sales continued to decline in the overall cat litter market while scoopable cat litter sales continued to increase. Net sales of animal health and nutrition products rose 10% primarily due to increased tons sold and increased average net selling prices for our mycotoxin binder and animal feed binder products. In contrast, net sales of agricultural chemical carriers were down 5% due to 11% lower tons sold caused by continued market erosion from the growth of genetically modified seed and seed treatments. Tons sold for the Group's Flo-Fre product line (a by-product of the manufacture of our agricultural chemical carriers) also declined; however, the impact of lower volume was offset by a higher average net selling price which resulted in an increase in net sales. Net sales of sports field products were down as the result of the loss of a customer.

The Business to Business Products Group's operating income increased 19% to $15,782,000 in fiscal 2008 from $13,302,000 in fiscal 2007. Average net selling price increases were partially offset by approximately 6% higher combined freight, materials and packaging costs. Freight costs increased approximately 23% due to higher diesel fuel prices. Packaging costs were driven upward by price increases in the resin and paper markets. Selling and administrative expenses were only 1% higher in fiscal 2008 compared to fiscal 2007. Higher marketing costs in fiscal 2008 were mostly offset by lower bad debt expense. Bad debt expense was higher in fiscal 2007 due to the write-off of a receivable from a sports product customer.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for fiscal 2008 were $157,311,000, an increase of $14,806,000, or 10%, from net sales of $142,505,000 reported in fiscal 2007. The net sales growth was driven by increases in both overall net selling prices and tons sold. The Group's total tons sold were up 9%, including an 18% increase in cat litter tons. Net sales of private label cat litter increased 35% due to selling price increases and 29% more volume. The higher volume was the result of expanded distribution to existing customers, as well as distribution to new customers. The Group's net sales were also positively impacted by reduced trade spending costs (trade spending costs are reported as a reduction of net sales). Partially offsetting these net sales increases was a 1% reduction in branded cat litter net sales due to loss of a customer. Net sales of synthetic and clay-based industrial absorbents were also both down 1% due to lower volume.

CONSOLIDATED RESULTS

Consolidated gross profit as a percentage of net sales in fiscal 2008 decreased to 20% from 22% in fiscal 2007. Cost of sales for fiscal 2008 was reduced by $831,000 as a result of the sale of emission reduction credits, as described in Note 2 of the Notes to the Consolidated Financial Statements, which increased our consolidated gross profit as a percentage of net sales for fiscal 2008 by approximately 1%. Increased average net selling prices in fiscal 2008 did not overcome increased freight, materials and packaging costs. Gross profit was further reduced by a 5% increase in the cost of fuel used in the manufacturing process in fiscal 2008 compared to fiscal 2007.

Selling, general and administrative expenses as a percentage of net sales in fiscal 2008 decreased to 14% from the 17% in fiscal 2007. The discussion of the Groups' operating income above describes the fluctuation in the selling, general and administrative expenses that were allocated to our operating segments. The remaining unallocated corporate expenses were lower in fiscal 2008 due primarily to decreases in the estimated incentive bonus and audit fees. The lower fiscal 2008 incentive bonus expense was based on performance targets that are established for each year. Audit expense was higher in fiscal 2007 when we became an accelerated filer and were required for the first time to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Interest expense in fiscal 2008 decreased $200,000 from fiscal 2007 due to a reduction in debt outstanding. Interest income in fiscal 2008 decreased $345,000 from fiscal 2007 due to lower average interest rates that offset the benefits of higher average investment balances.

Other income in fiscal 2008 decreased $506,000 from fiscal 2007. Other income in fiscal 2007 included proceeds received from life insurance policies on former employees.

Our effective tax rate was 26% of pre-tax income in fiscal 2008 versus 27% in fiscal 2007. The effective tax rate was lower in fiscal 2008 primarily due to an increased deduction for mining depletion.

Total assets increased $6,901,000, or 5%, during fiscal 2008. Current assets increased $4,351,000, or 6%, from the fiscal 2007 year-end balances primarily due to increased accounts receivable, investments in Treasury securities and inventories. These increases were partially offset by decreased cash and cash equivalents. These changes are described in the Liquidity and Capital Resources section below. Other assets increased $2,555,000 from fiscal 2007 due to the $1,300,000 purchase of strategic intangible assets for the Retail and Wholesale Products Group and a lease receivable relating to a co-packaging agreement for the Business to Business Products Group.

Property, plant and equipment, net of accumulated depreciation, was consistent with the year-end balance in fiscal 2007. Capital expenditures for fiscal 2008 were approximately equal to depreciation expense.

Total liabilities decreased $483,000, or 1%, during fiscal 2008. Noncurrent liabilities decreased $3,179,000, due to payment on long term debt. This decrease was partially offset by increases in the accrued postretirement benefits and deferred compensation, as described in Notes 9 and 10, respectively, of the Notes to the Consolidated Financial Statements. Current liabilities increased $2,696,000, or 10%, during fiscal 2008. The changes in current liabilities are described in the Liquidity and Capital Resources section below.

Net sales by our foreign subsidiaries during fiscal 2009 were $13,447,000, or 6% of total company net sales. This represents a decrease of $4,140,000, or 24%, from fiscal 2008, in which foreign subsidiary net sales were $17,587,000, or 8% of total company 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. Aggressive competition in the Canadian cat litter market also resulted in some reduced sales and the loss of a customer. In addition, the British Pound was approximately 5% weaker and the Canadian Dollar was approximately 17% weaker against the U.S. Dollar for fiscal 2009 compared to fiscal 2008, which resulted in lower sales values after translation to U.S. Dollars. For fiscal 2009 our foreign subsidiaries reported a net loss of $559,000, a decrease of $1,444,000 from the $885,000 net income reported in fiscal 2008. The lower tons sold and currency impacts described above contributed to the net loss, along with increased material and freight costs. Identifiable assets of our foreign subsidiaries as of July 31, 2009 were $9,692,000 compared to $10,857,000 as of July 31, 2008. Most of the decrease in identifiable assets was in cash and cash equivalents, accounts receivable and inventories.

Net sales by our foreign subsidiaries during fiscal 2008 were $17,587,000, or 8% of total company net sales. This represents an increase of $630,000, or 4%, from fiscal 2007, in which foreign subsidiary net sales were $16,957,000, or 8% of total company net sales. Net sales increased in both our Canadian and United Kingdom subsidiaries. Our Canadian subsidiary's net sales increase was primarily due to a higher net selling price that overcame lower tons sold. The lower volume was primarily in private label cat litter sales due to the loss of a customer. For fiscal 2008 our foreign subsidiaries reported net income of $885,000, an increase of $555,000 from the $330,000 net income reported in fiscal 2007. Net selling price increases improved results for both our Canadian and United Kingdom subsidiaries. Our Canadian subsidiary also obtained a greater portion of a raw material from an alternative lower cost source during fiscal 2008. Our Swiss subsidiary reported lower income taxes in fiscal 2008 due to additional taxes recognized in fiscal 2007 related to the repatriation of untaxed earnings. Identifiable assets of our foreign subsidiaries as of July 31, 2008 were $10,857,000 compared to $9,775,000 as of July 31, 2007. Most of the increase in identifiable assets was in cash and cash equivalents, inventories and accounts receivable.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirements include funding working capital needs, the purchasing and upgrading of real estate, equipment and facilities, and investing in infrastructure and potential acquisitions. We have principally 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 totaled $11,839,000, $6,848,000 and $12,133,000 at July 31, 2009, 2008 and 2007, respectively. As of July 31, 2009 there were no outstanding borrowings under our revolving credit facility with Harris N.A.

The following table sets forth certain elements of our Consolidated Statements of Cash Flows (in thousands):

                                                                             Fiscal Year Ended
                                                                  July 31,       July 31,        July 31,
                                                                    2009           2008            2007
Net cash provided by operating activities                        $ 15,814       $  11,341       $ 16,851
Net cash used in investing activities                              (2,189 )       (10,890 )       (5,467 )
Net cash used in financing activities                              (9,082 )        (5,666 )       (5,546 )
Effect of exchange rate changes on cash and cash equivalents          448             (70 )         (312 )
Net increase (decrease) in cash and cash equivalents                4,991          (5,285 )        5,526

Net cash provided by operating activities

In fiscal 2009 net cash provided by operations was $15,814,000, an increase of $4,473,000 from fiscal 2008, due primarily to an increase in other . . .