Edgar Filing: ARGAN INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.

For the fiscal year ended January 31, 2006
------------------------------------------

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the transition period from _____________ to _____________

Commission file number 001-31756

ARGAN, INC.
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(Name of Small Business Issuer in Its Charter)

Delaware 13-1947195
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

One Church Street, Suite 302, Rockville, Maryland 20850
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(Address of Principal Executive Offices) (Zip Code)

301-315-0027
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(Issuer's Telephone Number)

Securities registered under Section 12(b) of the Exchange Act:

Common Stock, $0.15 par value
-----------------------------
(Title of Class)

Securities registered under Section 12(g) of the Exchange Act: None

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [_]

State issuer's revenues for its most recent fiscal year: $28,452,000

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $1,158,000 as of April 28, 2006, based upon the
closing price on the NASDAQ Electronic Bulletin Board System reported for such
date. Shares of Common Stock held by each Officer and Director and by each
person who owns 5% or more of the outstanding Common Shares have been excluded
because such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

Number of shares of Common Stock outstanding as of May 10, 2006: 4,574,010

DOCUMENTS INCORPORATED BY REFERENCE
None

Transitional Small Business Disclosure Format (check one): Yes [_] No [X]

ARGAN, INC.
2006 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS

Page
PART I

ITEM 1. Description of Business............................................. 1

ITEM 2. Description of Property.............................................15

ITEM 3. Legal Proceedings...................................................16

ITEM 4. Submission of Matters to a Vote of Security Holders.................16

PART II

ITEM 5. Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities ...............16

ITEM 6. Management's Discussion and Analysis or Plan of Operation...........19

ITEM 7. Financial Statements................................................36

ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 62

ITEM 8A. Controls and Procedures............................................ 62

ITEM 8B. Other Information.................................................. 62

PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.................. 62

ITEM 10. Executive Compensation............................................. 64

ITEM 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters......................... 66

ITEM 12. Certain Relationships and Related Transactions..................... 69

ITEM 13. Exhibits........................................................... 70

ITEM 14. Principal Accountant Fees and Services............................. 73

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

We conduct our operations through our wholly owned subsidiaries Vitarich
Laboratories, Inc. (VLI) and Southern Maryland Cable, Inc. (SMC) that we
acquired in August 2004 and July 2003, respectively. Through VLI, we develop,
manufacture and distribute premium nutritional supplements, whole-food dietary
supplements and personal care 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. The Company is
actively pursuing acquisitions in the nutraceutical and other industries. Our
strategy is to become a geographically and customer diversified nutraceutical
manufacturer and distribution company.

Through VLI, we are dedicated to the research, development, manufacture and
distribution of premium nutritional supplements, whole-food dietary supplements
and personal care products. Several have garnered honors including the National
Nutritional Foods Association's prestigious People's Choice Awards for best
products of the year in their respective categories.

We provide nutrient-dense, super-food concentrates, vitamins and supplements.
Our target customers include health food store chains, mass merchandisers,
network marketing companies, pharmacies and major retailers.

We intend to enhance our position in the fast growing global nutrition industry
through our innovative product development and research. We believe that we will
be able to expand our distribution channels by providing continuous quality
assurance and by focusing on timely delivery of superior nutraceutical products.

We intend to seek acquisitions in the nutrition industry to evolve into a
customer and product diverse nutraceutical products company with a reputation
for high quality and on-time delivery of products.

Through SMC, we currently provide inside plant, premise wiring services to the
Federal Government and have plans to expand that work to commercial customers
who regularly need upgrades in their premise wiring systems to accommodate
improvements in security, telecommunications and network capabilities.

We continue to participate in the expansion of the telecommunications industry
by working with various telecommunications providers. We provide maintenance and
upgrade services for their outside plant systems that increase the capacity of
existing infrastructure. We also provide outside plant services to the power
industry by providing maintenance and upgrade services to utilities.

We intend to emphasize our high quality reputation, customer base and highly
motivated work force in competing for larger and more diverse contracts. We
believe that our high quality and well maintained fleet of vehicles and
construction machinery and equipment is essential to meet customers' needs for
high quality and on-time service. We are committed to our repair and maintenance
capabilities to maintain the quality and life of our equipment. Additionally, we
invest annually in new vehicles and equipment.

We were organized as a Delaware corporation in May 1961. On October 23, 2003,
our shareholders approved a plan providing for the internal restructuring of the
Company whereby we became a holding company, and our operating assets and
liabilities relating to our Puroflow Incorporated ("Puroflow") business were
transferred to a newly-formed, wholly owned subsidiary. The subsidiary then
changed its name to "Puroflow Incorporated" and we changed our name from
Puroflow Incorporated to "Argan, Inc."

On October 31, 2003, pursuant to a certain Stock Purchase Agreement ("Stock
Purchase Agreement"), we completed the sale of Puroflow to Western Filter
Corporation (WFC) for approximately $3.5 million in cash, of which $300,000 is
being held in escrow to indemnify WFC from losses if a breach of the
representations and warranties made by us pursuant to that sale should occur.
During the twelve months ended January 31, 2005, WFC asserted that the Company
breached certain representations and warranties under the Stock Purchase
Agreement. (See Note 14 to consolidated financial statements.)

Holding Company Structure

We intend to make additional acquisitions and/or investments. We intend to have
more than one industrial focus and to identify those companies that are in
industries with significant potential to grow profitably both internally and
through acquisitions. We expect that companies acquired in each of these
industrial groups will be held in separate subsidiaries that will be operated in
a manner that best provides cashflow and value for the Company.

We are a holding company with no operations other than our investments in VLI
and SMC. At January 31, 2006, there were no restrictions with respect to
dividends or other payments from VLI and SMC to Argan.

Our principal executive offices are located at One Church Street, Suite 302,
Rockville, Maryland 20850. Our phone number at that address is (301) 315-0027.
We maintain a website on the Internet at www.arganinc.com. Information on our
website is not incorporated by reference into this report.

Unless the context otherwise requires, references in this Form 10-KSB to
"Argan," "AI," the "Company," "we," "us" or "our" refer to Argan, Inc., a
Delaware corporation, and its subsidiaries. Our fiscal year for financial
reporting ends on January 31.

Private Sale of Stock

On May 4, 2006, the Company completed a private offering of 760,000 shares of
common stock at a price of $2.50 per share for aggregate proceeds of $1.9
million. The Company will use $1.8 million of the proceeds to pay down an equal
notional amount of the subordinated note due Kevin Thomas. The remainder of the
proceeds will be used for general corporate purposes.

One of the investors, MSRI SBIC, L.P., which acquired 240,000 shares in the
offering, is controlled by Daniel Levinson, a director of the Company. In
addition, James Quinn, a director of the Company acquired 40,000 shares for his
own account.

On January 28, 2005, the Company sold and issued to MSR I SBIC, L.P., a Delaware
limited partnership ("Investor"), 129,032 shares (the "Shares") of common stock
of the Company pursuant to a Subscription Agreement between the Company and
Investor (the "Agreement"). The Shares were issued at a purchase price of $7.75
per share, yielding aggregate proceeds of $999,998. The Investor is an entity
controlled by Daniel Levinson, a director of the Company. Pursuant to the
Agreement, we agreed to issue additional shares of our common stock to Investor
in accordance with the Agreement based upon the earlier of (i) our issuance of
additional shares of common stock having an aggregate purchase price of at least
$2,500,000 at a price per share less than $7.75, or (ii) July 31, 2005. The
additional shares of common stock to be issued would equal the price paid by
Investor divided by the lower of (i) the weighted average price of all stock
sold by the Company during the period January 28, 2005 through July 31, 2005, or
(ii) ninety percent of the average bid price of Argan's common stock for the
thirty days ended July 31, 2005, if the price was less than $7.75 per share,
less the 129,032 shares previously issued. Any additional shares issued would
effectively reduce the Investor's purchase price per common share as set forth
in the Agreement. The shares were issued pursuant to an exemption provided by
Section 4(2) of the Securities Act. The shares were registered under the
Securities Act on Form S-3 filed with the SEC on February 25, 2005.

The provision in the agreement which allows the Investor to receive additional
shares under certain conditions represents a derivative under Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." Accordingly, $139,000 of the proceeds received upon
issuance was accounted for as a liability for a derivative financial instrument.
This liability relates to the obligation to issue Investor additional shares
under certain conditions. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. The Company
recorded a fair value adjustment for a $343,000 loss during the twelve months
ended January 31, 2006 which is also reflected as a change in liability for the
derivative financial instruments. The fair value adjustment was recorded as a
charge to the Company's other expenses and net loss. The liability for
derivative financial instruments related to the Investor was settled as a
non-cash transaction by the issuance of 95,321 shares of the Company's common
stock on August 13, 2005.

Merger of Vitarich

On August 31, 2004, pursuant to an Agreement and Plan of Merger ("Merger
Agreement"), the Company acquired all of the common stock of Vitarich
Laboratories, Inc. ("Vitarich") by way of a merger of Vitarich with and into a
wholly-owned subsidiary of the Company ("VLI"), with VLI as the surviving
company of the Merger. Vitarich (now VLI) is a developer, manufacturer and
distributor of premium nutritional supplements, whole food dietary supplements
and personal care products.

In connection with the Merger Agreement, the Company paid Kevin J. Thomas
("Thomas"), the former shareholder of Vitarich, initial consideration consisting
of (i) $6.1 million in cash; and (ii) 825,000 shares of the Company's common
stock which was valued at $4,950,000 or $6.00 per share utilizing the quoted
market price on the acquisition date. These 825,000 shares were registered on
Form S-3 under the Securities Act of 1933, as amended, on February 25, 2005. The
Company also assumed $1.6 million in debt. The Company incurred $600,000 in
transaction costs which are included in the purchase cost.

In connection with the Merger Agreement, the Company assumed approximately $1.6
million of Vitarich indebtedness (including approximately $1.1 million of
equipment leases and working capital credit lines and approximately $507,000
that was due to Thomas by Vitarich at the time of the merger) as well as
Vitarich accounts payable and accrued liabilities. The Company also assumed
certain real property leases and other obligations of Vitarich in connection
with the merger. The Company paid the $507,000 that was due to Thomas at the
closing of the merger and paid approximately $714,000 of the assumed equipment
leases and working capital credit lines following the closing of the merger.

In connection with the Merger Agreement, VLI and Thomas entered into an
employment agreement, pursuant to which VLI agreed to employ Thomas as its
Senior Operating Executive for an initial term of three years, subject to
successive automatic one-year renewal terms after the initial term unless either
party provides notice of its election not to renew. Further, the Company entered
into a supply agreement with a supply company owned by Thomas, pursuant to which
the supply company committed to sell to the Company, and the Company committed
purchase on an as-needed basis, certain organic agriculture products produced by
the supply company.

Pursuant to the Merger Agreement, in addition to the initial consideration paid
at closing, the Company agreed to pay Thomas additional consideration equal to
(a) 5.5 times the Adjusted EBITDA of Vitarich (as defined in the Merger
Agreement) for the 12 months ended February 28, 2005 (b) less the initial
consideration paid at closing (provided however, that in no event was the
additional consideration less than zero or require repayment by Thomas of any
portion of the initial consideration paid at closing) ("Additional Cash
Consideration"). Such Additional Cash Consideration was to be paid 50% in cash
and 50% through issuance of additional common stock of the Company.

The Company's Additional Consideration was approximately $275,000 in cash, $2.7
million in a subordinated note and approximately 348,000 shares of the Company's
common stock with a fair value of $2.1 million or $6.00 per share utilizing the
quoted market price on February 28, 2005.

On July 5, 2005, the Company and Thomas entered into an agreement (Earn Back
Agreement) concerning the calculation of Additional Consideration due Thomas. In
the Earn Back Agreement, the Company agreed to pay Thomas $594,000 in a
subordinated note and 76,645 shares of the Company's common stock valued $5.50
per share utilizing the quoted market price on July 5, 2005. The $1,015,000 of
Additional Consideration has been recorded by the Company as additional purchase
consideration and an increase in goodwill.

Impairment of Vitarich's Goodwill and Purchased Intangibles

During the twelve months ended January 31, 2006, as a result of our annual
impairment analysis, we determined that the goodwill and the proprietary
formulas intangible asset of VLI were impaired. The recent under-performance of
VLI's financial results reduced the estimate of future cash flows which were
discounted based on a rate that reflects the perceived risk of our investment in
VLI to determine its fair value. During the twelve months ended January 31,
2006, we recorded an impairment charge of $6,497,000 with respect to goodwill
and proprietary formulas. (See Note 5 to the consolidated financial statements.)

Subordination of Certain Debt

On January 31, 2005, the Company entered into a Debt Subordination Agreement
("Subordination Agreement") with Thomas, SMC (SMC and the Company together are
referred to herein as, the "Debtor") and Bank of America, N.A. ("Lender") to
reconstitute as subordinated debt the Additional Cash Consideration that Debtor
owes to Thomas in connection with the Merger Agreement. Pursuant to the
Subordination Agreement, Debtor and Thomas agreed to reconstitute the Additional
Cash Consideration as subordinated debt and in furtherance thereof, the Company
agreed to execute and deliver to Thomas a Subordinated Promissory Note in an
amount equal to the amount that would otherwise be due Thomas as Additional Cash
Consideration under the Merger Agreement. Accordingly, under the Subordination
Agreement, Debtor subordinated all of the Junior Debt (as such term is defined
in the Subordination Agreement) to the full and final payment of all the
Superior Debt (as such term is defined in the Subordination Agreement) to the
extent provided in the Subordination Agreement, and Thomas transferred and
assigned to Lender all of his rights, title and interest in the Junior Debt and
appointed Lender as his attorney-in-fact for the purchases provided in the
Subordination Agreement for as long as any of the Superior Debt remains
outstanding. Except as otherwise provided in the Subordination Agreement and
until such time that the Superior Debt is satisfied in full, Debtor shall not,
among other things, directly or indirectly, in any way, satisfy any part of the
Junior Debt, nor shall Creditor, among other things, enforce any part of the
Junior Debt or accept payment from Debtor or any other person for the Junior
Debt or give any subordination in respect of the Junior Debt.

On January 28, 2005, the Company entered into a letter agreement ("Letter
Agreement") with Thomas in consideration for his agreement to delay the timing
of the payment of contingent cash consideration and for entering in a debt
subordination agreement, reconstituting such additional cash consideration as
subordinated debt. Pursuant to the Letter Agreement, the Company agreed to issue
additional shares of our common stock to Thomas in accordance with the Letter
Agreement based upon the earlier of (i) the Company's issuance of additional
shares of our common stock having an aggregate purchase price of at least $2.5
million at a price per share less than $7.75, or (ii) July 31, 2005. The
additional shares of common stock to be issued would equal the price paid by
Investor divided by the lower of (i) the weighted average of all stock sold by
the Company during the period January 28, 2005 through July 31, 2005, or (ii)
the average closing price of Argan's common stock for the thirty days ended July
31, 2005, if the price was less than $7.75 less the 1,173,147 shares previously
issued. These concessions allowing Thomas to receive additional shares under
certain conditions represent a freestanding financial instrument and are
accounted for in accordance with EITF 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock." The
Company recorded the freestanding financial instrument as a liability for the
fair value of $1,115,000 ascribed to the obligations of the Company to issue
Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge was recorded as compensation expense due to Thomas. The
amortization of the deferred loan issuance cost will increase the Company's
future interest expense through August 1, 2007, the maturity date of the note,
and reduce net income. The charge for compensation to Thomas was classified as
non-cash compensation expense and it increased the net loss by $614,000 for the
year ended January 31, 2005. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. The fair value
adjustment of a $1,587,000 loss during the twelve months ended January 31, 2006
was reflected as a change in liability for the derivative financial instruments
and as a charge to the Company's other expenses and net loss. The liability for
the derivative financial instrument was settled as a non-cash transaction by the
issuance of 535,052 shares of the Company's common stock on September 1, 2005.

As previously mentioned, on January 31, 2005 we entered into a debt
subordination agreement with Kevin Thomas to delay the timing of the payment of
Additional Cash Consideration to the earlier of August 1, 2006 or in the event
that the Company raises more than $1 million in equity, Thomas would be paid the
excess over the amount provided that such payment would not cause Argan to be in
default of its financing arrangements.

On May 5, 2006, the Company entered into an agreement with Thomas and the Lender
to extend the maturity of the subordinated note to August 1, 2007.

Amendment of Financing Arrangements

In May 2006, the Company agreed to amend the existing financing arrangements
whereby the revolving line of credit of $4.25 million in maximum availability
was extended to May 31, 2007. Under the amended financing arrangements, amounts
outstanding under the revolving line of credit and the three-year note bear
interest at LIBOR plus 3.25% and 3.45% respectively. Availability on a monthly
basis under the revolving line is determined by reference to accounts receivable
and inventory on hand which meet certain Bank of America, N.A. (Bank) criteria
(Borrowing Base). The aforementioned three-year note remains in effect and the
final monthly scheduled payment of $33,000 is due on July 31, 2006. As of
January 31, 2006, the Company had $200,000 outstanding under the term note. At
January 31, 2006, the Company also had $1,243,000 outstanding under the
revolving line of credit at an interest rate of 7.74% with $2.4 million of
additional availability under its borrowing base. At January 31, 2005, the
Company had $1,659,000 outstanding under the revolving line of credit at an
interest rate of 5.78%.

The amended financing arrangements provides for a new $1.5 million term loan
facility (New Term Loan). The proceeds of the New Term Loan are designated to
refinance a portion of the existing subordinated note with Thomas that has a
current outstanding balance of $3,292,000 which is due on August 1, 2007.
Advances under the New Term Loan are subject to the Company being in compliance
with its debt covenants with the Bank. The New Term Loan will be repaid in
thirty-six equal monthly principal payments and bears interest at LIBOR plus
3.25%. If the Company draws on the New Term Loan, the Company's Borrowing Base
will be reduced by $750,000 for maximum availability under the revolving line of
credit. The remaining balance of the subordinated debt will be fully
subordinated to the New Term Loan.

The amended financing arrangements provides for the measurement of certain
financial covenants including requiring the ratio of debt to pro forma earnings
before interest, taxes, depreciation and amortization (EBITDA) not to exceed 2.5
to 1 (with the next measurement date being July 31, 2006) and requiring pro
forma fixed charge coverage ratio not less than 1.25 to 1 (with the next
measurement date being July 31, 2006). The amended financings also require that
the Company meet minimum EBITDA covenants equal to or exceeding (on a rolling
four quarter basis) $1.2 million for July 31, 2006, $1.3 million for October 31,
2006 and $1.8 million for January 31, 2007 and for each successive quarter end
thereafter. Bank consent continues to be required for acquisitions and
divestitures. The Company continues to pledge the majority of the Company's
assets to secure the financing arrangements.

At January 31, 2006, the Company was not in compliance with the aforementioned
EBITDA and fixed charge coverage covenants. The Bank waived the failure for the
measurement period ended January 31, 2006. For future periods the Bank revised
the definitions of certain components of the financial covenants to exclude the
impact of VLI's impairment loss at January 31, 2006.

The amended financing arrangement contains a subjective acceleration clause
which allows the Bank to declare amounts outstanding under the financing
arrangement due and payable if certain material adverse changes occur. We
believe that we will continue to comply with our financial covenants under our
financing arrangement. If our performance does not result in compliance with any
of our financial covenants, or if the Bank seeks to exercise its rights under
the subjective acceleration clause referred to above, we would seek to modify
our financing arrangement, but there can be no assurance that the Bank would not
exercise their rights and remedies under our financing arrangement including
accelerating payment of all outstanding senior and subordinated debt due and
payable.

Competition

The market for nutritional products is highly competitive. Our direct
competition consists primarily of publicly and privately owned companies which
tend to be highly fragmented in terms of both geographical market coverage and
product categories. These companies compete with us on different levels in the
development, manufacture and marketing of nutritional supplements. Many of these
companies have broader product lines and larger sales volume, are significantly
larger than us, have greater name recognition, financial, personnel,
distribution and other resources than we do and may be better able to withstand
volatile market conditions. There can be no assurance that our customers and
potential customers will regard our products as sufficiently distinguishable
from competitive products. Our inability to compete successfully would have a
material adverse effect on our business.

We operate in the fragmented and competitive telecom and infrastructure services
industry. We compete with service providers ranging from small regional
companies, which service a single market, to larger firms servicing multiple
regions, as well as large national and multi-national contractors. We believe
that we compete favorably with the other companies in the telecom and utility
infrastructure services industry.

Materials

Raw materials used in VLI's products consist of nutrient powders, excipients,
adaptogens, empty capsules and necessary components for packaging and
distribution of finished nutritional and whole-food dietary supplements and
personal care products.

We purchase the raw materials and empty capsules from manufacturers in the
United States and foreign countries. Although we purchase raw materials from
reputable suppliers, we continuously evaluate samples, certificates of analysis,
material safety data sheets and the support research and documentation of both
active and inactive ingredients. We have not experienced difficulty in obtaining
adequate sources of supply, and generally a number of suppliers are available
for most raw materials. Although we cannot assure that adequate sources will
continue to be available, we believe we should be able to secure sufficient raw
materials in the future.

Generally, our telecom infrastructure services customers supply most or all of
the materials required for a particular contract and we provide the personnel,
tools and equipment to perform the installation services. However, with respect
to a portion of our contracts, we may supply part or all of the materials
required. In these instances, we are not dependent upon any one source for the
materials that we customarily utilize to complete the job. We are not presently
experiencing, nor do we anticipate experiencing, any difficulties in procuring
an adequate supply of materials.

Customers

The Company's seven largest customers, Trivita Corporation (TVC), Southern
Maryland Electric Cooperative (SMECO), Rob Reiss Companies (RRC), General
Dynamics Corp. (GD), CyberWize.com, Inc. (C), Orange Peel Enterprises (OPE) and
Verizon Communications (VZ) accounted for 21%, 12%, 12%, 7%, 6%, 6% and 6%,
respectively, of consolidated net sales for the year ended January 31, 2006. The
Company's four largest customers, SMECO, TVC, GD and C accounted for 23%, 17%,
14% and 8%, respectively, of consolidated net sales at January 31, 2005. The
Company generally does not require collateral and does not believe that it is
exposed to significant credit risk due to the credit worthiness of its
customers.

Backlog

At January 31, 2006, we had a backlog of $3.7 million for manufacturing
nutraceutical products and $6.3 million to perform telecom infrastructure
services in the next year. At January 31, 2005, we had a backlog of $2.2 million
for manufacturing nutraceutical products and $7.5 million to perform telecom
infrastructure services during fiscal year 2006.

Regulation

The formulation, manufacturing, packaging, labeling, advertising, distribution
and sale of our products are subject to regulation by one or more federal
agencies, including the Food and Drug Administration (FDA), the Federal Trade
Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of
Agriculture, the Environmental Protection Agency, and also by various agencies
of the states, localities and foreign countries in which our products are sold.
In particular, the FDA, pursuant to the Federal Food, Drug and Cosmetic Act
(FDCA), regulates the formulation, manufacturing, packaging, labeling,
distribution and sale of dietary supplements, including vitamins, minerals and
herbs, and of over-the-counter (OTC) drugs, while the FTC has jurisdiction to
regulate advertising of these products, and the Postal Service regulates
advertising claims with respect to such products sold by mail order. The FDCA
has been amended several times with respect to dietary supplements, most
recently by the Nutrition Labeling and Education Act of 1990 and the Dietary
Supplement Health and Education Act of 1994. Our inability to comply with these
federal regulations may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines and criminal prosecutions.

In addition, our products are also subject to regulations under various state
and local laws that include provisions governing, among other things, the
formulation, manufacturing, packaging, labeling, advertising and distribution of
dietary supplements and OTC drugs.

Our telecom infrastructure services operations are subject to various federal,
state and local laws and regulations including: licensing for contractors;
building codes; permitting and inspection requirements applicable to
construction projects; regulations relating to worker safety and environmental
protection; and special bidding, procurement and security clearance requirements
on government projects. Many state and local regulations governing construction
require permits and licenses to be held by individuals who have passed an
examination or met other requirements. We believe that we have all the licenses
required to conduct our operations and that we are in substantial compliance
with applicable regulatory requirements. Our failure to comply with applicable
regulations could result in substantial fines or revocation of our operating
licenses.

Safety and Risk Management

We are committed to ensuring that our nutraceutical products and telecom
infrastructure services employees perform their work in a safe environment. We
regularly communicate with our employees to promote safety and to instill safe
work habits. Our telecom infrastructure services safety director, an SMC
employee, reviews accidents and claims, examines trends and implements changes
in procedures or communications to address any safety issues.

Risk Management, Insurance and Performance Bonds

Contracts in the telecom infrastructure services industry which we serve may
require performance bonds or other means of financial assurance to secure
contractual performance. If we are unable to obtain surety bonds or letters of
credit in sufficient amounts or at acceptable rates, we might be precluded from
entering into additional contracts with certain of our customers. At this time,
we do not have significant surety bonds or letters of credit outstanding.

Employees

At January 31, 2006, we had approximately 204 employees, all of whom were
full-time. None of these employees is represented by a labor organization. We
are not aware of any employees seeking organization. We believe that our
employee relations are good.

Risk Factors

You should carefully consider the following risk factors before making an
investment decision. If any of the following risks actually occur, our business,
financial condition, or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

General Risks Relating to our Company

Our officers and directors have limited experience in managing our business and,
as a result, may be unsuccessful in doing so.

In April 2003, Rainer H. Bosselmann became Chairman and Chief Executive Officer,
H. Haywood Miller, III became Executive Vice President and Arthur F. Trudel
became Senior Vice President and Chief Financial Officer of the Company. On
April 7, 2006, Mr. Miller resigned his position at the Company. Upon
consummation of the private placement, four of our existing directors (Warren
Lichtenstein, Glen Kassan, Joshua Schechter and Robert Smith) resigned and were
replaced by Mr. Bosselmann and three new directors designated by Mr. Bosselmann
(DeSoto S. Jordan, James W. Quinn and Daniel A. Levinson). In addition, in June
2003, Peter L. Winslow was elected by the Board of Directors to fill a vacancy
caused by the resignation of Travis Bradford, and in October, 2003, W.G.
Champion Mitchell was elected to our Board of Directors at our 2003 Annual
Meeting replacing Michael H. Figoff who did not stand for re-election. Although
Messrs. Bosselmann, Trudel, Jordan, Quinn, Levinson, Winslow and Mitchell have
experience as executive officers and directors of other public companies, they
have limited experience in managing our business and, as a result, may be
unsuccessful in doing so.

Purchasers of our common stock will be unable to evaluate future acquisitions
and/or investments.

We completed our acquisition of Vitarich in August 2004. Prior to our
acquisition of Vitarich, we acquired SMC in July 2003. Accordingly, purchasers
of our common stock may be unable to evaluate the business, prospects, operating
results, management or other material factors relating to future acquisitions
and/or investments that we make. In addition, there can be no assurance that
future acquisitions will occur, or if they occur, will be beneficial to us and
our stockholders.

We may be unsuccessful at integrating companies that we acquire.

We may not be able to successfully integrate companies that we acquire with our
other operations without substantial costs, delays or other operational or
financial problems. Integrating acquired companies involves a number of special
risks which could materially and adversely affect our business, financial
condition and results of operations, including:

o failure of acquired companies to achieve the results we expect;

o diversion of management's attention from operational matters;

o difficulties integrating the operations and personnel of acquired
companies;

o inability to retain key personnel of acquired companies;

o risks associated with unanticipated events or liabilities;

o the potential disruption of our business; and

o the difficulty of maintaining uniform standards, controls,
procedures and policies.

If one of our acquired companies suffers customer dissatisfaction or performance
problems, the reputation of our entire company could be materially and adversely
affected. In addition, future acquisitions could result in issuances of equity
securities that would reduce our stockholders' ownership interest, the
incurrence of debt, contingent liabilities, deferred stock based compensation or
expenses related to the valuation of goodwill or other intangible assets and the
incurrence of large, immediate write-offs.

We may not be able to raise additional capital and, as a result, may not be able
to successfully execute our business plan.

We will need to raise additional capital to finance future business acquisitions
and/or investments. Additional financing may not be available on terms that are
acceptable to us or at all. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our
stockholders would be reduced. Additionally, these securities might have rights,
preferences and privileges senior to those of our current stockholders. If
adequate funds are not available on terms acceptable to us, our ability to
finance future business acquisitions and/or investments and to otherwise pursue
our business plan would be significantly limited.

We cannot readily predict the timing, size and success of our acquisition
efforts and therefore the capital we will need for these efforts. Using cash for
acquisitions limits our financial flexibility and makes us more likely to seek
additional capital through future debt or equity financings. When we seek
additional debt or equity financings, we cannot be certain that additional debt
or equity will be available to us at all or on terms acceptable to us.

We may be unsuccessful at generating internal growth.

Our ability to generate internal growth will be affected by, among other
factors, our success in:

o expanding the range of services and products we offer to customers
to address their evolving needs;

o attracting new customers;

o hiring and retaining employees; and

o reducing operating and overhead expenses.

Many of the factors affecting our ability to generate internal growth may be
beyond our control. Our strategies may not be successful and we may not be able
to generate cash flow sufficient to fund our operations and to support internal
growth. Our inability to achieve internal growth could materially and adversely
affect our business, financial condition and results of operations.

Our business growth could outpace the capability of our corporate management
infrastructure. Our operations and ability to execute our business plan could be
adversely effected as a result.

We cannot be certain that our infrastructure will be adequate to support our
operations as they expand. Future growth also could impose significant
additional responsibilities on members of our senior management, including the
need to recruit and integrate new senior level managers and executives. We
cannot be certain that we can recruit and retain such additional managers and
executives. To the extent that we are unable to manage our growth effectively,
or are unable to attract and retain additional qualified management, we may not
be able to expand our operations or execute our business plan. Our financial
condition and results of operations could be materially and adversely affected
as a result.

Loss of key personnel could prevent us from successfully executing our business
plan and otherwise adversely affect our business.

Our ability to maintain productivity and profitability will be limited by our
ability to employ, train and retain skilled personnel necessary to meet our
requirements. We cannot be certain that we will be able to maintain an adequate
skilled labor force necessary to operate efficiently and to support our growth
strategy or that our labor expenses will not increase as a result of a shortage
in the supply of these skilled personnel. Labor shortages or increased labor
costs could impair our ability or maintain our business or grow our revenues.

We depend on the continued efforts of our executive officers and on senior
management of the businesses we acquire. We cannot be certain that any
individual will continue in such capacity for any particular period of time. The
loss of key personnel, or the inability to hire and retain qualified employees,
could negatively impact our ability to manage our business.

We have experienced losses in the past and may experience additional losses in
the future.

As of January 31, 2006, we had an accumulated deficit of approximately $15
million resulting primarily from past losses. We may experience additional
losses in the future.

Any general increase in interest rate levels will increase our cost of doing
business. Our results of operations, cash flow and financial condition may
suffer as a result.

As of January 31, 2006, we have approximately $1.4 million of unhedged variable
rate debt. Any general increase in interest rate levels will increase our cost
of doing business.

Specific Risks Relating To Our Nutritional Supplement Business

If our business or our products are the subject of adverse publicity, our
business could suffer.

Our business depends, in part, upon the public's perception of our integrity and
the safety and quality of our products. Any adverse publicity, whether or not
accurate, could negatively affect the public's perception of us and could result
in a significant decline in our operations. Our business and products could be
subject to adverse publicity regarding, among other things:

o the nutritional supplements industry;

o competitors;

o the safety and quality of our products and ingredients; and

o regulatory investigations of our products or competitors' products.

Our inability to respond to changing consumers' demands and preferences could
adversely affect our business.

The nutritional industry is subject to rapidly changing consumer demands and
preferences. There can be no assurance that customers will continue to favor the
products provided and manufactured by us. In addition, products that gain wide
acceptance with consumers may result in a greater number of competitors entering
the market which could result in downward price pressure which could adversely
impact our financial condition. We believe that our growth will be materially
dependent upon our ability to develop new techniques and processes necessary to
meet the needs of our customers and potential customers. Our inability to
anticipate and respond to these rapidly changing demands could have an adverse
effect on our business operations.

There can be no assurance we will be able to obtain our necessary raw materials
in a timely manner.

Although we believe that there are adequate sources of supply for all of our
principal raw materials we require, there can be no assurance that our sources
of supply for our principal raw materials will be adequate in all circumstances.
In the event that such sources are not adequate, we will have to find alternate
sources. As a result we may experience delays in locating and establishing
relationships with alternate sources which could result in product shortages and
backorders for our products, with a resulting loss of revenue to us.

There are limited conclusive clinical studies available on human consumption of
our products.

Although many of the ingredients in our products are vitamins, minerals, herbs
and other substances for which there is a long history of human consumption,
some of our products contain innovative ingredients or combinations of
ingredients. Although we believe all of our products to be safe when used as
directed, there may be little long-term experience with human consumption of
certain of these product ingredients or combinations thereof. Therefore, no
assurance can be given that our products, even when used as directed, will have
the effects intended. Although we test the formulation and production of our
products, we have not sponsored or conducted clinical studies on the effects of
human consumption.

In the event we are exposed to product liability claims, we may be liable for
damages and expenses, which could adversely affect our financial condition.

We could face financial liability due to product liability claims if the use of
our products results in significant loss or injury. To date, we have not been
the subject of any product liability claims. However, we can make no assurances
that we will not be exposed to future product liability claims. Such claims may
include that our products contain contaminants, that we provide consumers with
inadequate instructions regarding product use, or that we provide inadequate
warnings concerning side effects or interactions of our products with other
substances. We believe that we maintain adequate product liability insurance
coverage. However, a product liability claim could exceed the amount of our
insurance coverage or a product claim could be excluded under the terms of our
existing insurance policy, which could adversely affect our financial condition.

The nutritional industry is intensely competitive and the strengthening of any
of our competitors could harm our business.

The market for nutritional products is highly competitive. Our direct
competition consists primarily of publicly and privately owned companies, which
tend to be highly fragmented in terms of both geographical market coverage and
product categories. These companies compete with us on different levels in the
development, manufacture and marketing of nutritional supplements. Many of these
companies have broader product lines and larger sales volume, are significantly
larger than us, have greater name recognition, financial personnel, distribution
and other resources than we do and may be better able to withstand volatile
market conditions. There can be no assurance that our customers and potential
customers will regard our products as sufficiently distinguishable from
competitive products. Our inability to compete successfully would have a
material adverse effect on our business.

Our violation of government regulations, or our inability to obtain necessary
government approvals for our products could harm our business.

The formulation, manufacturing, packaging, labeling, advertising, distribution
and sale of our products are subject to regulation by one or more federal
agencies, including the Food and Drug Administration (FDA), the Federal Trade
Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of
Agriculture, the Environmental Protection Agency, and also by various agencies
of the states, localities and foreign countries in which our products are sold.
In particular, the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act
(FDCA), regulates the formulation, manufacturing, packaging, labeling,
distribution and sale of dietary supplements, including vitamins, minerals and
herbs, and of over-the-counter (OTC) drugs, while the FTC has jurisdiction to
regulate advertising of these products, and the Postal Service regulates
advertising claims with respect to such products sold by mail order. The FDCA
has been amended several times with respect to dietary supplements, most
recently by the Nutrition Labeling and Education Act of 1990 and the Dietary
Supplement Health and Education Act of 1994. Our inability to comply with these
federal regulations may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines and criminal prosecutions.

In the future, we may become subject to additional laws or regulations
administered by the FDA or by other federal, state, local or foreign regulatory
authorities, to the repeal of laws or regulations that we consider favorable, or
to more stringent interpretations of current laws or regulations. We can neither
predict the nature of such future laws, regulations, repeals or interpretations,
nor can we predict what effect additional governmental regulation, when and if
it occurs, would have on our business. These regulations could, however, require
reformation of certain products to meet new standards, recalls or discontinuance
of certain products not able to be reformulated, additional record-keeping
requirements, increased documentation of the properties of certain products,
additional or different labeling, additional scientific substantiation or other
new requirements. Any of these developments could have a material adverse effect
on our business.

Our inability to adequately protect our products from replication by competitors
could have a material adverse effect on our business.

We own proprietary formulas for certain of our nutritional products. We regard
our proprietary formulas as valuable assets and believe they have significant
value in the marketing of our products. Because we do not have patents or
trademarks on our products, there can be no assurance that another company will
not replicate one or more of our products.

Loss of significant customers could adversely affect our business.

Sales to our four largest nutritional supplement customers, TriVita Corporation
(TVC), Rob Reiss Companies (RRC), CyberWize.com, Inc.(C) and Orange Peel
Enterprises (OPE) currently account for most of our nutritional supplement
business. TVC, RRC, C and OPE accounted for approximately 21%, 12%, 6% and 6% of
consolidated net sales, respectively during the year ended January 31, 2006. The
loss of any of these customers could have a material adverse effect on our
business, unless the loss is offset by increases to other customers.

Specific Risks Relating to Our Telecommunications Infrastructure Business

We are substantially dependent on economic conditions in the telecommunications
infrastructure industry. Adverse economic conditions in the industry could have
a material adverse effect on our future operating results.

We are involved in the telecom and utility infrastructure services industries,
which can be negatively affected by rises in interest rates, downsizings in the
economy and general economic conditions. In addition, our activities may be
hampered by weather conditions and an inability to plan and forecast activity
levels. Adverse economic conditions in the telecommunications infrastructure and
construction industries may have a material adverse effect on our future
operating results.

The industry served by our business is subject to rapid technological and
structural changes that could reduce the demand for the services we provide.

The utility, telecommunications and computer networking industries are
undergoing rapid change as a result of technological advances that could in
certain cases reduce the demand for our services or otherwise negatively impact
our business. New or developing technologies could displace the wireline systems
used for voice, video and data transmissions, and improvements in existing
technology may allow telecommunications companies to significantly improve their
networks without physically upgrading them. In addition, consolidation,
competition or capital constraints in the utility, telecommunications or
computer networking industries may result in reduced spending or the loss of one
or more of our customers. Additionally, our work in the telecommunications
infrastructure services industry could be negatively affected by rises in
interest rates, downsizings in the economy and general economic conditions.

Our telecommunications infrastructure services business is seasonal and our
operating results may vary significantly from quarter to quarter.

Our quarterly results are affected by seasonal fluctuations in our business. Our
quarterly results may also be materially affected by:

o variations in the margins or products performed during any
particular quarter;

o regional or general economic conditions;

o the budgetary spending patterns of customers, including government
agencies;

o the timing and volume of work under new agreements;

o the timing of our significant promotional activities;

o costs that we incur to support growth internally or through
acquisitions or otherwise;

o losses experienced in our operations not otherwise covered by
insurance;

o the change in mix of our customers, contracts and business;

o the timing of acquisitions;

o the timing and magnitude of acquisition assimilation costs; and

o increases in construction and design costs.

Accordingly, our operating results in any particular quarter may not be
indicative of the results that you can expect for any other quarter or for the
entire year.

Our operations with regard to our telecommunications business are expected to
have seasonally weaker results in the first and fourth quarters of the year, and
may produce stronger results in the second and third quarters. This seasonality
is primarily due to the effect of winter weather on outside plant activities, as
well as reduced daylight hours and customer budgetary constraints. Certain
customers tend to complete budgeted capital expenditures before the end of the
year, and postpone additional expenditures until the subsequent fiscal period.
We intend to actively pursue larger infrastructure projects with our customers.
The positive impact of major contracts requires that we undertake extensive up
front preparations with respect to staffing, training and relocation of
equipment. Consequently, we may incur significant period costs in one fiscal
period and realize the benefit of contractual revenues in subsequent periods.

Our financial results are dependent on government programs and spending, the
termination of which would have a material adverse effect on our business.

A significant portion of our business relates to structured cabling work for
military and other government agencies. As such, our business is reliant upon
military and other government programs. Reliance on government programs has
certain inherent risks. Among others, contracts, direct or indirect, with United
States government agencies are subject to unilateral termination at the
convenience of the government, subject only to the reimbursement of certain
costs plus a termination fee.

We are substantially dependent upon fixed price contracts and are exposed to
losses that may occur on such contracts in the event that we fail to accurately
estimate, when bidding on a contract, the costs that we will be required to
incur to complete the project.

We currently generate, and expect to continue to generate, a significant portion
of our revenues under fixed price contracts. We must estimate the costs of
completing a particular project to bid for these fixed price contracts. Although
historically we have been able to estimate costs, the cost of labor and
materials may, from time to time, vary from costs originally estimated. These
variations, along with other risks inherent in performing fixed price contracts,
may cause actual revenue and gross profits for a project to differ from those we
originally estimated and could result in reduced profitability or losses on
projects. Depending upon the size of a particular project, variations from the
estimated contract costs can have a significant impact on our operating results
for any fiscal quarter or year.

Many of our customer contracts may be canceled on short notice and we may be
unsuccessful in replacing contracts as they are completed or expire. As a
result, our business, financial condition and results of operations may be
adversely affected.

Any of the following contingencies may have a material adverse effect on our
business:

o our customers cancel a significant number of contracts;

o we fail to win a significant number of our existing contracts upon
re-bid; or

o we complete the required work under a significant number of
non-recurring projects and cannot replace them with similar
projects.

Many of our customers may cancel their contracts on short notice, typically 30
to 90 days, even if we are not in default under the contract. Certain of our
customers assign work to us on a project-by-project basis under master service
agreements. Under these agreements, the customers often have no obligation to
assign work to us. Our operations could be materially and adversely affected if
the volume of work we anticipate receiving from these customers is not assigned
to us. Many of our contracts, including our master service agreements, are
opened to public bid at the expiration of their terms. We may not be the
successful bidder on existing contracts that come up for bid.

Loss of significant customers could adversely affect our business.

Sales to our three largest telecom infrastructure services customers, SMECO, GD
and VZ currently account for most of our telecommunications business. SMECO, GD
and VZ accounted for approximately 12%, 7% and 6% of consolidated net sales
during the year ended January 31, 2006. The loss of any of these customers could
have a material adverse effect on our business, unless the loss is offset by
increases in sales to other customers.

We operate in highly competitive markets. If we fail to compete successfully
against current or future competitors, our business, financial condition and
results of operations will be materially and adversely affected.

We operate in highly competitive markets. We compete with service providers
ranging from small regional companies which service a single market, to larger
firms servicing multiple regions, as well as large national and multi-national
entities. In addition, there are few barriers to entry in the telecommunications
infrastructure industry. As a result, any organization that has adequate
financial resources and access to technical expertise may become one of our
competitors.

Competition in the telecommunications infrastructure industry depends on a
number of factors, including price. Certain of our competitors may have lower
overhead cost structures than we do and may, therefore, be able to provide their
services at lower rates than we can provide the same services. In addition, some
of our competitors are larger and have significantly greater financial resources
than we do. Our competitors may develop the expertise, experience and resources
to provide services that are superior in both price and quality to our services.
Similarly, we may not be able to maintain or enhance our competitive position
within our industry. We may also face competition from the in-house service
organizations of our existing or prospective customers.

A significant portion of our business involves providing services, directly or
indirectly as a subcontractor, to the United States government under government
contracts. The United States government may limit the competitive bidding on any
contract under a small business or minority set-aside, in which bidding in
limited to companies meeting the criteria for a small business or minority
business, respectively. We are currently qualified as a small business concern,
but not a minority business.

We may not be able to compete successfully against our competitors in the
future. If we fail to compete successfully against our current or future
competitors, our business, financial condition, and results of operations would
be materially and adversely affected.

We are subject to significant government regulation. This may increase the costs
of our operations and expose us to substantial civil and criminal penalties in
the event that we violate applicable law.

We provide, either directly as a contractor or indirectly as a sub-contractor,
products and services to the United States government under government
contracts. United States government contracts and related customer orders
subject us to various laws and regulations governing United States government
contractors and subcontractors, generally which are more restrictive than for
non-government contractors. These include subjecting us to examinations by
government auditors and investigators, from time to time, to ensure compliance
and to review costs. Violations may result in costs disallowed, and substantial
civil or criminal liabilities (including, in severe cases, denial of future
contracts).

If we are unable to obtain surety bonds or letters of credit in sufficient
amounts or at acceptable rates, we might be precluded from entering into
additional contracts with certain of our customers. This may adversely affect
our business.

Contracts in the industries we serve may require performance bonds or other
means of financial assurance to secure contractual performance. The market for
performance bonds has tightened significantly. If we are unable to obtain surety
bonds or letters of credit in sufficient amounts or at acceptable rates, we
might be precluded from entering into additional contracts with certain of our
customers.

Risks Relating to our Securities

Our Board of Directors may issue preferred stock with rights that are superior
to our common stock.

Our Certificate of Incorporation, as amended, permits our Board of Directors to
issue shares of preferred stock and to designate the terms of the preferred
stock. The issuance of shares of preferred stock by the Board of Directors could
adversely affect the rights of holders of common stock by, among other matters,
establishing dividend rights, liquidation rights and voting rights that are
superior to the rights of the holders of the common stock.

Our common stock is thinly traded. As a result, our stock price may be volatile
and you may have difficulty disposing of your investment at prevailing market
prices.

Since August 4, 2003, our common stock has been listed on the Boston Stock
Exchange under the symbol "AGX." Our common stock is traded over the counter
under the symbol "AGAX.PK." Our common stock is thinly and sporadically traded
and no assurances can be given that a larger market will ever develop, or if
developed, that it will be maintained.

Our acquisition strategy may result in dilution to our stockholders.

Our business strategy calls for strategic acquisition of other businesses. In
connection with our acquisition of VLI, among other consideration, we issued
approximately 1,785,000 shares of our common stock. We anticipate that future
acquisitions will require cash and issuances of our capital stock, including our
common stock. To the extent we are required to pay cash for any acquisition, we
anticipate that we would be required to obtain additional equity and/or debt
financing. Equity financing would result in dilution for our then current
stockholders. Stock issuances and financing, if obtained, may not be on terms
favorable to us and could result in substantial dilution to our stockholders at
the time(s) of these stock issuances and financings.

Availability of significant amounts of our common stock for sale could adversely
affect its market price.

As of January 31, 2006, there were approximately 3,814,000 shares of our common
stock outstanding. In March 2004, we registered with the Securities and Exchange
Commission on Form S-3, for resale, from time to time, by the investors in the
April 2003 private placement of 1,533,974 shares of our common stock (including
230,000 shares of our common stock that are issuable upon exercise of warrants
that were issued in connection with the private placement). In March, 2005, we
registered 954,032 shares of our common stock on Form S-3 for resale, by the
selling stockholders named therein consisting of shares issued in connection
with (i) the private sale of our common stock and (ii) our acquisition of VLI.
In addition, in connection with our acquisition of VLI, we issued an additional
approximately 960,000 shares of our common stock. In the future, these shares
will be registered for resale. If our stockholders sell substantial amounts of
our common stock in the public market, including shares registered under any
registration statement on Form S-3, the market price of our common stock could
fall.

We do not expect to pay dividends for the foreseeable future.

We have not paid cash dividends on our common stock since our inception and
intend to retain earnings, if any, to finance the development and expansion of
our business. As a result, we do not anticipate paying dividends on our common
stock in the foreseeable future. Payment of dividends, if any, will depend on
our future earnings, capital requirements and financial position, plans for
expansion, general economic conditions and other pertinent factors.

Our officers, directors and a certain key employee have substantial control over
the Company.

As of May 10, 2006, our executive officers and directors as a group own
approximately 33% of our voting shares (giving effect to an aggregate of 200,000
shares of common stock that may be purchased upon exercise of warrants and stock
options held by our executive officers and directors and 845,000 shares
beneficially held in the name of MSR Advisors and affiliates for which one of
our directors is President) and therefore, may have the power to influence
corporate actions such as an amendment to our certificate of incorporation, the
consummation of any merger, or the sale of all or substantially all of our
assets, and may influence the election of directors and other actions requiring
stockholder approval.

In addition, as of May 10, 2006, Kevin J. Thomas, the Senior Operating Executive
of VLI, owns approximately 37% of our outstanding voting shares. Therefore, Mr.
Thomas individually may have the power to influence corporate actions.

Our executive officers and directors, together with Kevin J. Thomas, currently
own approximately 62% of our outstanding voting shares which will allow our
executive officers and directors, together with Kevin J. Thomas, to approve
almost any corporate action requiring a minimum majority vote without a meeting
or prior notice to our other stockholders.

Provisions of our certificate of incorporation and Delaware law could deter
takeover attempts.

Provisions of our certificate of incorporation and Delaware law could delay,
prevent, or make more difficult a merger, tender offer or proxy contest
involving us. Among other things, under our certificate of incorporation, our
board of directors may issue up to 500,000 shares of our preferred stock and may
determine the price, rights, preferences, privileges and restrictions, including
voting and conversion rights, of these shares of preferred stock. In addition,
Delaware law limits transactions between us and persons that acquire significant
amounts of our stock without approval of our board of directors.

Materials Filed with the Securities and Exchange Commission

The public may read any materials that we file with the Securities and Exchange
Commission (SEC) at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at http://www.sec.gov.

Copies of the Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission are available without charge upon written request to:

Corporate Secretary
Argan, Inc.
Suite 302
One Church Street
Rockville, Maryland 20850

ITEM 2. DESCRIPTION OF PROPERTY

Our corporate headquarters which is under a lease expiring June 30, 2006, is
located in Rockville, Maryland. On May 1, 2006, the Company entered into a new
lease for our corporate headquarters that will commence on July 1, 2006 and
expire on June 30, 2009. VLI's headquarters are located in Naples, Florida in
four facilities with one under monthly lease, another with a lease that will
expire on July 31, 2008 and two others with leases that will expire on February
28, 2011. Two of the facilities are leased from the former owner of VLI. VLI's
four buildings contain warehouse facilities with an aggregate of 26,000 square
feet, office space with 8,000 square feet, as well as manufacturing space with
10,000 square feet and laboratory space with 1,000 square feet. SMC's
headquarters are located in Tracy's Landing, Maryland in a facility leased from
a former owner of SMC with an initial lease term expiring January 1, 2008 and
extensions available through January 1, 2020. The facility includes
approximately four acres of land, a 2,400 square foot maintenance facility and
3,900 square feet of office space.

SMC's principal operations are conducted at local construction offices and
equipment yards. These facilities are temporary in nature with most of SMC's
services performed on customer premises or job sites. Because equally suitable
temporary facilities are available in all areas where SMC does business, these
facilities are not material to SMC's operations.

ITEM 3. LEGAL PROCEEDINGS

On September 17, 2004, Western Filter Corporation (WFC) notified the Company
that WFC believed that the Company breached certain representations and
warranties under the Stock Purchase Agreement in connection with the sale of
Puroflow Incorporated to WFC. WFC asserts damages in excess of the $300,000
escrow which is being held by a third party in connection with the Stock
Purchase Agreement.

On March 22, 2005, WFC filed a complaint in Los Angeles Superior Court alleging
the Company and its executive officers, individually, committed breach of
contract, intentional misrepresentation, concealment and non-disclosure,
negligent misrepresentation and false promise. WFC seeks declaratory relief and
compensatory and punitive damages in an amount to be proven at trial as well as
the recovery of attorneys' fees.

Although the Company has reviewed WFC's claim and believes that substantially
all of the claims are without merit, as of January 31, 2006, the Company
recorded an accrual for a loss related to this matter of $360,000 for estimated
payments and legal expenses related to the claim of WFC that it considers to be
probable and that can be reasonably estimated. Although the ultimate amount of
liability that may result from this matter is not ascertainable, the Company
believes that any amounts exceeding the aforementioned accrual should not
materially affect the Company's financial condition. It is possible, however,
that the ultimate resolution of WFC's claim could result in a material adverse
effect on the Company's results of operations for a particular reporting period.
The Company will vigorously contest WFC's claim.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY

Our common stock is listed on the Boston Stock Exchange under the symbol AGX and
traded over the counter under the symbol AGAX.PK.

The following table sets forth the high and low bid quotations for our common
stock for the periods indicated. These quotations represent inter-dealer prices
and do not include retail markups, markdowns or commissions and may not
necessarily represent actual transactions. Although we have been listed and
registered on the Boston Stock Exchange since August 4, 2003, there have been no
sales of the Company's securities on the Boston Stock Exchange during the below
periods.

High Bid Low Bid
======== =======

Fiscal year Ended January 31, 2005
1st Quarter .................. $ 7.75 $ 6.91
2nd Quarter .................. 7.01 5.75
3rd Quarter .................. 6.60 5.62
4th Quarter .................. 6.50 5.63

Fiscal year Ended January 31, 2006
1st Quarter .................. $ 6.12 $ 5.70
2nd Quarter .................. $ 6.15 $ 5.05
3rd Quarter .................. $ 5.05 $ 1.01
4th Quarter .................. $ 2.65 $ 1.90

As of May 10, 2006 the Company had approximately 400 stockholders of record.

To date, Argan has not declared or paid cash dividends to its stockholders.
Argan has no plans to declare and pay cash dividends in the near future. Argan
plans to use its working capital on growing its operating segments.

Equity Compensation Plan Information

The Company has authorized the following equity securities for issuance under
equity compensation plans at January 31, 2006

Number of securities
remaining available
for future issuance
Number of securities to Weighted average under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column [a])

[a] [b] [c]
----------------------- -------------------- ------------------------

Equity compensation plans 303,000(1) $7.77 171,000(2)
approved by security holders

Equity compensation plans not
approved by security holders -- -- --
----------------------- -------------------- ------------------------
Total 303,000 $7.77 171,000
======================= ==================== ========================

(1) Represents 73,000 shares issuable upon exercise of options granted under
the 2001 Stock Option Plan as of January 31, 2006 and 230,000 shares
issuable upon exercise of warrants as described below.

(2) Represents 171,000 shares remaining available for grant under the 2001
Stock Option Plan as of January 31, 2006.

Private Placements

On May 4, 2006, the Company completed a private offering of 760,000 shares of
common stock at a price of $2.50 per share for aggregate proceeds of $1.9
million. The Company will use the proceeds to pay down $1.8 million in notional
amount of the subordinated note due Kevin Thomas. The remainder of the proceeds
will be used for general corporate purposes.

On April 29, 2003, Argan completed a private placement of its common stock, in
which we sold 1,303,974 shares of our common stock to a group of accredited
investors at a price of $7.75 per share. In connection with the private
placement, Rainer Bosselmann, H. Haywood Miller III, Arthur F. Trudel and MSR
Advisors, Inc., received warrants to purchase an aggregate of 230,000 shares of
our common stock at a purchase price of $7.75 per share. The Company raised a
total of $10,107,000 (before giving effect to offering expenses of approximately
$472,000 and 230,000 warrants issued in connection with the private placement).
The private offering was approved by shareholders' vote on April 15, 2003. The
shares in the private placement were issued pursuant to an exemption provided by
Section 4(2) of the Securities Act of 1933, as amended ("the Securities Act")
resale of the shares of common stock and the shares of common stock underlying
the warrants issued in the private placement were registered under the
Securities Act on Form S-3 filed with the Securities and Exchange Commission
(SEC) on March 15, 2004.

On January 28, 2005, the Company sold and issued to MSR I SBIC, L.P., a Delaware
limited partnership ("Investor"), 129,032 shares (the "Shares") of common stock
of the Company pursuant to a Subscription Agreement between the Company and
Investor (the "Agreement"). The Shares were issued at a purchase price of $7.75
per share, yielding aggregate proceeds of $999,998. The Investor is an entity
controlled by Daniel Levinson, a director of the Company. Pursuant to the
Agreement, we agreed to issue additional shares of our common stock to Investor
in accordance with the Agreement based upon the earlier of (i) our issuance of
additional shares of common stock having an aggregate purchase price of at least
$2,500,000 at a price per share less than $7.75, or (ii) July 31, 2005. The
additional shares of common stock to be issued would equal the price paid by
Investor divided by the lower of (i) the weighted average of all stock sold by
the Company during the period January 28, 2005 through July 31, 2005, or (ii)
ninety percent of the average bid price of Argan's common stock for the thirty
days ended July 31, 2005, if the price was less than $7.75 per share, less the
129,032 shares previously issued. Any additional shares issued would effectively
reduce the Investor's purchase price per common share as set forth in the
Agreement. The shares were issued pursuant to an exemption provided by Section
4(2) of the Securities Act. The resale of the shares was registered under the
Securities Act on Form S-3 filed with the SEC on February 25, 2005.

The provision in the agreement which allows the Investor to receive additional
shares under certain conditions represents a derivative under Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." Accordingly, $139,000 of the proceeds received upon
issuance was accounted for as a liability for a derivative financial instrument.
This liability relates to the obligation to issue Investor additional shares
under certain conditions. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. The Company
recorded a fair value adjustment for a $343,000 loss during the twelve months
ended January 31, 2006, which is reflected as a change in liability for the
derivative financial instruments. The fair value adjustment was recorded as a
charge to the Company's other expense and net loss. The liability for derivative
financial instruments related to the Investor aggregating $482,000 was settled
as a non-cash transaction by the issuance of 95,321 shares of the Company's
common stock on August 13, 2005.

Acquisition of Vitarich

On August 31, 2004, Argan acquired VLI for approximately $6.7 million in cash
and 825,000 shares of the Company's common stock with fair value of $4,950,000
or $6.00 per share utilizing the quoted market price on the acquisition date.
The value of the shares issued in the acquisition of VLI reflects the price per
share of $6.00 of the Company's common stock at August 31, 2004. The Company
also assumed $1.6 million in debt.

The purchase agreement also provided for contingent consideration based on
EBITDA for the twelve months ended February 28, 2005. The additional contingent
consideration would be paid in both cash and stock. The Company's Additional
Consideration was approximately $275,000 in cash, $2.7 million in a subordinated
note and approximately 348,000 shares of AI common stock with a fair value of
$2.1 million or $6.00 per share utilizing the quoted market price on February
28, 2005.

On July 5, 2005, the Company and Thomas entered into an agreement (Earn Back
Agreement) concerning the calculation of Additional Consideration due Thomas. In
the Earn Back Agreement, the Company agreed to pay Thomas $594,000 in a
subordinated note and 76,645 shares of the Company's common stock valued at
$5.50 per share utilizing the quoted market price on July 5, 2005. The
$1,015,000 of Additional Consideration has been recorded by the Company as
additional purchase consideration and an increase in goodwill.

On January 28, 2005 the Company entered into a Letter Agreement with Thomas in
consideration for his agreement to delay the timing of the payment of contingent
cash consideration and for entering into a Debt Subordination Agreement
(Subordination Agreement), reconstituting such additional cash consideration as
subordinated debt. The Letter Agreement includes certain concessions to Thomas
allowing him to receive additional consideration based on the market price of
the Company's common stock. The concessions provide that in addition to
providing Thomas additional shares if the Company issued additional shares at a
price less than $7.75, if the Company did not issue additional shares at a price
less than $7.75 per share then the Company would issue additional shares to
Thomas based on the average closing price of the Company's common stock for the
30 days ended July 31, 2005, if the price was below $7.75 per share less the
1,173,147 shares previously issued. These concessions allowing Thomas to receive
additional shares under certain conditions represent a freestanding financial
instrument and should be accounted for in accordance with EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock." At January 31, 2005, the Company recorded the freestanding
financial instrument as a liability for the fair value of $1,115,000 ascribed to
the obligations of the Company to issue Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge was recorded as compensation expense due to Thomas. The
amortization of the deferred loan issuance cost will increase the Company's
future interest expense through August 1, 2007, the maturity date of the note,
and reduce net income. The charge for compensation to Thomas was classified as
non-cash compensation expense and it increased the net loss by $614,000 for the
year ended January 31, 2005. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. A fair value
adjustment of $1,587,000 was recorded during the twelve months ended January 31,
2006 as a change in liability for the derivative financial instruments and as a
charge to the Company's other expenses, net and net loss. The liability for the
derivative financial instrument was settled as a non-cash transaction by the
issuance of 535,052 shares of the Company's common stock on September 1, 2005.

On May 5, 2006, the Company entered into an agreement with Thomas to extend the
maturity of the subordinated note to August 1, 2007.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This Form 10-KSB contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbor created thereby. These statements
relate to future events or our future financial performance, including
statements relating to our products, customers, suppliers, business prospects,
financings, investments and effects of acquisitions. In some cases, forward
looking statements can be identified by terminology such as "may," "will,"
"should," "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"potential," or "continue," the negative of these terms or other comparable
terminology. These statements involve a number of risks and uncertainties,
including preliminary information; the effects of future acquisitions and/or
investments; competitive factors; business and economic conditions generally;
changes in government regulations and policies; our dependence upon third-party
suppliers; continued acceptance of our products in the marketplace;
technological changes; and other risks and uncertainties that could cause actual
events or results to differ materially from any forward-looking statement.

GENERAL

We conduct our operations through our wholly owned subsidiaries, Vitarich
Laboratories, Inc. (VLI) that we acquired in August, 2004 and Southern Maryland
Cable, Inc. (SMC) that we acquired in July 2003. 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.

We were organized as a Delaware corporation in May 1961. On October 23, 2003,
our shareholders approved a plan providing for the internal restructuring of the
Company whereby we became a holding company, and our operating assets and
liabilities relating to our Puroflow business were transferred to a
newly-formed, wholly owned subsidiary. The subsidiary then changed its name to
"Puroflow Incorporated" and we changed our name from Puroflow Incorporated to
"Argan, Inc."

SUBSEQUENT PRIVATE OFFERING OF STOCK

PRIVATE SALE OF STOCK

On January 28, 2005, the Company sold and issued to MSR I SBIC, L.P., a Delaware
limited partnership ("Investor"), 129,032 shares (the "Shares") of common stock
of the Company pursuant to a Subscription Agreement between the Company and
Investor (the "Agreement"). The Shares were issued at a purchase price of $7.75
per share, yielding aggregate proceeds of $999,998. The Investor is an entity
controlled by Daniel Levinson, a director of the Company. Pursuant to the
Agreement, we agreed to issue additional shares of our common stock to Investor
in accordance with the Agreement based upon the earlier of (i) our issuance of
additional shares of common stock having an aggregate purchase price of at least
$2,500,000 at a price less than $7.75 per share, or (ii) July 31, 2005. The
additional shares of common stock to be issued would equal the price paid by
Investor divided by the lower of (i) the weighted average of all stock sold by
the Company during the period January 28, 2005 through July 31, 2005, or (ii)
ninety percent of the average bid price of Argan's common stock for the thirty
days ended July 31, 2005, if the price was less than $7.75 per share, less the
129,032 shares previously issued. Any additional shares issued would effectively
reduce the Investor's purchase price per common share as set forth in the
Agreement. The shares were issued pursuant to an exemption provided by Section
4(2) of the Securities Act. The resale of the shares was registered under the
Securities Act on Form S-3 filed with the SEC on February 25, 2005.

The provision in the agreement which allows the investor to receive additional
shares under certain conditions represents a derivative under Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." Accordingly, at January 31, 2005, $139,000 of the
proceeds received upon issuance was accounted for as a liability for a
derivative financial instrument. This liability relates to the obligation to
issue Investor additional shares under certain conditions. The derivative
financial instrument was subject to adjustment for changes in fair value
subsequent to issuance. The Company recorded a fair value adjustment of a
$343,000 loss during the twelve months ended January 31, 2006 which was
reflected as a change in liability for the derivative financial instruments. The
fair value adjustment was recorded as a charge to the Company's other expenses,
net and net loss. The liability for derivative financial instruments related to
the Investor was settled as a non-cash transaction by the issuance of 95,321
shares of the Company's common stock on August 13, 2005.

AGREEMENTS WITH KEVIN THOMAS

On August 31, 2004, Argan acquired VLI for approximately $6.7 million in cash
and 825,000 shares of the Company's common stock with fair value of $4,950,000
or $6.00 per share utilizing the quoted market price on the acquisition date.
The value of the shares issued in the acquisition of VLI reflects the price of
$6.00 per share of the Company's common stock at August 31, 2004. The Company
also assumed $1.6 million in debt.

The purchase agreement also provides for contingent consideration based on
EBITDA for the twelve months ended February 28, 2005. The additional contingent
consideration would be paid in both cash and stock. The Company's Additional
Consideration was approximately $275,000 in cash, $2.7 million in a subordinated
note and approximately 348,000 shares of AI common stock with a fair value of
$2.1 million or $6.00 per share utilizing the quoted market price on February
28, 2005.

On July 5, 2005, in connection with the calculation of the aforementioned
Additional Consideration, the Company and Thomas entered into an agreement (Earn
Back Agreement) concerning the calculation of Additional Consideration due
Thomas. In the Earn Back Agreement, the Company agreed to pay Thomas $594,000 in
a subordinated note and 76,645 shares of the Company's common stock valued at
$5.50 per share utilizing the quoted market price on July 5, 2005. The
$1,015,000 of Additional Consideration has been recorded by the Company as
additional purchase consideration and an increase in goodwill.

On January 28, 2005, the Company entered into a Letter Agreement with Thomas in
consideration for his agreement to delay the timing of the payment of contingent
cash consideration and for entering into a Debt Subordination Agreement
(Subordination Agreement), reconstituting such additional cash consideration as
subordinated debt. The Letter Agreement includes certain concessions to Thomas
allowing him to receive additional consideration based on the market price of
the Company's common stock. The concessions provide that in addition to
providing Thomas additional shares if the Company issued additional shares at a
price less than $7.75, if the Company did not issue additional shares at a price
less than $7.75 per share then the Company would issue additional shares to
Thomas based on the average closing price of the Company's common stock for the
30 days ended July 31, 2005, if the price was below $7.75 per share less the
1,173,147 shares previously issued. These concessions allowing Thomas to receive
additional shares under certain conditions represent a freestanding financial
instrument and should be accounted for in accordance with EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock." At January 31, 2005, the Company recorded the freestanding
financial instrument as a liability for the fair value of $1,115,000 ascribed to
the obligations of the Company to issue Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge is recorded as compensation expense due to Kevin Thomas. The
amortization of the deferred loan issuance cost will increase the Company's
future interest expense through August 1, 2007, the maturity date of the note,
and reduce net income. The charge for compensation to Kevin Thomas was
classified as non-cash compensation expense and it increased the net loss by
$614,000 of the year ended January 31, 2005. The derivative financial instrument
was subject to adjustment for changes in fair value subsequent to issuance. The
Company recorded a fair value adjustment of a $1,587,000 loss during the twelve
months ended January 31, 2006, which is also reflected as a change in liability
for the derivative financial instrument and as a charge to the Company's other
expenses and net loss. The liability for the derivative financial instrument was
settled as a non-cash transaction by the issuance of 535,052 shares of the
Company's common stock on September 1, 2005.

On May 5, 2006, the Company entered into an agreement with Thomas to extend the
maturity of the subordinated note to August 1, 2007.

SUBORDINATION AGREEMENT

Pursuant to the Subordination Agreement, Debtor and Thomas have agreed to
reconstitute the Additional Cash Consideration as subordinated debt and in
furtherance thereof, the Company has agreed to execute and deliver to Thomas a
Subordinated Promissory Note in an amount equal to the amount that would
otherwise be due Thomas as Additional Cash Consideration under the Merger
Agreement. Accordingly, under the Subordination Agreement, Debtor subordinated
all of the Junior Debt (as such term is defined in the Subordination Agreement)
to the full and final payment of all the Superior Debt (as such term is defined
in the Subordination Agreement) to the extent provided in the Subordination
Agreement, and Thomas transferred and assigned to Lender all of his rights,
title and interest in the Junior Debt and appointed Lender as his
attorney-in-fact for the purchases provided in the Subordination Agreement for
as long as any of the Superior Debt remains outstanding. Except as otherwise
provided in the Subordination Agreement and until such time that the Superior
Debt is satisfied in full, Debtor shall not, among other things, directly or
indirectly, in any way, satisfy any part of the Junior Debt, nor shall Creditor,
among other things, enforce any part of the Junior Debt or accept payment from
Debtor or any other person for the Junior Debt or give any subordination in
respect of the Junior Debt. On May 5, 2006, the Company entered into an
agreement with Thomas to extend the maturity of the subordinated note to August
1, 2007.

FINANCING ARRANGEMENTS

In May 2006, the Company agreed to amend the existing financing arrangements
whereby the revolving line of credit of $4.25 million in maximum availability
was extended to May 31, 2007. Under the amended financing arrangements, amounts
outstanding under the revolving line of credit and the three-year note bear
interest at LIBOR plus 3.25% and 3.45% respectively. Availability on a monthly
basis under the revolving line is determined by reference to accounts receivable
and inventory on hand which meet certain Bank of America, N.A. (Bank) criteria
(Borrowing Base). The aforementioned three-year note remains in effect and the
final monthly scheduled payment of $33,000 is due on July 31, 2006. As of
January 31, 2006, the Company had $200,000 outstanding under the term note. At
January 31, 2006, the Company also had $1,243,000 outstanding under the
revolving line of credit at an interest rate of 7.74% with $2.4 million of
additional availability under its borrowing base. At January 31, 2005, the
Company had $1,659,000 outstanding under its revolving line of credit at an
interest rate of 5.78%.

The amended financing arrangements provides for a new $1.5 million term loan
facility (New Term Loan). The proceeds of the New Term Loan are designated to
refinance a portion of the existing subordinated note with Kevin Thomas that has
a current outstanding balance of $3,292,000 which is due on August 1, 2007.
Advances under the New Term Loan are subject to the Company being in compliance
with its debt covenants with the Bank. The New Term Loan will be repaid in
thirty-six equal monthly principal payments and bear interest at LIBOR plus
3.25%. If the Company draws on the New Term Loan, the Company's Borrowing Base
will be reduced by $750,000 for maximum availability under the revolving line of
credit. The remaining balance of the subordinated debt will be fully
subordinated to the New Term Loan.

The amended financing arrangements provides for the measurement of certain
financial covenants including requiring the ratio of debt to pro forma earnings
before interest, taxes, depreciation and amortization (EBITDA) not to exceed 2.5
to 1 (with the first measurement date of July 31, 2006) and requiring pro forma
fixed charge coverage ratio not less than 1.25 to 1 (with the first measurement
date of July 31, 2006). The amended financing arrangements also require that the
Company meet minimum EBITDA covenants equal to or exceeding (on a rolling four
quarter basis) $1.2 million for July 31, 2006, $1.3 million for October 31, 2006
and $1.8 million for January 31, 2007 and for each successive quarter end
thereafter. Bank consent continues to be required for acquisitions and
divestitures. The Company continues to pledge the majority of the Company's
assets to secure the financing arrangements.

At January 31, 2006, the Company failed to comply with the aforementioned EBITDA
and fixed charge coverage covenants. The Bank waived the failure for the
measurement period ended January 31, 2006. For future measurement periods, the
Bank revised the definitions of certain components of the financial covenants to
specifically exclude the impact of VLI's impairment loss at January 31, 2006.

On August 31, 2004, with the consent of Lender, the Debtor entered into an
Agreement and Plan of Merger (the "Merger Agreement"), whereby the Company
acquired all of the common stock of Vitarich Laboratories, Inc. ("Vitarich") by
way of merger of Vitarich with and into a wholly-owned subsidiary of the
Company, with Vitarich (now VLI) as the surviving company. Pursuant to the
Merger Agreement, Thomas (who was a shareholder of Vitarich) was entitled to
receive from Debtor, subject to certain conditions, Additional Cash
Consideration as provided in the Merger Agreement. See "Acquisition of Vitarich
Laboratories, Inc." under this Item 6 for additional information relating to the
Merger Agreement.

HOLDING COMPANY STRUCTURE

NUTRITIONAL PRODUCTS

We are dedicated to the research, development, manufacture and distribution of
premium nutritional supplements, whole-food dietary supplements and personal
care products. Several have garnered honors including the National Nutritional
Foods Association's prestigious Peoples Choice Awards for best products of the
year in its respective category.

We provide nutrient-dense, super-food concentrates, vitamins and supplements.
Our customers include health food store chains, mass merchandisers, network
marketing companies, pharmacies and major retailers.

We are focused on efficiently utilizing the strong cash flow potential from
manufacturing nutritional products. To ensure that working capital is
effectively allocated, we closely monitor our inventory turns as well as the
number of days sales that we have in our accounts receivable.

TELECOM INFRASTRUCTURE SERVICES

We currently provide inside plant, premise wiring services to the Federal
Government and have plans to expand that work to commercial customers who
regularly need upgrades in their premise wiring systems to accommodate
improvements in security, telecommunications and network capabilities.

We continue to participate in the expansion of the telecommunications industry
by working with various telecommunications providers. We are actively pursuing
contracts with a wide variety of telecommunications providers. We provide
maintenance and upgrade services for their outside plant systems that increase
the capacity of existing infrastructure. We also provide outside plant services
to the power industry by providing maintenance and upgrade services to
utilities.

We intend to emphasize our high quality reputation, outstanding customer base
and highly motivated work force in competing for larger and more diverse
contracts. We believe that our high quality and well maintained fleet of
vehicles and construction machinery and equipment is essential to meet
customers' needs for high quality and on-time service. We are committed to
invest in our repair and maintenance capabilities to maintain the quality and
life of our equipment. Additionally, we invest annually in new vehicles and
equipment.

Critical Accounting Policies

Management is required to make judgments, assumptions and estimates that affect
the amounts reported when we prepare financial statements and related
disclosures in conformity with generally accepted accounting principles. Note 2
to the consolidated financial statements describes the significant accounting
policies and methods used in the preparation of our consolidated financial
statements. Estimates are used for, but not limited to our accounting for
revenue recognition, allowance for doubtful accounts, inventory valuation,
long-lived assets and deferred income taxes. Actual results could differ from
these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
our consolidated financial statements. If future conditions and results are
different than our assumptions and estimates, materially different amounts could
be reported.

Revenue Recognition

Vitarich Laboratories, Inc.

We manufacture products for our customers based on their orders. We typically
ship the orders immediately after production, keeping relatively little on-hand
as finished goods inventory. We recognize customer sales at the time title and
the risks and rewards of ownership passes to our customer which is generally
when orders are shipped. Sales are recognized on a net basis which reflect
reductions for certain product returns and discounts. Cost of goods sold and
finished goods inventory include materials and direct labor as well as other
direct costs combined with allocations of indirect operational costs.

Southern Maryland Cable, Inc.

We generate revenue under various arrangements, including contracts under which
revenue is based on a fixed price basis and on a time and materials basis.
Revenues from time and materials contracts are recognized when the related
service is provided to the customer. Revenues from fixed price contracts,
including a portion of estimated profit, are recognized as services are
provided, based on costs incurred and estimated total contract costs using the
percentage of completion method.

The timing of billing to customers varies based on individual contracts and
often differs from the period of revenue recognition. Estimated earnings in
excess of billings totaled $675,000 at January 31, 2006.

Contract costs are recorded when incurred and include direct labor and other
direct costs combined with allocations of operational indirect costs. Management
periodically reviews the costs incurred and revenue recognized from contracts
and adjusts recognized revenue to reflect current expectations. Provisions for
estimated losses on incomplete contracts are provided in full in the period in
which such losses become known.

Inventories

Inventories are stated at the lower of cost or market (net realizable value).
Cost is determined on the first-in first-out (FIFO) method. Appropriate
consideration is given to obsolescence, excessive inventory levels, product
deterioration and other factors in evaluating net realizable value.

Impairment of Long-Lived Assets, Including Definite Lived Intangible Assets

Long-lived assets, consisting primarily of property and equipment are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be assessed pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." We determine whether any
impairment exists by comparing the carrying value of these long-lived assets to
the undiscounted future cash flows expected to result from the use of these
assets. In the event we determine that an impairment exists, a loss would be
recognized based on the amount by which the carrying value exceeds the fair
value of the assets, which is generally determined by using quoted market prices
or valuation techniques such as the discounted present value of expected future
cash flows, appraisals, or other pricing models as appropriate. During the
twelve months ended January 31, 2006, the Company recorded an impairment charge
for its proprietary formulas intangible asset. (See Results of Operations for
the twelve months ended January 31, 2006 for further discussion.)

Goodwill and Other Indefinite Lived Intangible Assets

In connection with the acquisitions of VLI and SMC, the Company has substantial
goodwill and intangible assets including contractual customer relationships,
proprietary formulas, non-compete agreements and trade names. In accordance with
SFAS 142 "Goodwill and Other Intangible Assets," the Company reviews for
impairment, at least annually, goodwill and intangible assets deemed to have an
indefinite life.

Goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is to identify a potential impairment by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
The estimates of fair value of a reporting unit, generally a Company's operating
segment, is determined using various valuation techniques, with the primary
technique being a discounted cash flow analysis. A discounted cash flow analysis
requires making various judgmental assumptions, including assumptions about
future cash flows, growth rates and discount rates. Developing assumptions for
the Company's entrepreneurial business requires significant judgment and to a
great extent relies on the Company's ability to successfully determine trends
with respect to customers, industry and regulatory environment. The assumptions,
including assumptions about future flows and growth rates, are based on the
Company's budget and business plans as well as industry trends with respect to
customers and other manufacturers' and distributors' sales and margins. The
Company reviews trends for publicly traded companies which either compete with
the Company to provide services or the types of products the Company produces or
are users of the types of services and products provided by the Company. Changes
in economic and operating conditions impacting these assumptions could result in
goodwill impairment in future periods. Discount rate assumptions are based on
the Company's subjective assessment of the risk inherent in the respective
reporting units. Risks which the Company faces in its business include the
public's perception of our integrity and the safety and quality of our products
and services. In addition, in the industries that we operate we are subject to
rapidly changing consumer demands and preferences. The Company also operates in
competitive industries. We are not assured that customers or potential customers
will regard our products and services as sufficiently distinguishable from our
competitors' product and service offerings. If after taking into consideration
industry and Company trends, the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not deemed impaired and the
second step of the impairment test is not performed. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill
impairment test compares the implied fair value of the reporting unit's goodwill
with the carrying amount of that goodwill. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The implied
fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. Accordingly, the fair value of
the reporting unit is allocated to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit.

The Company will test for impairment of Goodwill and other intangible assets
more frequently if events or changes in circumstances indicate that the asset
might be impaired. In accordance with its annual valuation of goodwill, the
Company recorded an impairment loss with respect to VLI's goodwill and its
proprietary formulas for the twelve months ended January 31, 2006. (See further
discussion of our results of operations for the twelve months ended January 31,
2006.)

During the twelve months ended January 31, 2005, we recognized that an
impairment existed on an interim basis with respect to SMC's goodwill,
contractual customer relationships and trade name. (See further discussion of
our results of operations for the twelve months ended January 31, 2005.)

Contractual Customer Relationships

Southern Maryland Cable, Inc. - The fair value of the Contractual Customer
Relationships (CCR's) was determined at the time of the acquisition of SMC by
discounting the cash flows expected from SMC's continued relationships with
three customers - General Dynamics Corp. (GD), Verizon Communications (VZ) and
Southern Maryland Electric Cooperative (SMECO). Expected cash flows were based
on historical levels, current and anticipated projects and general economic
conditions. In some cases, the estimates of future cash flows reflect periods
beyond those of the current contracts in place. While SMC's relationship with GD
is relatively recent, SMC has performed work for VZ and SMECO for approximately
twenty years and ten years respectively. The long-term relationship with VZ and
SMECO affected the discount rate used to discount expected cash flows as well as
the Company's estimated weighted average cost of capital and SMC's asset mix. We
are amortizing the CCR's over a seven year weighted average life given the long
standing relationships SMC has with VZ and SMECO.

Vitarich Laboratories, Inc. - The fair value of the Contractual Customer
Relationships at VLI (VCCR's) was determined at the time of the acquisition of
VLI by identifying long established customer relationships in which VLI has a
pattern of recurring purchase and sales orders. The Company estimated expected
cash flows attributable to these existing customer relationships factoring in
market place assumptions regarding future contract renewals, customer attrition
rates and forecasted expenses to maintain the installed customer base. These
cash flows were then discounted based on a rate that reflects the perceived risk
of the VCCR's, the Company's estimated weighted average cost of capital and
VLI's asset mix. VLI has had a relationship of five years or more with most if
its currently significant customers. We are amortizing VCCR's over a five year
life based on our expectations of continued cash flows from these relationships
and our history of maintaining relationships.

Trade Name

The fair value of the SMC Trade Name was estimated using a
relief-from-royalty-methodology. We determined that the useful life of the Trade
Name was indefinite since it is expected to contribute directly to future cash
flows in perpetuity. The Company has also considered the effects of demand and
competition including its customer base. While SMC is not a nationally
recognized Trade Name, it is a regionally recognized name in Maryland and the
Mid-Atlantic region, SMC's primary region of operations.

We are using the relief-from-royalty method described above to test the Trade
Name for impairment annually on November 1 and on an interim basis if events or
changes in circumstances between annual tests indicate the Trade Name might be
impaired.

Proprietary Formulas

The fair value of the Proprietary Formulas (PF's) was determined at the time of
the acquisition of VLI. Cash flows were developed based on employing a
technology contribution approach to determine revenues associated with existing
proprietary formulations.

Estimates regarding product life cycle and development costs were utilized in
determining cash flow. The expected cash flows were discounted based using a
rate that reflects the perceived risk of the PF's, the Company's weighted
average cost of capital and VLI's asset mix. We are amortizing the PF's over a
three year life based on the estimated contributory life of the PF's utilizing
historical product life cycles and changes in technology.

During the twelve months ended January 31, 2006, we recognized in our annual
valuation of our purchased intangibles that an impairment existed with respect
to VLI's goodwill and proprietary formulas. (See further discussion of our
results of operations for the twelve months ended January 31, 2006.)

Non-Compete Agreement

The fair value of the Non-Compete Agreement (NCA) was determined at the time of
acquisition of VLI by discounting the estimated reduction in the cash flows
expected if one key employee, the former sole shareholder of VLI, were to leave.
The key employee signed a non-compete clause prohibiting the employee from
competing directly or indirectly for five years. The estimated reduced cash
flows were discounted based on a rate that reflects the perceived risk of the
NCA, the estimated weighted average cost of capital and VLI's asset mix. We are
amortizing the NCA over five years, the length of the non-compete agreement.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with
Statement of Financial Accounting Standards ("SFAS") No.133 "Accounting for
Derivative Instruments and Hedging Activities" and Emerging Issues Task Force
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in a Company's Own Stock." The derivative financial
instruments are carried at fair value with changes in fair value recorded as
other expense, net. The determination of fair value for our derivative financial
instruments is subject to the volatility of our stock price as well as certain
underlying assumptions which include the probability of raising additional
capital.

Deferred Tax Assets and Liabilities

We account for income taxes under the asset and liability method. The approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. Developing our provision for income
taxes requires significant judgment and expertise in Federal and state income
tax laws, regulations and strategies, including the determination of deferred
tax assets and liabilities and, if necessary, any valuation allowances that may
be required for deferred tax assets.

At January 31, 2006, we have net operating loss carry forward aggregating
$377,000 which expires in 2026.

Stock Based Compensation

We continue to apply APB Opinion No. 25 and related interpretations to its stock
based compensation awards. The fair value of the options granted in fiscal 2006
and 2005 have been estimated at the date of grant using the Black-Scholes
option-pricing model. Because option valuation models require the use of
subjective assumptions, any changes in these assumptions can materially impact
the fair value.

Pro Forma Disclosures

Years Ended January 31, 2006 and 2005

2006 2005
----------- -----------

Net loss, as reported ($9,508,000) ($3,193,000)
Add: Stock based compensation recorded in the financial statements -- --
Deduct: Total stock-based employees compensation
expense determined under fair value based methods
for all awards, net of amounts already recorded (44,000) (59,000)
----------- -----------

Pro forma net loss ($9,552,000) ($3,252,000)
=========== ===========

Basic and diluted loss per share:

Basic and diluted - as reported ($2.76) ($1.49)

Basic and diluted - pro forma ($2.78) ($1.51)

Weighted average fair value of options granted $2.28 $2.23

Risk-free interest rate 3.65% 3.49%

Expected volatility 56% 57%

Expected life 5 years 5 years

Dividend yield 0% 0%

ACQUISITION OF VITARICH LABORATORIES, INC.

On August 31, 2004, pursuant to an Agreement and Plan of Merger ("Merger
Agreement"), the Company acquired all of the common stock of Vitarich
Laboratories, Inc. (Vitarich) by way of a merger of Vitarich with and into a
wholly-owned subsidiary of the Company (VLI), with VLI as the surviving company
of the Merger. Vitarich (now VLI) is a developer, manufacturer and distributor
of premium nutritional supplements, whole-food dietary supplements and personal
care products. The results of operations of the acquired company are included in
the consolidated results of the Company from August 31, 2004, the date of
acquisition.

In connection with the Merger Agreement, the Company paid Kevin J. Thomas
(Thomas), the former shareholder of Vitarich, initial consideration consisting
of (i) $6.1 million in cash; and (ii) 825,000 shares of the Company's common
stock which was valued at $4,950,000 or $6.00 per share utilizing the quoted
market price on the acquisition date. These 825,000 shares were registered on
Form S-3 under the Securities Act of 1933, as amended, on February 25, 2005. The
Company incurred $600,000 in transaction costs which are included in the
purchase cost.

Pursuant to the Merger Agreement, in addition to the initial consideration paid
at closing, the Company agreed to pay Thomas additional consideration equal to
(a) 5.5 times the Adjusted EBITDA of Vitarich (as defined in the Merger
Agreement) for the 12 months ended February 28, 2005 (b) less the initial
consideration paid at closing (provided, however, that in no event shall the
additional consideration be less than zero or require repayment by Thomas of any
portion of the initial consideration paid at closing) ("Additional Cash
Consideration"). Such Additional Cash Consideration was to be paid 50% in the
form of a subordinated note and 50% through issuance of additional common stock
of the Company.

The Company's Additional Consideration was approximately $275,000 in cash, $2.7
million in a subordinated note and approximately 348,000 shares of AI common
stock with a fair value of $2.1 million or $6.00 per share utilizing the quoted
market price on February 28, 2005.

On July 5, 2005, the Company and Thomas entered into an agreement (Earn Back
Agreement) concerning the calculation of Additional Consideration due Thomas. In
the Earn Back Agreement, the Company agreed to pay Thomas $594,000 in a
subordinated note and 76,645 shares of the Company's common stock valued at
$5.50 per share utilizing the quoted market price on July 5, 2005. The
$1,015,000 of Additional Consideration has been recorded by the Company as
additional purchase consideration and an increase in goodwill.

During the twelve months ended January 31, 2006, we recorded an impairment loss
with respect to VLI's goodwill. (See further discussion of our resulting
operations for the twelve months ended January 31, 2006.)

The Merger Agreement also provided that, if between the closing date and the
payment date of the Additional Cash Consideration, the Company raised additional
capital by issuance of stock pursuant to a public or private offering for a
price less than $7.75 per share (the Additional Capital Subscription Price),
then the number of shares of the Company's common stock issued to Thomas as
initial consideration in the merger was to be adjusted to the number of shares
of the Company's common stock that would have been issued at the closing of the
merger had the value of each share of the Company's common stock been the
Additional Capital Subscription Price. (See disclosure regarding Letter
Agreement below).

In connection with the Merger Agreement, VLI and Thomas entered into an
employment agreement, pursuant to which VLI agreed to employ Thomas as its
Senior Operating Executive for an initial term of 3 years, subject to successive
automatic one-year renewal terms after the initial term unless either party
provides notice of its election not to renew; and the Company entered into a
supply agreement with a supply company majority owned by Thomas, pursuant to
which the supply company committed to sell to the Company, and the Company
committed to purchase on an as-needed basis, certain organic agriculture
products produced by the supply company.

On January 31, 2005, the Company entered into a Debt Subordination Agreement
("Subordination Agreement") with Thomas, SMC, and the Company referred herein as
the "Debtor" and Bank of America, N.A. ("Lender") to reconstitute as
subordinated debt Additional Cash Consideration that Debtor will owe to Thomas
in connection with the Merger Agreement.

Pursuant to the Subordination Agreement, Debtor and Thomas have agreed to
reconstitute the Additional Cash Consideration as subordinated debt and in
furtherance thereof, the Company has agreed to execute and deliver to Thomas a
Subordinated Promissory Note in an amount equal to the amount that would
otherwise be due Thomas as Additional Cash Consideration under the Merger
Agreement. Accordingly, under the Subordination Agreement, Debtor subordinated
all of the Junior Debt (as such term is defined in the Subordination Agreement)
to the full and final payment of all the Superior Debt (as such term is defined
in the Subordination Agreement) to the extent provided in the Subordination
Agreement, and Thomas transferred and assigned to Lender all of his rights,
title and interest in the Junior Debt and appointed Lender as his
attorney-in-fact for the purposes provided in the Subordination Agreement for as
long as any of the Superior Debt remains outstanding. Except as otherwise
provided in the Subordination Agreement and until such time that the Superior
Debt is satisfied in full, Debtor shall not, among other things, directly or
indirectly, in any way, satisfy any part of the Junior Debt, nor shall Creditor,
among other things, enforce any part of the Junior Debt or accept payment from
Debtor or any other person for the Junior Debt or give any subordination in
respect of the Junior Debt.

On January 28, 2005 the Company entered into a Letter Agreement with Thomas in
consideration for his agreement to delay the timing of the payment of contingent
cash consideration and for entering into the aforementioned Debt Subordination
Agreement, reconstituting such additional cash consideration as subordinated
debt. The Letter Agreement includes certain concessions to Thomas allowing him
to receive additional consideration based on the market price of the Company's
common stock. The concessions provide that in addition to providing Thomas
additional shares if the Company issued additional shares at a price less than
$7.75, if the Company did not issue additional shares at a price less than $7.75
per share then the Company would issue additional shares to Thomas based on the
average closing price of the Company's common stock for the 30 days ended July
31, 2005, if the price was below $7.75 per share less the 1,173,147 shares
previously issued. These concessions allowing Thomas to receive additional
shares under certain conditions represent a freestanding financial instrument
and were accounted for in accordance with EITF 00-19 "Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company's Own
Stock." At January 31, 2005, the Company recorded the freestanding financial
instrument as a liability for the fair value of $1,115,000 ascribed to the
obligations of the Company to issue Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge was recorded as compensation expense due to Thomas. The
amortization of the deferred loan issuance cost will increase the Company's
future interest expense through August 1, 2007, the maturity date of the note,
and reduce net income. The charge for compensation to Thomas was classified as
non-cash compensation expense and it increased the net loss by $614,000 for the
year ended January 31, 2005. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. The Company
recorded a fair value adjustment of a $1,587,000 loss during the twelve months
ended January 31, 2006, which is also reflected as a change in liability for the
derivative financial instrument and as a charge to the Company's other expenses,
net and net loss. The liability for the derivative financial instrument was
settled as a non-cash transaction by the issuance of 535,052 shares of the
Company's common stock on September 1, 2005.

On May 5, 2006, the Company entered into an agreement with Thomas to extend the
maturity of the subordinated note to August 1, 2007.

During the twelve months ended January 31, 2006, we recorded impairment losses
with respect to VLI's goodwill and proprietary formulas which were acquired in
the acquisition. (See further discussion of our resulting operations for the
twelve months ended January 31, 2006.)

WESTERN FILTER LITIGATION

On October 31, 2003, the Company completed the sale of Puroflow Incorporated (a
wholly-owned subsidiary) to Western Filter Corporation (WFC) for approximately
$3.5 million in cash of which $300,000 is held in escrow to indemnify WFC from
losses if a breach of the representations and warranties made by the Company in
connection with that sale should occur. On September 17, 2004, WFC notified the
Company asserting that WFC believes that the Company breached certain
representations and warranties under the Stock Purchase Agreement. WFC asserts
damages in excess of the $300,000 escrow which is being held by a third party.

WFC filed a civil action against Argan, Inc. on March 22, 2005. The suit was
initially filed in the Superior Court of the State of California for the County
of Los Angeles. The complaint asserts seven claims against the Company: (1)
breach of contract; (2) intentional misrepresentation; (3) concealment and
non-disclosure; (4) negligent misrepresentation; (5) false promise; (6)
negligence; and (7) declaratory disclosure as well as negligent
misrepresentations against the Company's executive officers.

WFC alleges substantial damages. This action was removed to the United States
District Court for the Central District of California. On June 30, 2005, WFC
filed its Second Amended Complaint. The Company filed its Motion to Dismiss the
Complaint on July 27, 2005. The District Court denied the Company's Motion to
Dismiss on November 18, 2005. The Company will file its Answer and Special
Defenses. The Company has reviewed WFC's complaint and believes that most claims
are substantially without merit. The Company will vigorously contest WFC's
claims.

At January 31, 2006, the Company has an accrual related to this matter of
$360,000 for estimated payments and legal fees related to the claims of WFC that
it considers to be probable and that can be reasonably estimated. Although the
ultimate amount of liability that may result from this matter is not
ascertainable, the Company believes that any amounts exceeding the
aforementioned accrual should not materially affect the Company's financial
condition. It is possible, however, that the ultimate resolution of WFC's claim
could result in a material adverse effect on the Company's results of operations
for a particular reporting period.

RESULTS OF OPERATIONS

The following summarizes the results of our operations for the twelve months
ended January 31, 2006 compared to the twelve months ended January 31, 2005.

Year Ended
January 31

2006 2005
------------ ------------
Net sales
Nutraceutical products $17,702,000 $6,805,000
Telecom infrastructure services 10,750,000 7,713,000
------------ ------------
Net sales 28,452,000 14,518,000
------------ ------------
Cost of sales
Nutraceutical products 13,842,000 4,852,000
Telecom infrastructure services 8,543,000 6,559,000
------------ ------------
Gross profit 6,067,000 3,107,000
------------ ------------
Selling and general and administrative expenses,
including non-cash compensation expense of
$614,000 in 2005 7,469,000 5,346,000
Impairment loss 6,497,000 1,942,000
------------ ------------
Loss from operations (7,899,000) (4,181,000)
Interest expense 606,000 124,000
Other expense (income), net 1,925,000 (67,000)
------------ ------------
Loss before income taxes (10,430,000) (4,238,000)
Income tax benefit 922,000 1,045,000
------------ ------------
Net loss ($9,508,000) ($3,193,000)
============ ============
Basic and diluted loss per share ($2.76) ($1.49)
============ ============
Weighted average shares outstanding - basic
and diluted 3,439,000 2,149,000
============ ============

Balance sheet data:

Working capital $1,516,000 $1,488,000
Total assets 23,622,000 25,257,000
Long-term obligations 3,468,000 481,000
Stockholders' equity 11,686,000 15,500,000
Cash dividends declared per common share -- --

Net Sales

Net sales of nutraceutical products were $17,702,000 for the year ended January
31, 2006, compared to net sales of nutraceutical products of $6,805,000 for the
year ended January 31, 2005. The increase in net sales of nutraceutical products
of $10,897,000 or 160% is due primarily to the acquisition of VLI on August 31,
2004. The results of VLI were included for five months during the year ended
January 31, 2005 and for the entire year ended January 31, 2006. VLI experienced
a 8% gain in net sales comparing the year ended January 31, 2006 to the same
period a year ago.

Net sales of telecommunications infrastructure services were $10,750,000 for the
year ended January 31, 2006 compared to $7,713,000 for the year ended January
31, 2005. The increase is due primarily to increased revenues of $1.2 million
for services to Verizon Communications, Inc. (VZ). VZ revenues increased in the
current fiscal year due to SMC reestablishing a contractual relationship with VZ
which had been previously discontinued. In July 2004, SMC lost a significantly
profitable contract with VZ. In September 2005, SMC commenced work on an
underground telecommunications infrastructure services contract which had
previously been awarded to a third party which could not perform. In addition,
SMC commenced contracting directly with Electronic Data Systems Corp. (EDS)
which provided approximately $1 million in revenues during the year ended
January 31, 2006. SMC also experienced increased revenues from a broad range of
existing as well as new customers.

Cost of Sales

For the year ended January 31, 2006, cost of sales for nutraceutical products
were $13,842,000 or 78% of net sales for nutraceutical products compared to
$4,852,000 or 71% of net sales for nutraceutical products for the year ended
January 31, 2005. VLI experienced a higher percentage of cost of sales in fiscal
year 2006 due to increased costs of non-nutritional materials whose cost was
affected by the rise in oil prices. In addition, VLI outsourced certain
manufacturing processes due to in-house machinery performance issues. VLI also
became certified as a "Good Manufacturing Processes" (GMP) facility during the
year ended January 31, 2006 which required increased laboratory capabilities and
staff.

For the year ended, January 31, 2006, cost of sales for telecommunications
infrastructure services was $8,543,000 or 79% of net sales of telecommunications
infrastructure services compared to $6,559,000 or 85% of net sales for
telecommunications infrastructure services for the year ended January 31, 2005.
SMC experienced improved percentage margin performance due primarily to more
effective utilization of technical staff assigned to work performed for General
Dynamics and EDS as work loads were more consistent in fiscal year 2006 than in
fiscal year 2005. In addition, new field operations management had a positive
impact on certain time and materials contracts.

Selling, General and Administrative Expenses

For the year ended January 31, 2006, selling general and administrative expenses
were $7,469,000 or 26% of consolidated net sales compared to $5,346,000 or 37%
of consolidated net sales for the year January 31, 2005. An increase of
$2,610,000 in expenses was due primarily to the acquisition of VLI which was
acquired on August 31, 2004 and included for five months in the year ended
January 31, 2005 compared to the entire year ended January 31, 2006. At January
31, 2006, corporate expenses decreased by $446,000 from the year ended January
31, 2005 due primarily to $614,000 in non-cash compensation expense attributed
to Kevin Thomas at January 31, 2005 in connection with certain derivative
financial instruments the impact of which was offset in part by a consulting fee
of $100,000 paid to MSR during the year ended January 31, 2006.

Impairment of Goodwill and Intangibles

During the year ended January 31, 2006, as a result of our annual impairment
analysis, we determined that the goodwill of VLI was impaired. VLI experienced
revenue levels well below expectations due to weaker than anticipated sales of
products utilizing its adaptogen inventory raw material. In addition, VLI had
gross margins which were lower than VLI's historical experience. The decline was
due to VLI's slow reaction to passing along price increases for increased costs
of non-nutritional components of its products caused by the spike in oil prices.
VLI also experienced increased costs due to outsourcing of the manufacture of
certain products at levels greater than anticipated. Also contributing to lower
margins was the impact of the costs associated with VLI's certification as a
good manufacturing practices facility. The recent under-performance of VLI's
financial results reduced the estimate of future cash flows which were
discounted based on a rate that reflects the perceived risk of our investment in
VLI to determine its fair value. During the twelve months ended January 31, 2006
we recorded a goodwill impairment charge of $5,810,000.

During the year ended January 31, 2006, we determined that VLI's PF intangible
was impaired. VLI's revenues were below levels anticipated at the time VLI was
acquired. PF's generated less revenue than originally projected at the time of
acquisition. PF's, as a result, were determined to be impaired because the
carrying amount was not fully recoverable through anticipated future gross cash
flows. Accordingly, the Company determined the fair value of the PF's and
compared it to its carrying amount. The Company recorded an impairment loss of
$687,000, as this is the amount by which the PF's carrying amount exceeded its
fair value.

During the year ended January 31, 2005, the Company determined that both events
and changes in circumstances with respect to its business climate would have a
significant effect on its future estimated cash flows. During the year ended
January 31, 2005, SMC had a customer contract terminated which had historically
provided positive margins and cash flows. In addition, SMC experienced revenue
levels well below expectations for its largest fixed price contract customer. As
a consequence, SMC reduced its future expectations of cash flows and the Company
concluded that there was an indication that its intangible assets not subject to
amortization might be impaired. In performing its analysis of future cash flows,
the Company assumed substantial increase in revenue for the twelve months ended
January 31, 2006 and marginal growth thereafter. In addition, the Company
assumed that SMC would return to its historical gross margin percentages. The
Company determined the fair value of SMC's Goodwill and Trade Name and compared
it to its respective carrying amounts. The carrying amounts exceeded SMC's
Goodwill and Trade Name's respective fair values by $740,000 and $456,000,
respectively, which the Company recorded as an impairment loss for the year
ended January 31, 2005.

During the twelve months ended January 31, 2005, the Company terminated a
customer contract. The impact of the termination indicated that its Contractual
Customer Relationships (CCR) carrying amount was not fully recoverable.
Accordingly, the Company determined the fair value of the CCR's and compared it
to its carrying amount. The Company recorded an impairment loss of $746,000, as
this is the amount by which the CCR's carrying amount exceeded its fair value.

Interest Expense

We had an increase in interest expense to $606,000 for the year ended January
31, 2006 from $124,000 for the year ended January 31, 2005 due primarily to the
amortization of issuance cost for subordinated debt of $244,000 and interest
expense on subordinated debt of $170,000.

Other Expense, Net

We had other expense of $1,925,000 for the year ended January 31, 2006 compared
to other income of $67,000 for the year ended January 31, 2005. The significant
amount of other expense is due to the fair value loss for the liability for
derivative financial instruments of $1,930,000 which was realized during the
year ended January 31, 2006.

Income Tax Benefit

AI's effective income tax benefit rate was 9% for the twelve months ended
January 31, 2006 compared to a 25% income tax benefit rate for the twelve months
ended January 31, 2005. During the year ended January 31, 2006, the Company
recorded the impairment loss of $5,810,000 with respect to VLI's goodwill and
the $1,930,000 fair market value loss for the liability for derivative financial
instruments as other expense both of which are treated as permanent differences
for income tax reporting purposes. These permanent differences reduced our
effective income tax benefit rate from 38% to 9% for the year ended January 31,
2006. During the twelve months ended January 31, 2005, we recorded a $740,000
impairment charge related to goodwill and compensation expense of $614,000
attributed to inducements given to Thomas which are treated as permanent
differences for income tax reporting purposes. We considered the aforementioned
permanent differences in AI's effective tax rate.

Comparison of the Results of Operations for the Fiscal Year Ended January 31,
2006 to the Pro Forma Results of Operations for the Fiscal Year Ended January
31, 2005

The following summarizes the results of our operations for twelve months ended
January 31, 2006 compared to unaudited pro forma statement of operations for the
twelve months ended January 31, 2005 as if the acquisition of VLI was completed
on February 1, 2004.

The unaudited pro forma statement of operations does not purport to be
indicative of the results that would have actually been obtained if the
acquisition of VLI occurred on February 1, 2004 or that may be obtained in the
future. VLI previously reported its results of operations using a calendar
year-end. No material events occurred subsequent to these reporting periods that
would require adjustment to our unaudited pro forma statements of operations.

Year Ended
January 31

2006 2005
------------ ------------
Net sales (Pro forma)

Nutraceutical products $17,702,000 $16,418,000
Telecom infrastructure services 10,750,000 7,713,000
------------ ------------
Net sales 28,452,000 24,131,000
------------ ------------
Cost of sales
Nutraceutical products 13,842,000 11,865,000
Telecom infrastructure services 8,543,000 6,559,000
------------ ------------
Gross profit 6,067,000 5,707,000
Selling and general and administrative expenses,
Including non-cash compensation expense
of $614,000 in 2005 7,469,000 7,260,000
Impairment loss 6,497,000 1,942,000
------------ ------------
Loss from operations ($7,899,000) ($3,495,000)
============ ============

Net Sales

Net sales of nutraceutical products were $17,702,000 for the year ended January
31, 2006 compared to pro forma net sales of $16,418,000 of nutraceutical
products for the year ended January 31, 2005 or an increase of 8%. The increase
in net sales was due primarily to the increase of sales with CyberWize.com, Inc.
(C).

Cost of Sales

For the year ended January 31, 2006, cost of sales for nutraceutical products
were $13,842,000 or 78% of net sales for nutraceutical products compared to
$11,865,000 or 72% of pro forma net sales of nutraceutical products for the year
ended January 31, 2005. VLI experienced a higher percentage of cost of sales
during the year ended January 31, 2006 due to increased costs of non-nutritional
materials whose cost was affected by the rise in oil prices. In addition, VLI
incurred costs because it outsourced certain manufacturing processes due
in-house machinery performance issues. VLI also became certified as a "Good
Manufacturing Processes" (GMP) facility during the year ended January 31, 2006
which required increased laboratory capabilities and staff.

Selling General and Administrative

For the year ended January 31, 2006, selling general and administrative expenses
were $7,469,000 or 26% of consolidated net sales compared to $7,260,000 or 30%
of pro forma consolidated net sales for the year ended January 31, 2005. During
the year ended January 31, 2006, corporate expenses decreased by $446,000 due
primarily to $614,000 in non-cash compensation expense attributed to Kevin
Thomas at January 31, 2005 in connection with certain derivative financial
instruments which was offset, in part, by a consulting fee of $100,000 paid to
MSR during the year ended January 31, 2006. VLI experienced an increase in
selling costs during the year ended January 31, 2006, as it commenced an
expansion of its efforts to expand its product offerings to new customers. In
addition, VLI incurred recruiting, relocation and severance costs in building
its management team.

Impairment of Goodwill and Intangibles (See discussion above regarding
impairment losses recorded during the years ended January 31, 2006 and 2005.)

LIQUIDITY AND CAPITAL RESOURCES

Cash Position and Indebtedness

We had working capital of $1.5 million at January 31, 2006. We had $5,000 in
cash. In addition, we had $2.4 million available under credit facilities.

Working capital was approximately $1.5 million at January 31, 2006 and 2005.
Components of the Company's cash flow provided by operations during the year
ended January 31, 2006 included an increase of $400,000 in accounts receivable,
an increase of $352,000 in estimated earnings in excess of billings which were
offset by an increase in accounts payable and accrued expenses of $2,016,000.
The Company had a loss before taxes of $10,430,000 for the year ended January
31, 2006. The Company's non-cash expenses included in the determination of loss
before income taxes included the impairment loss of $6,497,000 with respect to
VLI's annual valuation of goodwill and PF's, the non-cash loss on liability for
derivative financial instruments of $1,930,000, $1,603,000 for amortization of
purchased intangibles, and $1,076,000 for depreciation and other amortization.

Cash Flows

Net cash provided by operations for the year ended January 31, 2006, was
$2,322,000 compared with $2,226,000 of cash used in operations for the year
ended January 31, 2005 due primarily to the improved performance of SMC. For the
year ended January 31, 2006, SMC had income from operations of $658,000 compared
to a loss of $2,378,000 for the year ended January 31, 2005. Revenues from VZ
increased by $1.2 million due to SMC reestablishing a contractual relationship
with VZ which had been previously discontinued. In July 2004, SMC lost a
significantly profitable contract with VZ. In September 2005, SMC commenced work
on an underground telecommunications infrastructure services contract which had
been previously awarded to a third party which could not perform. In addition,
SMC commenced contracting directly with EDS which provided approximately $1
million in revenues during the year ended January 31, 2006. SMC also experienced
increased revenues from a broad range of existing as well as new customers.

The Company's non-cash expenses increased during the year ended January 31, 2006
due primarily to the acquisition of VLI in August 2004. VLI is included in the
Company's results for the entire year ended January 31, 2006 and five months for
the year ended January 31, 2005. Depreciation and amortization increased to
$1,076,000 for the year ended January 31, 2006 from $547,000 for the same period
one year ago. Amortization of purchased intangibles increased to $1,603,000 for
the year ended January 31, 2006 from $830,000 for the year ended January 31,
2005.

During the year ended January 31, 2006, the Company recorded an impairment loss
of $6,497,000 with respect to its annual valuation of VLI's goodwill and PF's.
(See preceding discussion in Results of Operations.)

During the year ended January 31, 2005, the Company suffered an impairment loss
on goodwill and other purchased intangibles with respect to SMC. Non-cash loss
on liability for derivative financial instruments reflects the mark to market
loss through July 31, 2005 of liability for derivative financial instruments
which were created in January 2005.

During the year ended January 31, 2006, accounts receivable, net and estimated
earnings in excess of billings used cash of $400,000 and $352,000, respectively,
due to the strong fourth quarter revenue experienced by SMC. During the twelve
months ended January 31, 2006, accounts payable and accrued expenses provided
$2,016,000 in cash due to increased customer deposits to secure current and
future sales activity, the build-up of inventory at the end of the year to
support future sales, accrued corporate legal fees for WFC case, as well as
payments due SMC's subcontractors who are paid on terms consistent to SMC's
terms with its customers.

During the year ended January 31, 2006, net cash used for investing activities
was $1,826,000 compared to net cash used for investing activities of $3,879,000
for the year ended January 31, 2005. The significant amount of cash used for
investing activities during the year ended January 31, 2005 was due to the
acquisition of VLI for $6,650,000 which was partially funded by redemption of
investments. In comparison, the Company spent $1,173,000 for property and
equipment to upgrade VLI's manufacturing efficiency and other payments of
$426,000 with respect to the acquisition of VLI during the year ended January
31, 2006.

For the year ended January 31, 2006, net cash used by financing activities was
$658,000 compared to $1,060,000 provided by financing activities for the year
ended January 31, 2005. The change in net cash provided during the year ended
January 31, 2005 to net cash used during the year ended January 31, 2006 is due
to payments made on the line of credit by the Company during the year ended
January 31, 2006 from cash provided by operating activities offset, in part, by
escrow cash which provided $304,000 in cash as a result of Bank of America, NA
(Bank) releasing escrowed funds in accordance with the amended financing
arrangements for the year ended January 31, 2006.

In May 2006, the Company agreed to amend the existing financing arrangements
whereby the revolving line of credit of $4.25 million in maximum availability
was extended to May 31, 2007. Under the amended financing arrangements, amounts
outstanding under the revolving line of credit and the three-year note bear
interest at LIBOR plus 3.25% and 3.45%, respectively. Availability on a monthly
basis under the revolving line is determined by reference to accounts receivable
and inventory on hand which meet certain Bank of America, N.A. (Bank) criteria
(Borrowing Base). The aforementioned three-year note remains in effect and the
final monthly scheduled payment of $33,000 is due on July 31, 2006. As of
January 31, 2006, the Company had $200,000 outstanding under the term note. At
January 31, 2006, the Company also had $1,243,000 outstanding under the
revolving line of credit at an interest rate of 7.74% with $2.4 million of
additional availability under its borrowing base. At January 31, 2005, the
Company had $1,659,000 outstanding under its revolving line of credit at an
interest rate of 5.78%.

The amended financing arrangements provides for a new $1.5 million term loan
facility (New Term Loan). The proceeds of the New Term Loan are designated to
refinance a portion of the existing subordinated note with Kevin Thomas that has
a current outstanding balance of $3,292,000 which is due on August 1, 2007.
Advances under the New Term Loan are subject to the Company being in compliance
with its debt covenants with the Bank. The New Term Loan will be repaid in
thirty-six equal monthly principal payments and bear interest at LIBOR plus
3.25%. If the Company draws on the New Term Loan, the Company's Borrowing Base
will be reduced by $750,000 for maximum availability under the revolving line of
credit.

The amended financing arrangements provides for the measurement of certain
financial covenants including requiring the ratio of debt to pro forma earnings
before interest, taxes, depreciation and amortization (EBITDA) not to exceed 2.5
to 1 (with the next measurement period of July 31, 2006) and requiring pro forma
fixed charge coverage ratio not less than 1.25 to 1 (with the next measurement
period of July 31, 2006). The amended financing arrangements also provide a
requirement that the Company meet minimum EBITDA covenants equal to or exceeding
(on a rolling four quarter basis) $1.2 million for July 31, 2006, $1.3 million
for October 31, 2006 and $1.8 million for January 31, 2007 and for each
successive quarter end thereafter. Bank consent continues to be required for
acquisitions and divestitures. The Company continues to pledge the majority of
the Company's assets to secure the financing arrangements.

Management believes that cash generated from the Company's operations combined
with capital resources available under its renewed line of credit is adequate to
meet the Company's future operating cash needs. Any future acquisitions, other
significant unplanned costs or cash requirements may require the Company to
raise additional funds through the issuance of debt and equity securities. There
can be no assurance that such financing will be available on terms acceptable to
the Company, or at all. If additional funds are raised by issuing equity
securities, significant dilution to the existing stockholders may result.

Contractual Obligations

Our current contractual obligations include long-term debt, subordinated debt
and operating leases for our office, warehouse and manufacturing facilities. See
Notes 6, 8 and 13 of our consolidated financial statements for a discussion of
our contractual obligations.

Principal maturities of long-term debt and future minimum lease payments at
January 31, 2006 are as follows:

Payment Due by Period
--------------------------------- More than
Contractual Obligations Total One Year 1-3 Years 4-5 Years 5 Years
----------------------- ---------- -------- ---------- --------- ---------

Long-term debt $597,000 $421,000 $167,000 $9,000 --

Subordinated debt 3,292,000 -- 3,292,000 -- --

Operating Leases 2,533,000 450,000 805,000 598,000 $680,000
---------- -------- ---------- --------- ---------

Total $6,422,000 $871,000 $4,264,000 $607,000 $680,000
========== ======== ========== ========= =========

Customers

During the twelve months ended January 31, 2006, we provided nutritional and
whole-food supplements as well as personal care products to customers in the
global nutrition industry and services to telecommunications and utilities
customers as well as to the Federal Government, through a contract with General
Dynamics Corp. ("GD"). Certain of our more significant customer relationships
are with Southern Maryland Electrical Cooperative (SMECO), GD, TriVita
Corporation (TVC), Rob Reiss Companies (RRC), CyberWize.com, Inc. (C), Orange
Peel Enterprises (OPE) and Verizon Communications (VZ). SMECO, GD and VZ
accounted for approximately 12%, 7% and 6% of consolidated net sales during the
twelve months ended January 31, 2006. TVC, RRC, C and OPE accounted for 21%,
12%, 6% and 6% of consolidated net sales for the twelve months ended January 31,
2006. Combined SMECO, GD, TVC, RRC, C, OPE and VZ accounted for approximately
70% of consolidated net sales during the twelve months ended January 31, 2006.

SEASONALITY

The Company's telecom infrastructure services operations are expected to have
seasonally weaker results in the first and fourth quarters of the fiscal year,
and may produce stronger results in the second and third quarters. This
seasonality is primarily due to the effect of winter weather on outside plant
activities, as well as reduced daylight hours and customer budgetary
constraints. Certain customers tend to complete budgeted capital expenditures
before the end of the year, and postpone additional expenditures until the
subsequent fiscal period.

IMPACT OF CHANGES IN ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)") which supersedes Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," replaces Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" and amends FASB Statement No. 95, "Statement of Cash Flows." SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in our consolidated statements of
operations based on their fair values. Pro forma disclosure is no longer an
alternative. We will adopt SFAS 123(R) on February 1, 2006 using the modified
prospective method and, accordingly, the financial statements for prior periods
will not reflect any restated amounts. See Note 2 in the Notes to Consolidated
Financial Statements for the pro forma net income (loss) and net income (loss)
per share amounts, for fiscal year 2006 and 2005, presented as if the Company
had used a fair-value-based method similar to the methods required under SFAS
No. 123(R) to measure compensation expense for employee stock incentive awards.
Although the Company has not yet determined whether the adoption of SFAS No.
123(R) will result in amounts that are similar to the current pro forma
disclosures under SFAS No. 123, it is evaluating the requirements under SFAS No.
123(R). The Company has not had a consistent pattern of issuing stock options.
The Company typically issues blocks of stock options when it consummates an
acquisition such as VLI when it issued stock options in September 2004 for
35,000 shares which had an estimated fair value of $78,000. The full impact of
adopting SFAS 123(R) cannot be accurately estimated at this time as it will
depend on the market value and the amount of share based awards granted in
future periods.

In December 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4" ("SFAS No. 151") which requires that abnormal amounts
of idle facility expense, freight, handling costs and wasted material (spoilage)
be recognized as current-period charges. In addition, the statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company will adopt
this statement as required, and management does not believe the adoption will
have a material effect on the Company's results of operations, financial
condition or liquidity.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 requires restatement of prior
periods' financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. Also, SFAS No. 154 requires that retrospective application
of a change in accounting principle be limited to the direct effects of the
change. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. Management does
not believe that the adoption of SFAS No. 154 will have a material impact on the
Company's consolidated financial statements.

INTERNAL CONTROL OVER FINANCIAL REPORTING

(a) Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of The Company's disclosure
controls and procedures (as defined in Rule 13a-15 of the Securities Exchange
Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current disclosure controls
and procedures are effective in timely alerting them of material information
relating to the Company that is required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934.

(b) Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934 and for the assessment of
the effectiveness of Internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

Management has enhanced internal controls over financial reporting during the
quarter ended January 31, 2006 that have materially affected or are reasonably
likely to materially affect the Company's internal control over financial
reporting. The Company improved controls over material agreements and filings
with the SEC prior to their release as well as the monitoring of the financial
information of the Company's subsidiaries.

EFFECTS OF INFLATION ON BUSINESS

Management believes that inflation will not have a material effect on the
Company's operations.

ITEM 7. FINANCIAL STATEMENTS

The following financial statements (including the notes thereto and the Report
of the Independent Registered Public Accounting Firm with respect thereto), are
filed as part of this Annual Report on Form 10-KSB.

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets at January 31, 2006 and 2005.

Consolidated Statements of Operations for each of the two years in the
period ended January 31, 2006. Consolidated Statements of Stockholders'
Equity for each of the two years in the period ended January 31, 2006.

Consolidated Statements of Cash Flows for each of the two years in the
period ended January 31, 2006.

Notes to Consolidated Financial Statements.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Argan, Inc.

We have audited the accompanying consolidated balance sheets of Argan, Inc. (the
Company) as of January 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended January 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Argan,
Inc. at January 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
January 31, 2006, in conformity with U.S. generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

McLean, Virginia
May 10, 2006

ARGAN, INC.

Consolidated Balance Sheets

January 31, 2006 January 31, 2005
================ ================

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,000 $167,000
Accounts receivable, net of allowance for doubtful accounts
of $50,000 at 1/31/06 and $85,000 at 1/31/05 3,351,000 2,951,000
Receivable from affiliated entity, net of allowance for doubtful
accounts of $0 at 1/31/06 and $84,000 at 1/31/05 157,000 112,000
Escrowed cash 300,000 604,000
Estimated earnings in excess of billings 675,000 323,000
Inventories, net of reserves of $95,000 at 1/31/06 and $62,000
at 1/31/05 3,410,000 3,465,000
Prepaid expenses and other current assets 458,000 622,000
---------------- ----------------
TOTAL CURRENT ASSETS 8,356,000 8,244,000
---------------- ----------------

Property and equipment, net 3,324,000 2,703,000
Issuance cost for subordinated debt 257,000 501,000
Other assets 46,000 35,000
Contractual customer relationships, net 1,894,000 2,397,000
Trade name 224,000 224,000
Proprietary formulas, net 726,000 2,153,000
Non-compete agreement, net 1,290,000 1,650,000
Goodwill 7,505,000 7,350,000
---------------- ----------------
TOTAL ASSETS $23,622,000 $25,257,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,205,000 $1,705,000
Due to affiliates 121,000 47,000
Accrued expenses 1,801,000 1,285,000
Liability for derivative financial instruments -- 1,254,000
Deferred income tax liability 49,000 144,000
Line of credit 1,243,000 1,659,000
Current portion of long-term debt 421,000 662,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 6,840,000 6,756,000
---------------- ----------------
Deferred income tax liability 1,618,000 2,520,000
Deferred rent 10,000 --
Long-term debt 176,000 481,000
Subordinated debt due former owner of Vitarich Laboratories, Inc. 3,292,000 --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share -
authorized 500,000 shares - issued - none -- --
Common stock, par value $.15 per share -
12,000,000 shares authorized - 3,817,243 shares issued
at January 31, 2006 and 2,762,078 shares issued at
January 31, 2005 and 3,814,010 shares outstanding
at January 31, 2006 and 2,758,845 shares outstanding
at January 31, 2005 572,000 414,000
Warrants outstanding 849,000 849,000
Additional paid-in capital 25,336,000 19,800,000
Accumulated deficit (15,038,000) (5,530,000)
Treasury stock at cost:
3,233 shares at January 31, 2006 and 2005 (33,000) (33,000)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 11,686,000 15,500,000
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,622,000 $25,257,000
================ ================

See Accompanying Notes

ARGAN, INC.

Consolidated Statements of Operations

Years Ended January 31
2006 2005
============ ============

Net Sales
Nutraceutical products $17,702,000 $6,805,000
Telecom infrastructure services 10,750,000 7,713,000
------------ ------------
Net Sales 28,452,000 14,518,000
Cost of Sales
Nutraceutical products 13,842,000 4,852,000
Telecom infrastructure services 8,543,000 6,559,000
------------ ------------
Gross profit 6,067,000 3,107,000

Selling, general and administrative expenses, includes non-cash
compensation expense of $614,000 for the year ended
January 31, 2005 7,469,000 5,346,000
Impairment loss 6,497,000 1,942,000
------------ ------------
Loss from operations (7,899,000) (4,181,000)

Interest expense 606,000 124,000
Other expense (income), net 1,925,000 (67,000)
------------ ------------
Loss before income taxes (10,430,000) (4,238,000)
Income tax benefit 922,000 1,045,000
------------ ------------
Net loss ($9,508,000) ($3,193,000)
============ ============

Basic and diluted loss per share $(2.76) $(1.49)
============ ============
Weighted average number of shares outstanding - basic and diluted 3,439,000 2,149,000
============ ============

See Accompanying Notes

ARGAN, INC.
Consolidated Statements of Stockholders' Equity
For the Years Ended January 31, 2006 and 2005

COMMON
STOCK ADDITIONAL ACCUMULATED
PAR WARRANTS PAID-IN DEFICIT TREASURY
SHARES VALUE OUTSTANDING CAPITAL TOTAL STOCK TOTAL
--------- -------- ------------ ----------- ------------ --------- ------------

Balance at
January 31, 2004 1,802,813 $270,000 $849,000 $14,121,000 $(2,337,000) $(33,000) $12,870,000

Acquisition of Vitarich
Laboratories, Inc. 825,000 124,000 -- 4,826,000 -- -- 4,950,000

Exercise of Stock 2,000 1,000 -- 11,000 -- -- 12,000
Options

Issuance of Common
Stock 129,032 19,000 -- 842,000 -- -- 861,000

Net loss -- -- -- -- (3,193,000) -- (3,193,000)
--------- -------- ------------ ----------- ------------ --------- ------------
Balance at
January 31, 2005 2,758,845 414,000 849,000 19,800,000 (5,530,000) (33,000) 15,500,000

Issuance of common
stock to MSR 95,321 14,000 -- 468,000 -- -- 482,000

Issuance of common
stock to Kevin Thomas 959,844 144,000 -- 5,068,000 -- -- 5,212,000

Net loss (9,508,000) (9,508,000)
--------- -------- ------------ ----------- ------------ --------- ------------

Balance at
January 31, 2006 3,814,010 $572,000 $849,000 $25,336,000 $(15,038,000) $(33,000) $11,686,000
========= ======== ============ =========== ============ ========= ============

See Accompanying Notes

ARGAN, INC.
Consolidated Statements of Cash Flows

Years Ended January 31
2006 2005
============ ============

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($9,508,000) ($3,193,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,076,000 547,000
Amortization of purchase intangibles 1,603,000 830,000
Impairment loss on goodwill and intangibles 6,497,000 1,942,000
Non-cash compensation expense -- 614,000
Deferred income taxes (997,000) (1,108,000)
Non-cash loss on liability for derivative financial instruments 1,930,000 --
Gain on sale of property and equipment (25,000) (5,000)
Changes in operating assets and liabilities:
Accounts receivable, net (400,000) (57,000)
Receivable from affiliated entity, net (45,000) (13,000)
Estimated earnings in excess of billings (352,000) 191,000
Inventories, net 319,000 (218,000)
Prepaid expenses and other current assets 135,000 (107,000)
Accounts payable and accrued expenses 2,016,000 (1,640,000)
Billings in excess of estimated earnings -- (20,000)
Due to affiliates 74,000 47,000
Other (1,000) (36,000)
------------ ------------
Net cash provided by (used in) operating activities 2,322,000 (2,226,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Vitarich Laboratories, Inc., net (426,000) (6,650,000)
Purchase of investments -- (9,000,000)
Redemptions of investments -- 12,000,000
Purchases of property and equipment (1,480,000) (242,000)
Proceeds from sale of property and equipment 80,000 13,000
------------ ------------
Net cash used in investing activities (1,826,000) (3,879,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from escrowed cash 304,000 --
Proceeds from sale of common stock -- 1,000,000
Proceeds from exercise of stock options -- 12,000
Proceeds from long-term debt 9,000 --
Proceeds from short-term debt 140,000 172,000
Principal payments on short-term debt (156,000) (47,000)
Proceeds from line of credit 4,825,000 3,109,000
Principal payments on line of credit (5,241,000) (1,450,000)
Principal payments on long-term debt (539,000) (1,229,000)
Payment of former owner's loan to Vitarich Laboratories, Inc. -- (507,000)
------------ ------------
Net cash (used in) provided by financing activities (658,000) 1,060,000
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 167,000 5,212,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (162,000) (5,045,000)
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $5,000 $167,000
============ ============

See Accompanying Notes

ARGAN, INC.
Consolidated Statements of Cash Flows (Continued)

Years Ended January 31
2006 2005
============ ============

Supplemental disclosure of investing and
financing activities:
Cash paid during the period for:
Interest $350,000 $124,000
============ ============
Income taxes $151,000 $373,000
============ ============
Acquisition of VLI:
Fair value of net assets acquired
Accounts receivable $1,470,000
Inventories 3,247,000
Other current assets 372,000
Property and equipment 1,064,000
Other non-current assets 42,000
------------
Total non-cash assets 6,195,000

Accounts payable and accrued expenses 3,209,000
Short-term borrowings and current maturities of debt 1,191,000
Other non-current liabilities 2,564,000
Long-term debt 371,000
------------
7,335,000

Net non-cash assets acquired (1,140,000)
------------
Fair value of net assets acquired (1,140,000)
------------
Excess of costs over fair value of net assets acquired 12,740,000
------------
Purchase price $11,600,000
============

Cash paid, net $6,650,000
Stock issued 4,950,000
------------
Purchase price $11,600,000
============

See Accompanying Notes

NOTE 1 - ORGANIZATION

Nature of Operations

Argan, Inc. (AI or the Company) conducts its operations through its wholly owned
subsidiaries, Vitarich Laboratories, Inc. (VLI) which it acquired in August
2004, and Southern Maryland Cable, Inc. (SMC) which it acquired in July 2003.
Through VLI, the Company develops, manufactures and distributes premium
nutritional supplements, whole-food dietary supplements and personal care
products. Through SMC, the Company provides telecommunications infrastructure
services including project management, construction and maintenance to the
Federal Government, telecommunications and broadband service providers, as well
as electric utilities primarily in the Mid-Atlantic region.

AI was organized as a Delaware corporation in May 1961. On October 23, 2003, our
shareholders approved a plan providing for the internal restructuring of the
Company whereby AI became a holding company and its operating assets and
liabilities relating to its Puroflow business were transferred to a
newly-formed, wholly owned subsidiary. The subsidiary then changed its name to
"Puroflow Incorporated" (PI) and AI changed its name from Puroflow Incorporated
to "Argan, Inc." At the time of the transfer, SMC was the other wholly owned
operating subsidiary of AI.

On October 31, 2003, the Company completed the sale of PI to Western Filter
Corporation (WFC) for approximately $3.5 million in cash of which $300,000 is
being held in escrow to indemnify WFC from any damages resulting if a breach of
representations and warranties under the Stock Purchase Agreement should occur.
(See Note 14)

Management's Plans, Liquidity and Business Risks

As of January 31, 2006, the Company had an accumulated deficit of $15 million.
At January 31, 2006, the Company had $2.4 million available under its revolving
line of credit with the Bank of America, NA (Bank). The Company operates in two
separate and distinct markets. The market for nutritional products is highly
competitive and the telecom and infrastructure services industry is fragmented,
but also very competitive. The successful execution of the Company's business
plan is dependent upon the Company's ability to integrate acquired companies and
their related assets into its operations, its ability to increase and retain its
customers, the ability to maintain compliance with significant government
regulation, the ability to attract and retain key employees and the Company's
ability to manage its growth and expansion, among other factors.

On May 4, 2006, the Company completed a private offering of 760,000 shares of
common stock at a price of $2.50 per share for aggregate proceeds of $1.9
million. The Company will use $1.8 million of the proceeds to pay down an equal
notional amount of the subordinated note due the former owner of VLI. The
remainder of the proceeds will be used for general corporate purposes. (See Note
9)

The Company's line of credit was due to expire on May 31, 2006. On May 5, 2006,
the Company renewed its line of credit with the Bank, extending the maturity
date to May 31, 2007. Concurrent with the renewal, the Bank has agreed to
provide a new $1.5 million term loan facility (New Term Loan) designed to
refinance a portion of the existing subordinated note with the former owner of
VLI that had an outstanding balance of $3,292,000 at January 31, 2006. The
Company must be in compliance with its debt covenants to draw on the New Term
Loan. (See Note 8)

The financing arrangement with the Bank requires the Company to comply with
certain financial covenants. At January 31, 2006, the Company failed to comply
with financial covenants requiring that the ratio of debt to pro forma earnings
before interest, taxes, depreciation and amortization not exceed 2.5 to 1 and
requiring a pro forma fixed charge coverage ratio of not less than 1.25 to 1.
The Bank waived the failure for the measurement period ended January 31, 2006.
For future measurement periods, the Bank revised the definitions of certain
components of the financial covenants to specifically exclude the impact of
VLI's impairment loss at January 31, 2006.

The subordinated debt due the former owner of VLI was originally due on August
1, 2006. On May 5, 2006, the Company entered into an agreement with the former
owner of VLI to delay the timing of the payment on the subordinated debt to
August 1, 2007. The former owner of VLI will be paid prior to this date if the
Company were to raise additional equity having an aggregate purchase price of
more than $1 million. The Company also has the option to draw on the
aforementioned New Term Loan to pay the former owner of VLI if we are in
compliance with their debt covenants. (See Note 8)

Management believes that capital resources available under its renewed line of
credit combined with cash generated from the Company's operations is adequate to
meet the Company's future operating cash needs. Accordingly, the carrying value
of the assets and liabilities in the accompanying balance sheet do not reflect
any adjustments should the Company be unable to meet its future operating cash
needs in the ordinary course of business. The Company continues to take various
actions to align its cost structure to appropriately match its expected
revenues, including limiting its operating expenditures and controlling its
capital expenditures. Any future acquisitions, other significant unplanned costs
or cash requirements may require the Company to raise additional funds through
the issuance of debt and equity securities. There can be no assurance that such
financing will be available on terms acceptable to the Company, or at all. If
additional funds are raised by issuing equity securities, significant dilution
to the existing stockholders may result.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The consolidated financial statements include the
accounts of AI and its wholly owned subsidiaries. The Company's fiscal year ends
on January 31. The results of companies acquired during the year are included in
the consolidated financial statements from the effective date of the
acquisition. All significant intercompany balances and transactions have been
eliminated in consolidation. The components of loss from continuing operations
before income taxes are due to domestic operations.

Use of Estimates - The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make use of estimates and assumptions that affect the reported
amount of assets and liabilities, revenue, expenses, and certain financial
statement disclosures. Estimates are used for but not limited to our accounting
for revenue recognition, allowance for doubtful accounts, inventory valuation,
long lived assets including goodwill and intangible assets, contingent
obligations, and deferred taxes. Actual results could differ from these
estimates.

Reclassifications - Certain amounts in the prior year financial statements have
been reclassified to conform with the presentation in the current year financial
statements.

Cash and Cash Equivalents - Cash and cash equivalents include cash balances on
deposit in banks, overnight investments in mutual funds, and other financial
instruments having an original maturity of three months or less. For purposes of
the consolidated statements of cash flow, the Company considers these amounts to
be cash equivalents.

Escrowed Cash - $300,000 of the proceeds from the sale of PI to WFC is being
held in escrow to indemnify WFC from any damage which may result from the breach
of representations and warranties under the Stock Purchase Agreement.

Accounts Receivable and Estimated Earnings in Excess of Billings - Accounts
receivable and estimated earnings in excess of billings represent amounts due
from customers for services rendered or products delivered. The timing of
billing to customers under construction-type contracts varies based on
individual contracts and often differs from the period of revenue recognition.
These differences are included in estimated earnings. The amount of estimated
earnings in excess of billings at January 31, 2006 was $675,000 and is expected
to be collected in the normal course of business.

Accounts Receivable - The retainage included in accounts receivable in the
accompanying balance sheets represents amounts withheld by customers until the
general contractor finishes a phase of a project. Retainage amounts included in
accounts receivable was $17,000 at January 31, 2006 and $53,000 at January 31,
2005. The Company expects to collect $17,000 of the retainage within one year.

SMC provides for an allowance for doubtful accounts based on historical
experience and a review of its receivables. SMC's receivables are presented net
of an allowance for doubtful accounts of $5,000 at January 31, 2006 and $13,000
at January 31, 2005.

VLI provides for an allowance for doubtful accounts based on historical
experience and a review of its accounts receivable and the receivable from
affiliated entity. Accounts receivable and the receivable from affiliated entity
are presented net of an allowance for doubtful accounts of $45,000 and $0,
respectively, at January 31, 2006 and $72,000 and $84,000, respectively at
January 31, 2005.

Inventories - Inventories are stated at the lower of cost or market (net
realizable value). Cost is determined on the first-in, first-out (FIFO) method.
Appropriate consideration is given to obsolescence, excessive inventory levels,
product deterioration, and other factors in evaluating net realizable value.

Inventories consist of the following:

2006 2005
----------- -----------
Raw materials $3,190,000 $3,268,000
Work-in-process 70,000 60,000
Finished goods 245,000 199,000
----------- -----------
3,505,000 3,527,000
Less: Reserves (95,000) (62,000)
----------- -----------
Inventories, net $3,410,000 $3,465,000
=========== ===========

The Company entered into an agreement with one of its major customers, whereby
the customer made an advanced payment to the Company for a significant portion
of raw material at cost. The raw material is held at the Company's premises and
is used in the production of product for the customer. The Company is accounting
for this as an inventory financing arrangement and recognizes revenue from the
sale of the raw material when the finished product is shipped to the customer.
At January 31, 2006, the Company had inventory and customer deposits related to
this arrangement of $470,000.

Property and Equipment - Property and equipment are stated at historical cost.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets, which are generally from five to twenty years.
Leasehold improvements are amortized on a straight-line basis over the estimated
useful life of the related asset or the lease term, whichever is shorter.
Maintenance and repairs (totaling $476,000 and $347,000 for the years ended
January 31, 2006 and 2005, respectively,) are expensed as incurred and major
improvements are capitalized. When assets are sold or retired, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in income.

Issuance Cost for Subordinated Debt - Such costs represent fees and expenses
related to the subordinated debt due to the former owner of VLI and are
amortized over the term of the related debt.

Impairment of Long-Lived Assets, including Definite Lived Intangible Assets -
Long-lived assets, consisting primarily of property and equipment are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be assessed pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company determines whether any
impairment exists by comparing the carrying value of these long-lived assets to
the undiscounted future cash flows expected to result from the use of these
assets. In the event the Company determines that an impairment exists, a loss
would be recognized based on the amount by which the carrying value exceeds the
fair value of the assets, which is generally determined by using quoted market
prices or valuation techniques such as the present value of expected future cash
flows, appraisals, or other pricing models as appropriate.

Goodwill and Other Indefinite Lived Intangible Assets - In connection with the
acquisitions of VLI and SMC, the Company has substantial goodwill and intangible
assets including contractual customer relationships, proprietary formulas,
non-compete agreements and trade names. In accordance with SFAS 142 "Goodwill
and Other Intangible Assets," the Company reviews for impairment, at least
annually, goodwill and intangible assets deemed to have an indefinite life.

Goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is to identify a potential impairment by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
The estimates of fair value of a reporting unit, generally a Company's operating
segment, is determined using various valuation techniques, with the principal
techniques being a discounted cash flow analysis and market multiple valuation.
A discounted cash flow analysis requires making various judgmental assumptions,
including assumptions about future cash flows, growth rates and discount rates.
Developing assumptions for the Company's entrepreneurial business requires
significant judgment and to a great extent relies on the Company's ability to
successfully determine trends with respect to customers, industry and regulatory
environment. The assumptions, including assumptions about future cash flows and
growth rates, are based on the Company's budget and business plans as well as
industry trends with respect to customers and other manufacturers' and
distributors' sales and margins. The Company reviews trends for publicly traded
companies which either compete with the Company to provide services or the types
of products the Company produces or are users of the types of services and
products provided by the Company. Changes in economic and operating conditions
impacting these assumptions could result in goodwill impairment in future
periods. Discount rate assumptions are based on the Company's subjective
assessment of the risk inherent in the respective reporting units. Risks which
the Company faces in its business include the public's perception of our
integrity and the safety and quality of our products and services. In addition,
in the industries that we operate we are subject to rapidly changing consumer
demands and preferences. The Company also operates in competitive industries. We
are not assured that customers or potential customers will regard our products
and services as sufficiently distinguishable from our competitors' product and
service offerings. If after taking into consideration industry and Company
trends, the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not deemed impaired and the second step of the
impairment test is not performed. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting
unit's goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. Accordingly, the fair
value of the reporting unit is allocated to all of the assets and liabilities of
that unit (including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination and the fair value of the
reporting unit was the purchase price paid to acquire the reporting unit. The
Company will test for impairment of goodwill and other intangible assets more
frequently if events or changes in circumstances indicate that the asset might
be impaired.

In accordance with its annual valuation of goodwill, the Company recorded an
impairment loss with respect to VLI's goodwill as of November 1, 2005. (See Note
5)

The Company recorded an impairment loss with respect to SMC's goodwill and
intangible assets during the twelve months ended January 31, 2005. (See Note 5)

Contractual Customer Relationships -Southern Maryland Cable, Inc. - The fair
value of the Contractual Customer Relationships (CCR's) was determined at the
time of the acquisition of SMC by discounting the cash flows expected from SMC's
continued relationships with three customers - General Dynamics Corp. (GD),
Verizon Communications (VZ) and Southern Maryland Electric Cooperative (SMECO).
Expected cash flows were based on historical levels, current and anticipated
projects and general economic conditions. In some cases, the estimates of future
cash flows reflect periods beyond those of the current contracts in place. While
SMC's relationship with GD is relatively recent, SMC has performed work for VZ
and SMECO for approximately twenty years and ten years, respectively. The
long-term relationship with VZ and SMECO affected the discount rate used to
discount expected cash flows as well as the Company's estimated weighted average
cost of capital and SMC's asset mix. We are amortizing the CCR's over a seven
year weighted average life given the long standing relationships SMC has with VZ
and SMECO. The Company recorded an impairment loss with respect to CCR's during
the twelve months ended January 31, 2005. (See Note 5)

Contractual Customer Relationships - Vitarich Laboratories, Inc. - The fair
value of the Contractual Customer Relationships at VLI (VCCR's) was determined
at the time of the acquisition of VLI by identifying long established customer
relationships in which VLI has a pattern of recurring purchase and sales orders.
The Company estimated expected cash flows attributable to these existing
customer relationships factoring in market place assumptions regarding future
contract renewals, customer attrition rates and forecasted expenses to maintain
the installed customer base. These cash flows were then discounted based on a
rate that reflects the perceived risk of the VCCR's, the Company's estimated
weighted average cost of capital and VLI's asset mix. VLI has had a relationship
of five years or more with most if its currently significant customers. We are
amortizing VCCR's over a five year life based on our expectations of continued
cash flows from these relationships and our history of maintaining
relationships.

Trade Name - The fair value of the SMC trade name was estimated using a
relief-from-royalty-methodology. We determined that the useful life of the trade
name was indefinite since it is expected to contribute directly to future cash
flows in perpetuity. The Company has also considered the effects of demand and
competition including its customer base. While SMC is not a nationally
recognized trade name, it is a regionally recognized name in the Mid-Atlantic
region, SMC's primary region of operations.

Proprietary Formulas - The fair value of the Proprietary Formulas (PF's) was
determined at the time of the acquisition of VLI. Cash flows were developed
based on employing a technology contribution approach to determine revenues
associated with existing proprietary formulations.

Non-Compete Agreement - The fair value of the Non-Compete Agreement (NCA) was
determined at the time of acquisition of VLI by discounting the estimated
reduction in the cash flows expected if one key employee, the former sole
shareholder of VLI, were to leave. The key employee signed a non-compete clause
prohibiting the employee from competing directly or indirectly for five years.
The estimated reduced cash flows were discounted based on a rate that reflects
the perceived risk of the NCA, the estimated weighted average cost of capital
and VLI's asset mix. We are amortizing the NCA over five years, the length of
the non-compete agreement.

Derivative Financial Instruments - The Company accounts for embedded derivative
financial instruments as derivative financial instruments in accordance with
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," and Emerging Issues Task Force Issue No.
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in a Company's Own Stock." The derivative financial
instruments are carried at fair value with changes in fair value recorded as
other expense. The determination of fair value for our derivative financial
instruments is subject to the volatility of our stock price as well as certain
underlying assumptions which include the probability of raising additional
capital.

Revenue Recognition - Vitarich Laboratories, Inc. - Customer sales are
recognized at the time title and the risks and rewards of ownership passes. This
typically is when products are shipped per customer's instructions. Sales are
recognized on a net basis which reflect reductions for certain product returns
and discounts.

Revenue Recognition - Southern Maryland Cable, Inc. - The Company generates
revenue under various arrangements, including contracts under which revenue is
based on a fixed price basis and on a time and materials basis. Revenues from
time and materials contracts are recognized when the related service is provided
to the customer. Revenue from fixed price contracts, including a portion of
estimated profit, is recognized as services are provided, based on costs
incurred and estimated total contract costs using the percentage of completion
method. Many of SMC's contracts consist of multi-deliverables. Because the
projects are fully integrated undertakings, SMC cannot separate each component
of the services provided.

Cost Recognition - Southern Maryland Cable, Inc. - Direct contract includes all
direct material, labor, subcontractor costs and those indirect costs related to
contract performance, such as equipment, supplies and tools where a reasonable
allocation of such costs to contracts can be made. Selling, general and
administrative costs are charged to expense when incurred. At January 31, 2006,
the Company did not have any uncompleted contracts for which it anticipated a
significant loss.

Cost Recognition - Vitarich Laboratories, Inc. - Cost of goods sold and finished
goods inventory include materials and direct labor as well as other direct costs
combined with allocations of indirect operational costs. Costs included in
finished goods inventory are expensed when products are shipped.

Advertising Costs - The Company accounts for advertising costs in accordance
with Statement of Position (SOP) No. 93-7 "Reporting on Advertising Costs."
Costs related to specific marketing campaigns are deferred and expensed the
first time the advertising takes place. All other advertising and promotion
costs are expensed as incurred. At January 31, 2006, the Company had $33,000 of
deferred marketing campaign development costs and $27,000 in prepaid advertising
supplies. The Company did not have any deferred advertising costs at January 31,
2005. For the years ended January 31, 2006 and 2005, the Company incurred
advertising and promotion expense of $22,000 and $7,000, respectively.

Research and Development Expenditures - Vitarich Laboratories, Inc. - Research
and development is a key component of VLI's business development efforts. VLI
develops product formulations for its customers. VLI focuses its research and
development capabilities particularly on new and emerging raw materials and
products. Research and development expenses relate primarily to VLI's
proprietary formulations and are expensed as incurred. The Company recorded
$90,000 and $12,000 of research and development expenses during the years ended
January 31, 2006 and 2005, respectively.

Income Taxes - The Company files a consolidated federal income tax return.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of its assets and liabilities.

Fair Value of Financial Instruments - The carrying amount of certain of the
Company's financial instruments, including investments, accounts receivable, and
accounts payable, approximates fair value due to the relatively short maturity
of such instruments. The Company's variable rate short-term line of credit and
variable rate long-term debt approximate fair value because of the short-term
nature of the liabilities.

Earnings Per Share - Income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings per share represent net income divided by the weighted
average number of common shares outstanding inclusive of the effects of dilutive
securities. Outstanding stock options and warrants were not included in the
weighted average number of shares outstanding during the years ended January 31,
2006 and 2005 due to the Company's net loss and because the market price of the
Company's common stock was significantly below the respective exercise prices
for the stock options and warrants.

Stock Option Plans - The Company measures compensation costs for stock based
compensation plans using the intrinsic value method of accounting as prescribed
in APB Opinion No. 25 and related interpretations. In electing to continue to
follow APB No. 25 for expense recognition purposes, the Company has provided
below the expanded disclosures required under SFAS No. 148 for stock-based
compensation granted including, if materially different from reported results,
disclosure of pro forma net income and net income per share had compensation
expense relating to grants been measured under the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"). All options issued during the years ended January 31, 2006 and 2005 had
an exercise greater than the market price of the Company's stock on the date of
grant. The fair value of the options granted in fiscal years 2006 and 2005 have
been estimated at the date of grant using the Black-Scholes option-pricing
model. Option valuation models require the use of subjective assumptions and
changes in these assumptions can materially impact the fair value of the
options.

The following tables illustrate the effect on net loss if the fair-value-based
method had been applied to all outstanding and unvested awards in each period.

Pro Forma Disclosures
For the years Ended January 31

2006 2005
=========== ===========

Net loss, as reported ($9,508,000) ($3,193,000)
Add: Stock-based compensation recorded in the financial statements -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based methods (44,000) (59,000)
----------- -----------
Pro forma net loss ($9,552,000) ($3,252,000)
=========== ===========
Basic and diluted loss per share:
Basic and diluted - as reported ($2.76) ($1.49)
=========== ===========
Basic and diluted - pro forma ($2.78) ($1.51)
=========== ===========
Weighted average fair value of options granted $2.28 $2.23
Risk-free interest rate 3.65% 3.49%
Expected volatility 56% 57%
Expected life 5 years 5 years
Dividend yield 0% 0%

Credit Risk - Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts receivable,
cash and investments.

AI's seven largest customers, TriVita Corporation (TVC), Southern Maryland
Electric Cooperative (SMECO), Rob Reiss Companies (RRC), General Dynamics Corp.
(GD), CyberWize.com, Inc. (C), Orange Peel Enterprises (OPE) and Verizon
Communications (VZ) accounted for 21%, 12%, 12%, 7%, 6%, 6% and 6%, respectively
of consolidated net sales for the year ended January 31, 2006. AI's four largest
customers, SMECO, TVC, GD and C accounted for 23%, 17%, 14% and 8%,
respectively, of consolidated net sales at January 31, 2005. The Company
generally does not require collateral and does not believe that it is exposed to
significant credit risk due to the credit worthiness of its customers.

The Company typically has had cash or short-term financial instruments on
deposit in a bank in excess of federally insured limits.

Seasonality - The Company's telecom infrastructure services operations are
expected to have seasonally weaker results in the first and fourth quarters of
the year, and may produce stronger results in the second and third quarters.
This seasonality is primarily due to the effect of winter weather on outside
plant activities as well as reduced daylight hours and customer budgetary
constraints. Certain customers tend to complete budgeted capital expenditures
before the end of the year, and postpone additional expenditures until the
subsequent fiscal period.

IMPACT OF CHANGES IN ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)) which supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" replaces Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation," and
amends FASB Statement No. 95, "Statement of Cash Flows." SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in our consolidated statement of operations based on
their fair values. Pro forma disclosure is no longer an alternative. AI will
adopt SFAS 123(R) on February 1, 2006 using the modified prospective method and,
accordingly the financial statements for prior periods will not reflect any
restated amounts. See Note 2 in the Notes to Consolidated Financial Statements
for the pro forma net income (loss) and net income (loss) per share amounts, for
fiscal year 2006 and 2005, presented as if the Company had used a
fair-value-based method similar to the methods required under SFAS No. 123(R) to
measure compensation expense for employee stock incentive awards. Although the
Company has not yet determined whether the adoption of SFAS No. 123(R) will
result in amounts that are similar to the current pro forma disclosures under
SFAS No. 123, it is evaluating the requirements under SFAS 123(R). The Company
has not had a consistent pattern of issuing stock options. The Company typically
issues blocks of stock options when it consummates an acquisition such as VLI
when it issued stock options in September 2004 for 35,000 shares which had an
estimated fair value of $78,000. The full impact of adopting SFAS 123(R) cannot
be accurately estimated at this time as it will depend on the market value and
the amount of share based awards granted in future periods.

In December 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4" ("SFAS No. 151") which requires that abnormal amounts
of idle facility expense, freight, handling costs and wasted material (spoilage)
be recognized as current-period charges. In addition, the statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company will adopt
this statement on February 1, 2006. Management does not believe the adoption
will have a material effect on the Company's results of operations, financial
condition or liquidity.

NOTE 3 - ACQUISITION

On August 31, 2004, the Company acquired, by merger, all of the common stock of
VLI, a developer, manufacturer and distributor of premium nutritional
supplements, whole-food dietary supplements and personal care products. The
Company's purchase of VLI is focused on acquiring VLI's long-standing exclusive
customer relationships, its proprietary formulations, its certified good
manufacturing practices and its well established position in the fast growing
global nutrition industry. The Company also ascribed significant value to VLI's
ability to substantially expand its business. The initial consideration paid to
VLI's owner was based on a multiple of 5.5 times EBITDA for the twelve months
ended December 31, 2003. In establishing the multiple, the Company took into
consideration the multiples being offered in other negotiated transactions and
the valuation of a number of other public companies that manufacture and market
nutritional supplements. To the extent that VLI's EBITDA for the twelve months
ended February 28, 2005 exceeded the aforementioned 2003 EBITDA, additional
consideration was paid in an amount determined using the same multiple as was
used for the initial consideration. Goodwill, before giving effect to a
$5,810,000 impairment loss, (the excess of cost of VLI over the sum of the fair
value of assets acquired less liabilities assumed) increased by $5,965,000 based
on the subsequent payment of consideration. The Company believes that the
aforementioned factors support the premium paid for VLI.

The results of operations of the acquired company are included in the
consolidated results of the Company from August 31, 2004, the date of
acquisition.

The initial consideration was approximately $6.7 million in cash, including
expenses, and 825,000 shares of the Company's common stock with fair value of
$4,950,000 or $6.00 per share utilizing the quoted market price on the
acquisition date. The Company also assumed approximately $1.6 million in debt.
The merger agreement contained provisions for the payment of additional
consideration ("Additional Consideration") by the Company to the former VLI
shareholder to be satisfied in the Company's common stock and cash if certain
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) thresholds
for the twelve months ended February 28, 2005 were met.

On July 5, 2005, the Company and Thomas entered into an agreement (Earn Back
Agreement) concerning the calculation of Additional Consideration due Thomas. In
the Earn Back Agreement, the Company agreed to pay Thomas $594,000 in a
subordinated note and 76,645 shares of the Company's common stock valued at
$5.50 per share utilizing the quoted market price on July 5, 2005. The
$1,015,000 of Additional Consideration has been recorded by the Company as
additional purchase consideration and an increase in goodwill.

The merger agreement also provides that, if between the closing date and the
additional consideration payment date, the Company raises additional capital by
issuance of stock pursuant to a public or private offering for a price less than
$7.75 per share (the Additional Capital Subscription Price), then the number of
shares of the Company's common stock issued to Thomas as initial consideration
will be adjusted to the number of common shares that would have been issued at
the closing of the merger had the value of each share of the Company's common
stock been the Additional Capital Subscription Price. Any additional payments
earned under the terms of the purchase agreement would be recorded as an
increase in goodwill. (See Note 6)

The Company's accounting for the acquisition of VLI uses the purchase method of
accounting whereby the excess of cost over the net amounts assigned to assets
acquired and liabilities assumed is allocated to goodwill and intangible assets
based on their estimated fair values. Such intangible assets identified by the
Company include $12,375,000, $2,500,000, $2,000,000 and $1,800,000,
respectfully, allocated to goodwill, Proprietary Formulas (PF), VLI Contractual
Customer Relationships (VCCR) and a Non-Compete Agreement (NCA). During the year
ended January 31, 2006, the Company reviewed its classification of VLI's
customer relationships and determined that they should be reclassified as
contractual customer relationships. Balances associated with the year ended
January 31, 2005 were also reclassified. During the year ended January 31, 2006,
the gross carrying amount of Goodwill in connection with the acquisition of VLI
prior to giving effect to the impairment loss of $5,810,000 increased by
$5,965,000 due to amounts paid in connection with the Additional Consideration
and the Earnback Agreement. The Company is amortizing PF over three years and
VCCR and NCA over five years. Accumulated amortization excluding the impairment
loss on PF's is $1,087,000, $567,000 and $510,000 at January 31, 2006,
respectively for PF, VCCR and NCA. The aggregate amortization for each of the
five succeeding years is:

2007 $1,218,000
2008 1,027,000
2009 760,000
2010 444,000
----------
$3,449,000
==========

During the year ended January 31, 2006, the Company recorded an impairment loss
with respect to VLI's goodwill. (See Note 5)

On January 31, 2005, the Company entered into a Debt Subordination Agreement
("Subordination Agreement") with Thomas, for the cash portion of the Additional
Consideration the Company owed Thomas.

On January 28, 2005 the Company entered into a Letter Agreement with Thomas in
consideration for his agreement to delay the timing of the payment of contingent
cash consideration and for entering into a Debt Subordination Agreement
(Subordination Agreement), reconstituting such additional cash consideration as
subordinated debt. The Letter Agreement includes certain concessions to Thomas
allowing him to receive additional consideration based on the market price of
the Company's common stock. The concessions provide that in addition to
providing Thomas additional shares if the Company issued additional shares at a
price less than $7.75, if the Company did not issue additional shares at a price
less than $7.75 per share then the Company would issue additional shares to
Thomas based on the average closing price of the Company's common stock for the
30 days ended July 31, 2005, if the price was below $7.75 per share less
1,173,147 shares previously issued. These concessions allowing Thomas to receive
additional shares under certain conditions represent a freestanding financial
instrument and should be accounted for in accordance with EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in a
Company's Own Stock." At January 31, 2005, the Company recorded the freestanding
financial instrument as a liability for the fair value of $1,115,000 ascribed to
the obligations of the Company to issue Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge was recorded as compensation expense due to Kevin Thomas. The
amortization of the deferred loan issuance costs increases the Company's future
interest expense through August 1, 2006, the original maturity date of the note
(extended to August 1, 2007, see Note 6), and reduce net income. The charge for
compensation to Kevin Thomas was classified as non-cash compensation expense and
it increased the net loss by $614,000 for the year ended January 31, 2005. The
derivative financial instrument was subject to adjustment for changes in fair
value subsequent to issuance. The fair value adjustment was reflected as a
change in liability for the derivative financial instrument and as a charge to
the Company's other expenses or income and net loss. The liability for the
derivative financial instrument was settled as a non-cash transaction by the
issuance of 535,052 shares of the Company's common stock on September 1, 2005.

Except as otherwise provided in the Subordination Agreement and until such time
that the Superior Debt (as such term is defined in the Subordination Agreement)
is satisfied in full, Debtor shall not, among other things, directly or
indirectly, in any way, satisfy any part of the Junior Debt (as such term is
defined in the Subordination Agreement), nor shall Thomas, among other things,
enforce any part of the Junior Debt or accept payment from Debtor or any other
person for the Junior Debt or give any subordination in respect of the Junior
Debt.

The following unaudited pro forma statements of operations for the twelve months
ended January 31, 2005 does not purport to be indicative of the results that
would have actually been obtained if the acquisition had occurred on February 1,
2004 or that may be obtained in the future. VLI previously reported its results
of operations using a calendar year end. No material events occurred subsequent
to this reporting period that would require adjustment to our unaudited pro
forma statements of operations. The number of shares outstanding used in
calculating pro forma earnings per share assume the shares issued in connection
with the acquisition of VLI were outstanding since February 1, 2004.

Year Ended January 31
=====================
Pro Forma Statement Operations 2005
=====================
Net Sales:
Nutraceutical products $16,418,000
Telecom infrastructure services 7,713,000
---------------------
Consolidated net sales 24,131,000
Cost of Sales:
Nutraceutical products 11,865,000
Telecom infrastructure services 6,559,000
---------------------
Gross profit 5,707,000
---------------------
Selling, general and administrative expenses, including
non-cash compensation expense of $614,000 7,260,000
Impairment loss 1,942,000
---------------------
Loss from operations (3,495,000)
Other expense, net (106,000)
---------------------
Loss before income taxes (3,601,000)
Income tax benefit 866,000
---------------------
Net loss ($2,735,000)
=====================
Loss per share:
- basic and diluted ($1.04)
=====================
Weighted average shares outstanding:
- basic and diluted 2,631,000
=====================

NOTE 4 - SUMMARY OF INTANGIBLE ASSETS

The Company's intangible assets consist of the following at January 31, 2006:

Gross SMC VLI Net
Estimated Carrying Accumulated Impairment Impairment Carrying
Useful Life Amount Amortization Loss(1) Loss(2) Amount
------------------------- ------------ ---------- ---------- -----------

Goodwill Indefinite $14,055,000(3) -- 740,000(1) 5,810,000(2) $7,505,000
Contractual
Customer
Relationships 5-7 years 3,600,000 960,000 746,000(1) -- 1,894,000
Proprietary
Formulas 3 years 2,500,000 1,087,000 -- 687,000(2) 726,000
Non-Compete
Agreement 5 years 1,800,000 510,000 -- -- 1,290,000
Trade Name Indefinite 680,000 -- 456,000(1) -- 224,000
----------- ------------ ---------- ---------- -----------
$22,635,000 $2,557,000 $1,942,000(1) $6,497,000(2) $11,639,000
=========== ============ ========== ========== ===========

(1) During the twelve months ended January 31, 2005, the Company recorded an
impairment loss with respect to goodwill and intangibles at SMC. (See Note 5)

(2) During the twelve months ended January 31, 2006, the Company recorded an
impairment loss with respect to goodwill and proprietary formulas at VLI. (See
Note 5)

(3) Amounts recorded as goodwill are not deductible for tax reporting purposes.

During the year ended January 31, 2006, the gross carrying amount of Goodwill
increased by $5,965,000 prior to giving effect to the VLI impairment loss of
$5,810,000 due to the amounts paid in connection with the Additional
Consideration and the Earnback Agreement.

Amortization expense excluding the impairment loss for the twelve months ended
January 31, 2006 aggregated $503,000, $740,000, and $360,000 for Contractual
Customer Relationships, Proprietary Formulas and Non-Compete Agreement,
respectively.

Estimated amortization expense for each of the next five fiscal years is as
follows:

2007 $1,321,000
2008 1,130,000
2009 863,000
2010 547,000
2011 49,000
----------
$3,910,000
==========

NOTE 5 - IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

During the year ended January 31, 2006, as a result of our annual impairment
analysis, we determined that the goodwill of VLI was impaired. VLI experienced
revenue levels well below expectations due to weaker than anticipated sales of
products. In addition, VLI had gross margins which were lower than VLI's
historical experience. The decline was due to VLI's slow reaction to passing
along price increases for increased costs of non-nutritional components of its
products caused by the spike in oil prices. VLI also experienced increased costs
due to outsourcing of the manufacture of certain products at levels greater than
anticipated. Also contributing to lower margins were the impact of the costs
associated with its certification as a good manufacturing practices facility.
The recent under-performance of VLI's financial results reduced the estimate of
future cash flows which were discounted based on a rate that reflects the
perceived risk of our investment in VLI to determine its fair value. During the
twelve months ended January 31, 2006, we recorded a goodwill impairment charge
of $5,810,000.

During the year ended January 31, 2005, the Company determined that both events
and changes in circumstances with respect to SMC's business climate would have a
significant effect on its future estimated cash flows. During the year ended
January 31, 2005, SMC terminated a customer contract which had historically
provided positive margins and cash flows. In addition, SMC experienced revenue
levels well below expectations for its largest fixed-priced contract customer.
As a consequence, SMC has reduced its future forecasts and expectations of cash
flows. As a result of these events, the Company believed that there was an
indication that its intangible assets not subject to amortization might be
impaired. The Company determined the fair value of its Goodwill and Trade Name
and compared it to the respective carrying amounts. The carrying amounts
exceeded the Goodwill and Trade Name's respective fair values by $740,000 and
$456,000, respectively, which the Company recorded as an impairment loss for the
year ended January 31, 2005.

During the year ended January 31, 2005, the Company terminated the above
mentioned customer contract. The impact of the termination indicated that the
Company's CCR carrying amount was not fully recoverable. Accordingly, the
Company determined the fair value of the CCR's and compared it to its carrying
amount. The Company recorded an impairment loss of $746,000, as this was the
amount by which the CCR carrying amount exceeded its fair value.

NOTE 6 - RELATED PARTY TRANSACTIONS

Pursuant to the Subscription Agreement, the Company agreed to issue additional
shares of Common Stock to Investor in accordance with the Subscription Agreement
under certain conditions upon the earlier of (i) the Company's issuance of
additional shares of Common Stock having an aggregate purchase price of at least
$2,500,000 for a consideration per share less than $7.75, subject to certain
exclusions; or (ii) ninety percent of the average bid price of Argan's common
stock for the thirty days ended July 31, 2005 if the price was less than $7.75,
less the 129,032 shares previously issued. Any additional shares issued would
effectively reduce the Investor's purchase price per common share as set forth
in the Subscription Agreement.

The provision in the agreement which allowed the Investor to receive additional
shares under certain conditions represents a derivative under Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." Accordingly at January 31, 2005, $139,000 of the
proceeds received upon issuance was accounted for as a liability for derivative
financial instrument. This liability relates to the obligation to issue Investor
additional shares under certain conditions. The derivative financial instrument
was subject to adjustment for changes in fair value subsequent to issuance. The
fair value adjustment loss of $343,000 was recorded during the year ended
January 31, 2006 and included in other expense and net loss. The liability
aggregating $482,000 was settled in a non-cash transaction by the issuance of
95,321 shares of the Company's common stock on August 13, 2005.

The Company retained Investor under a consulting arrangement to assist in
identifying and meeting potential equity investors. Under this consulting
arrangement, the Company paid the Investor $100,000 during the year ended
January 31, 2006.

On January 31, 2005, the Company entered into a Debt Subordination Agreement
("Subordination Agreement") with Thomas for the cash portion of the Additional
Consideration the Company owed Thomas. The Subordinated debt had an original
maturity of August 1, 2006 and had an interest rate of 10%. On May 5, 2006, the
Company entered into an extension with Thomas of the maturity date of the
subordinated note to August 1, 2007.

On January 28, 2005, the Company entered into a Letter Agreement with Thomas in
consideration for his agreement to delay the timing of the payment of contingent
cash consideration and for entering into a Debt Subordination Agreement
(Subordination Agreement), reconstituting such additional cash consideration as
subordinated debt. The Letter Agreement includes certain concessions to Thomas
allowing him to receive additional consideration based on the market price of
the Company's common stock. The concessions provide that in addition to
providing Thomas additional shares if the Company issued additional shares at a
price less than $7.75, if the Company did not issue additional shares at a price
less than $7.75 per share then the Company would issue additional shares to
Thomas based on the average closing price of the Company's common stock for the
30 days ended July 31, 2005, if the price was below $7.75 per share less
1,173,147 shares previously issued. These concessions allowing Thomas to receive
additional shares under certain conditions represent a freestanding financial
instrument and should be accounted for in accordance with EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in a
Company's Own Stock." At January 31, 2005, the Company recorded the freestanding
financial instrument as a liability for the fair value of $1,115,000 ascribed to
the obligations of the Company to issue Thomas additional shares.

At issuance, $501,000 of the charge related to the liability for derivative
financial instruments was recorded as deferred issuance cost for subordinated
debt which will be amortized over the life of the subordinated debt and $614,000
of the charge was recorded as compensation expense due to Kevin Thomas. The
amortization of the deferred loan issuance cost increases the Company's interest
expense through August 1, 2007, the maturity date of the note, and reduces net
income. The charge for compensation to Kevin Thomas was classified as non-cash
compensation expense and it increased the net loss by $614,000 for the year
ended January 31, 2005. The derivative financial instrument was subject to
adjustment for changes in fair value subsequent to issuance. The fair value
adjustment of a $1,587,000 loss during the year ended January 31, 2006 was
reflected as a change in liability for the derivative financial instrument and
as a charge to the Company's other expenses or income and net loss. The
liability for the derivative financial instrument was settled as a non-cash
transaction by the issuance of 535,052 shares of the Company's common stock on
September 1, 2005.

The Company leases administrative, manufacturing and warehouse facilities from
individuals who are officers of SMC and VLI. The total expense under these
arrangements was $298,000 and $134,000 for the years ended January 31, 2006 and
2005, respectively. The future minimum lease commitments under these
arrangements during each fiscal year ended January 31 through fiscal year ended
January 31, 2011 is:

2007 $298,000
2008 299,000
2009 299,000
2010 299,000
2011 299,000
Thereafter 680,000
----------
$2,174,000
==========

The Company made payments of approximately $122,000 to Kevin Thomas in
connection with leasehold improvements made to the Company's primary warehouse
and manufacturing facility.

AI also entered into a supply agreement with an entity owned by the former
shareholder of VLI whereby the supplier committed to sell to AI and AI committed
to purchase on an as-needed basis, certain organic products. VLI made $189,000
and $47,000 in purchases under the supply agreement for the years ended January
31, 2006 and 2005.

The Company also sells its products in the normal course of business to an
entity in which the former owner of VLI has an ownership interest. The pricing
on such transactions is consistent with VLI's customer pricing for nonaffiliated
entities. VLI had approximately $587,000 and $242,000 in sales with this entity
for the years ended January 31, 2006 and 2005. At January 31, 2006 and 2005, the
affiliated entity owed $157,000 and $112,000, respectively, to VLI net of an
allowance for doubtful accounts of $0 and $84,000, respectively.

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at January 31, 2006 and 2005:

Estimated
2006 2005 Useful Lives
----------- ----------- -------------

Leasehold improvements $ 905,000 $ 400,000 5 to 20 years
Machinery and equipment 2,451,000 1,665,000 5 to 7 years
Trucks 913,000 744,000 5 to 7 years
Machinery and equipment under capital leases 386,000 428,000 5 to 7 years
Trucks under capital lease 87,000 145,000 5 to 7 years
----------- -----------
4,742,000 3,382,000
Less accumulated depreciation (1,255,000) (579,000)
Less accumulated depreciation on assets held
under capital leases (163,000) (100,000)
----------- -----------
Property and equipment, net $ 3,324,000 $ 2,703,000
=========== ===========

Depreciation expense including assets under capital lease, for the fiscal years
ended January 31, 2006 and 2005 was $805,000, and $508,000, respectively.

NOTE 8 - DEBT

Long-term debt consists of the following:

2006 2005
========== ==========

Bank term loan $200,000 $600,000
Capital leases 287,000 418,000
Other financing 110,000 125,000
---------- ----------
597,000 1,143,000
Less: current portion 421,000 662,000
---------- ----------
$176,000 $481,000
========== ==========

Line of credit $1,243,000 $1,659,000
========== ==========

Subordinated debt due former owner of Vitarich Laboratories, Inc. $3,292,000 --
========== ==========

Interest expense was $606,000 and $124,000 for the years ended January 31, 2006
and 2005, respectively. On May 5, 2006, the Company entered into an extension
with Thomas of the maturity date of the subordinated note to August 1, 2007.

On January 31, 2005, the Company entered into a debt subordination agreement
with Thomas for the cash portion of the Additional Consideration the Company
owed Thomas. The subordinated debt had an original maturity of August 1, 2006
and had an interest rate of 10%. (See Note 6)

In May 2006, the Company agreed to amend the existing financing arrangements
with the Bank. Under this arrangement, the Company has a revolving line of
credit of $4.25 million and a term loan with an original balance of $1.2
million. The May 2006 amendment extended the expiration of the revolving line of
credit to May 31, 2007. Under the amended financing arrangements, amounts
outstanding under the revolving line of credit and the three year term note bear
interest at LIBOR plus 3.25% and 3.45% respectively. Availability on a monthly
basis under the revolving line is determined by reference to accounts receivable
and inventory on hand which meet certain Bank criteria (Borrowing Base). The
aforementioned three year term note remains in effect and the final monthly
scheduled payment of $33,000 is due on July 31, 2006. As of January 31, 2006,
the Company had $200,000 outstanding under the term note. At January 31, 2006,
the Company also had $1,243,000 outstanding under the revolving line of credit
at an interest rate of 7.74% with $2.4 million of additional availability under
its borrowing base. At January 31, 2005, the Company had $1,659,000 outstanding
under the revolving line of credit at an interest rate of 5.78%.

The amended financing arrangements provides for a new $1.5 million term loan
facility (New Term Loan). The proceeds of the New Term Loan are designated to
refinance a portion of the existing subordinated note with Thomas that has a
current outstanding balance of $3,292,00. Advances under the New Term Loan are
subject to the Company being in compliance with its debt covenants with the
Bank. The New Term Loan will be repaid in thirty-six equal monthly principal
payments and bears interest at LIBOR plus 3.25%. If the Company draws on the New
Term Loan, the Company's borrowing base will be reduced by $750,000 for maximum
availability under the revolving line of credit.

The financing arrangements provide for the measurement at Argan's fiscal year
end and at each of Argan's fiscal quarter ends of certain financial covenants
including requiring that the ratio of debt to pro forma earnings before
interest, taxes, depreciation and amortization (EBITDA) not exceed 2.5 to 1
(with the next measurement date on July 31, 2006) and requiring a pro forma
fixed charge coverage ratio of not less than 1.25 to 1 (with the next
measurement date on July 31, 2006). The amended financings also require that the
Company meet minimum EBITDA covenants equal to or exceeding (on a rolling four
quarter basis) $1.2 million for July 31, 2006, $1.3 million for October 31, 2006
and $1.8 million for January 31, 2007 and for each successive quarter end
thereafter. Bank consent continues to be required for acquisitions and
divestitures. The Company continues to pledge the majority of the Company's
assets to secure the financing arrangements.

Information regarding the three year term note as of January 31, 2006 is
included in the table below:

2006 2005
========== ==========

Long term debt: current $200,000 $400,000
Weighted average interest rate at January 31 7.65% 5.6%
Weighted average borrowing outstanding throughout the fiscal year $400,000 $800,000
Weighted average interest rate during the fiscal year 6.65% 4.9%
Maximum outstanding during the year $600,000 $1,000,000
Principal paid during the fiscal year $400,000 $400,000

NOTE 9 - PRIVATE OFFERINGS OF COMMON STOCK

On January 28, 2005, the Company sold and issued to MSR I SBIC, L.P., a Delaware
limited partnership ("Investor"), 129,032 shares (the "Shares") of the Company's
common stock, pursuant to a Subscription Agreement between the Company and
Investor. The Shares were issued at a purchase price of $7.75 per share ("Share
Price"), yielding aggregate proceeds of $999,998. (See Note 6) The Shares were
issued pursuant to the exemption provided by Section 4(2) of the Securities Act
of 1933, as amended. The Investor is an entity controlled by Daniel Levinson, a
director of the Company. Pursuant to the Subscription Agreement, the Company has
agreed to issue additional shares of Common Stock to Investor in accordance with
the Subscription Agreement based upon the earlier of (i) the Company's issuance
of additional shares of Common Stock having an aggregate purchase price of at
least $2,500,000 at a price per share less than $7.75 or (ii) July 31, 2005. The
additional shares of common stock to be issued would equal the price paid by
Investor divided by the lower of (i) the weighted average of all stock sold by
the Company during the period January 28, 2005 through July 31, 2005 or (ii)
ninety percent of the average bid price of Argan's common stock for the thirty
days ended July 31, 2005, if the price was less than $7.75, less the 129,032
previously issued. Any additional shares issued would effectively reduce the
Investor's purchase price per common share as set forth in the Subscription
Agreement.

The provision in the agreement which allowed the Investor to receive additional
shares under certain conditions represents a derivative under Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." Accordingly at January 31, 2005, $139,000 of the
proceeds received upon issuance was accounted for as a liability for a
derivative financial instrument. This liability related to the obligation to
issue Investor additional shares under certain conditions. The derivative
financial instrument was subject to adjustment for changes in fair value
subsequent to issuance. During the year ended January 31, 2006, the Company
recorded a fair value adjustment loss of $343,000 which is recorded in other
expense and net loss. The liability aggregating $482,000 was settled in a
non-cash transaction by the issuance of 95,321 shares of the Company's common
stock on August 13, 2005. (See Note 6)

NOTE 10 - STOCK BASED COMPENSATION

The Company established a stock option plan (the "Plan") in August 2001,
pursuant to which the Company's Board of Directors (the "Board") may grant stock
options to officers, directors and key employees. The Plan, was amended in April
2003 to authorize the grant of options for up to 250,000 shares of common stock.

Under a previous plan, the Company had issued stock options to certain officers,
directors and key employees to purchase shares of its Common Stock within
prescribed periods at prices that varied between $3.75 to $12.15 per share. This
plan was terminated upon the consummation of the August 2001 Incentive Stock
Option Plan.

Stock options granted may be "Incentive Stock Options" ("ISOs") or "Nonqualified
Stock Options" ("NSOs"). ISOs have an exercise price at least equal to the
stock's fair market value at the date of grant, a ten-year term and vest and
become fully exercisable one year from the date of grant. NSOs may be granted at
an exercise price other than the stock's fair market value at the date of grant
and have up to a ten-year term, and vest and become fully exercisable as
determined by the Board.

During fiscal 2006, the Board granted 15,000 ISO's to employees. The ISO's were
granted at $7.75 per share and vest over one year with a maximum life of five
years.

During fiscal 2005, the Board granted 3,000 ISO's and 35,000 NSO's to employees.
The ISO's and NSO's were granted at $7.75 per share and generally vest over one
year with a maximum life of five years.

Stock option activity is as follows:

No. of Average
Options Exercise Price
------- --------------

Balance at January 31, 2004 54,000 $8.04
-------
Granted 38,000 $7.75
Exercised (2,000) $5.70
Forfeited (8,000) $8.53
-------
Balance at January 31, 2005 82,000 $7.83
-------
Granted 15,000 $7.75
Exercised -- --
Forfeited (24,000) $7.77
-------
Balance at January 31, 2006 73,000 $7.84
=======

At January 31, 2006, the range of exercise prices, the number of options
outstanding and the weighted average remaining contractual life of these options
are as follows:

Exercise No. of Weighted Average
Price Options Remaining Life
------------- ------- ----------------

$7.90 42,000 7.5 years
$7.75 31,000 3.7 years
-------
73,000
=======

At January 31, 2006 and 2005, 58,000 and 45,000 options, respectively, were
exercisable at a weighted average exercise price of $7.86 and $7.90,
respectively.

In connection with the Company's private placement in April 2003, the Company
issued warrants to purchase 230,000 shares of the Company's common stock at a
price of $7.75 per share with a ten year term. 180,000 of the warrants were
granted to three individuals who became the executive officers of the Company
upon completion of the offering. In addition, MSR Advisors, Inc. ("MSR")
received warrants to purchase 50,000 shares of the Company's common stock. A
director of the Company is the Chief Executive Officer of MSR. The fair value of
the warrants of $849,000 was recognized as offering costs. All warrants are
exercisable.

At January 31, 2006, there were 303,000 shares of the Company's common stock
reserved for issuance upon exercise of stock options and warrants.

NOTE 11- INCOME TAXES

Income tax (benefit) expense related to continuing operations for the years
ended January 31, 2006 and 2005 is as follows:

2006 2005
=========== ===========
Current:
Federal $8,000 $--
State 67,000 63,000
----------- -----------
75,000 63,000

Deferred:
Federal (844,000) (934,000)
State (153,000) (174,000)
----------- -----------
(997,000) (1,108,000)
----------- -----------
Total tax benefit ($922,000) ($1,045,000)
=========== ===========

The actual income tax benefit for the years ended January 31, 2006 and 2005
differs from the "expected" tax computed by applying the U.S. Federal corporate
income tax rate of 34% to income from continuing operations before income tax as
follows:

2006 2005
=========== ===========

Computed "expected" tax benefit ($3,546,000) ($1,441,000)
Increase (decrease) resulting from:
State income taxes, net (333,000) (100,000)
Permanent differences 2,957,000(a) 496,000(b)
----------- -----------
($922,000) ($1,045,000)
=========== ===========

(a) Permanent differences for the year ended January 31, 2006, include a
non-cash loss on liability for derivative financial instruments of $1,930,000
and impairment loss of $5,810,000 with respect to VLI's goodwill.

(b) Permanent differences for the year ended January 31, 2005, include a
goodwill impairment charge of $740,000 and $614,000 in compensation expense
related to concessions given to Thomas.

The tax effects of temporary differences for continuing operations that give
rise to deferred tax assets and liabilities at January 31, 2006 and 2005 are as
follows:

2006 2005
========== ==========
Assets:
Inventory and receivable reserves $77,000 $56,000
Accrued vacation 53,000 41,000
Accrued legal fees 147,000 98,000
Net operating loss 143,000 324,000
Other 23,000 --
---------- ----------
443,000 519,000
---------- ----------
Liabilities:

SMC cash to accrual adjustment 86,000 172,000
Property and equipment 462,000 578,000
Purchased intangibles 1,562,000 2,429,000
Other -- 4,000
---------- ----------
2,110,000 3,183,000
---------- ----------
Net deferred tax liabilities $1,667,000 $2,664,000
========== ==========

At January 31, 2006, AI has a net operating loss carryforward aggregating
$377,000 which expires in 2026 and can be applied to future operating profits to
reduce the tax liability.

NOTE 12- SEGMENT REPORTING

Effective with the acquisition of VLI, the Company has two operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and assessing performance.

The Company's two reportable segments are telecom infrastructure services and
nutraceutical products. The Company conducts its operations through its wholly
owned subsidiaries - VLI and SMC. The "Other" column includes the Company's
corporate and unallocated expenses.

The Company's reportable segments are organized in separate business units with
different management, customers, technology and services. The respective
segments account for the respective businesses using the accounting policies in
Note 2. Summarized financial information concerning the Company's reportable
segments is shown in the following tables:

For the Twelve Months
Ended January 31, 2006
Telecom
Nutraceutical Infrastructure
Products Services Other Consolidated
------------- -------------- ----------- ------------

Net sales $17,702,000 $10,750,000 $ -- $28,452,000
Cost of sales 13,842,000 8,543,000 -- 22,385,000
------------- -------------- ----------- ------------
Gross profit 3,860,000 2,207,000 -- 6,067,000

Selling, general and administrative
expenses 4,162,000 1,549,000 1,758,000 7,469,000
Impairment loss(2) 6,497,000 -- -- 6,497,000
------------- -------------- ----------- ------------
Income (loss) from operations (6,799,000) 658,000 (1,758,000) (7,899,000)
------------- -------------- ----------- ------------
Interest expense 364,000 56,000 186,000 606,000
Other income (loss), net 5,000 (1,930,000)(3) (1,925,000)
------------- -------------- ----------- ------------

Income (loss) income taxes ($7,163,000) $607,000 ($3,874,000) (10,430,000)
============= ============== =========== ------------

Income tax benefit 922,000
------------

Net loss ($9,508,000)
============
Depreciation and amortization $399,000 $404,000 $273,000 $1,076,000
============= ============== =========== ============
Amortization of intangibles $1,500,000 $103,000 -- $1,603,000
============= ============== =========== ============
Goodwill $6,565,000 $940,000 -- $7,505,000
============= ============== =========== ============
Total Assets $17,768,000 $5,245,000 $609,000 $23,622,000
============= ============== =========== ============
Fixed asset additions $1,173,000 $307,000 -- $1,480,000
============= ============== =========== ============

For the Twelve Months
Ended January 31, 2005
Telecom
Nutraceutical Infrastructure
Products (1) Services Other Consolidated
------------- -------------- ----------- ------------

Net sales $6,805,000 $7,713,000 $ -- $14,518,000
Cost of sales 4,852,000 6,559,000 -- 11,411,000
------------- -------------- ----------- ------------
Gross profit 1,953,000 1,154,000 -- 3,107,000

Selling, general and administrative
expenses(4) 1,552,000 1,590,000 2,204,000 5,346,000
Impairment loss -- 1,942,000 -- 1,942,000
------------- -------------- ----------- ------------
Income (Loss) from operations 401,000 (2,378,000) (2,204,000) (4,181,000)
Interest expense 73,000 48,000 3,000 124,000
Other income, net -- 6,000 61,000 67,000
------------- -------------- ----------- ------------

Income (loss) income taxes $328,000 ($2,420,000) ($2,146,000) (4,238,000)
============= ============== =========== ------------

Income tax benefit 1,045,000
------------

Net loss ($3,193,000)
============
Depreciation and amortization $122,000 $384,000 $41,000 $547,000
============= ============== =========== ============
Amortization of intangibles $664,000 $166,000 $830,000
============= ============== =========== ============
Goodwill $6,410,000 $940,000 -- $7,350,000
============= ============== =========== ============
Total Assets $19,128,000 $5,007,000 $1,122,000 $25,257,000
============= ============== =========== ============
Fixed asset additions $164,000 $78,000 -- $242,000
============= ============== =========== ============

(1) Operating results of VLI are included since date of acquisition, August
31, 2004.

(2) Impairment loss for VLI includes impairment charge to goodwill of
$5,810,000 and to proprietary formulas of $687,000.

(3) Includes $1,930,000 for non-cash loss on liability for derivative
financial instruments.

(4) Includes $614,000 for non-cash compensation expense attributed to
concessions given Thomas.

For the year ended January 31, 2006, the Company has customers whose sales
represent a significant portion of enterprise and segment net sales.
Nutraceutical sales to four customers, TriVita Corporation (TVC), Rob Reiss
Companies (RRC), Cyberwize.com, Inc. (C), and Orange Peel Enterprises (OPE)
accounted for 21%, 12%, 6% and 6% of consolidated net sales, respectively, while
telecom infrastructure services to three customers, Southern Maryland Electric
Cooperative (SMECO), General Dynamics Corp. (GD) and Verizon Communications,
Inc. (VZ) aggregated 12%, 7% and 6%, respectively, of consolidated net sales.

For the year ended January 31, 2005, the Company had customers whose sales
represented a significant portion of enterprise and segment net sales.
Nutraceutical sales to two customers TVC and C accounted for 17% and 8% of
consolidated net sales, respectively, while telecom infrastructure services to
two customers, SMECO and GD aggregated 23% and 14%, respectively, of
consolidated net sales.

NOTE 13 - COMMITMENTS

The Company and its subsidiaries have entered into various non-cancelable
operating leases for facilities, machinery, equipment and trucks. The Company
leases office, warehouse and manufacturing facilities under operating leases
expiring in fiscal years 2008, 2009 and 2012. None of the Company's leases
include significant amounts for incentives, rent holidays, penalties, or price
escalations. Under the lease agreements, the Company is obligated to pay
property taxes, insurance, and maintenance costs. Certain leases contain renewal
options. Total rent expense for all operating leases including related parties
was approximately $601,000 and $268,000 for the years ended January 31, 2006 and
2005, respectively. The following is a schedule of future minimum lease payments
for operating leases that had initial or remaining non-cancelable lease terms in
excess of one year as of January 31, 2006:

2007 $450,000
2008 436,000
2009 369,000
2010 299,000
2011 299,000
Thereafter 680,000
----------
$2,533,000
==========

The Company has also separately financed vehicles and machinery which will be
substantially repaid over the next 41 months with a weighted average interest
rate of 7.42% and 5.28% at January 31, 2006 and 2005. Information regarding
these loans is included in the table below:

2006 2005
-------- --------
Long-term debt $287,000 $418,000
Less: Current portion 111,000 137,000
-------- --------
Long-term debt excluding
current portion $176,000 $281,000
======== ========

Minimum repayments of principal under vehicle and machinery financings are as
follows:

2007 $129,000
2008 97,000
2009 86,000
2010 9,000
---------
321,000
Less: Amount representing interest (34,000)
---------
$287,000
=========

NOTE 14 - WESTERN FILTER CORPORATION LITIGATION

On September 17, 2004, WFC notified the Company asserting that WFC believes that
the Company breached certain representations and warranties under the Stock
Purchase Agreement. WFC asserts damages in excess of the $300,000 escrow which
is being held by a third party in connection with the Stock Purchase Agreement.

Although the Company has reviewed WFC's claim and believes that substantially
all of the claims are without merit, at January 31, 2006, the Company had an
accrual related to this matter of $360,000 for estimated payments and legal fees
related to the claims of WFC that it considers to be probable and that can be
reasonably estimated. Although the ultimate amount of liability that may result
from this matter is not ascertainable, the Company believes that any amounts
exceeding the aforementioned accrual should not materially affect the Company's
financial condition. It is possible, however, that the ultimate resolution of
WFC's claim could result in a material adverse effect on the Company's results
of operations for a particular reporting period. The Company will vigorously
contest WFC's claim.

In the normal course of business, the Company has pending claims and legal
proceedings. It is the opinion of the Company's management, based on information
available at this time, that none of the current claims and proceedings will
have a material effect on the Company's consolidated financial statements.

NOTE 15 - DEFINED CONTRIBUTION PLAN

The Company has a 401-(K) Savings Plan covering all of its employees, whereby
the Company makes discretionary contributions for its eligible employees. The
Company's expense for these defined contribution plans totaled $15,000 and
$17,000 for the years ended January 31, 2006 and 2005, respectively.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES.

(a) Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including Chief Executive Officer, and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15 of the Securities Exchange
Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current disclosure controls
and procedures are effective in timely alerting them of material information
relating to the Company that is required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934.

(b) Internal Control Over Financial Reporting

Changes in Internal Control Over Financial Reporting

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

The following table sets forth the age and title of each nominee director, as
well as descriptions of such person's additional business experience during the
past five years.

Name Age Position
---- --- --------
Rainer H. Bosselmann 62 Chairman of the Board, Chief
Executive Officer and President

DeSoto S. Jordan 61 Director

Daniel A. Levinson 45 Director

W.G. Champion Mitchell 59 Director

T. Kent Pugmire 74 Director

James W. Quinn 48 Director

Peter L. Winslow 75 Director

Rainer H. Bosselmann. Mr. Bosselmann has been a Director and Chairman of the
Board since May 2003 and President since October 2003. Mr. Bosselmann was a
Director and Vice Chairman of the Board from January 2003 to May 2003. Mr.
Bosselmann was Chairman of the Board, Chief Executive Officer and a Director of
Arguss Communications, Inc. ("Arguss"), a telecommunications infrastructure
company listed on the New York Stock Exchange, from 1996 through 2002 and
President of Arguss from 1997 through 2002. Since 1996, Mr. Bosselmann has
served as a principal with Holding Capital Group, Inc., a firm engaged in
mid-market acquisitions and investments. From 1991 through 1995, Mr. Bosselmann
served as Vice Chairman of the Board and President of Jupiter National, Inc.
("Jupiter National"), a business development company listed on the American
Stock Exchange.

DeSoto S. Jordan. Mr. Jordan has been a Director of the Company since May 2003.
Mr. Jordan has been Chairman of Afton Holdings, LLC, a private equity firm,
since 2000. Mr. Jordan was co-founder of Perot Systems Corporation and served as
an officer from 1988 to 1999 and as a Director since February 2004. Mr. Jordan
was a Director of Arguss from 1999 through 2002.

Daniel A. Levinson. Mr. Levinson has been a Director of the Company since May
2003. In 1997, Mr. Levinson founded Main Street Resources, a niche sponsor of
private equity transactions, and has been its managing partner. Since 1998, Mr.
Levinson has been President of MSR Advisors, Inc. From 1988 to 1997, Mr.
Levinson was one of the principals of Holding Capital Group. Mr. Levinson was
also a Director of Arguss from 2000 through 2002.

W.G. Champion Mitchell. Mr. Mitchell has been a Director of the Company since
October 2003. Since January 2003, Mr. Mitchell has been Chairman of the Board
and Chief Executive Officer of Network Solutions, Inc. Network Solutions is
engaged in the creation, marketing and management of digital identity and web
presence products. From August 2001 to 2003, Mr. Mitchell was Executive Vice
President and General Manager, Mass Markets Division, of VeriSign Inc. VeriSign
is a provider of critical Internet infrastructure services. From May 1999 to
March 2000, Mr. Mitchell was Chairman, President and CEO of Convergence
Equipment Company, a telephony switch manufacturer. From February 1997 until May
1999, Mr. Mitchell was Chairman and Chief Executive Officer of Global Exchange
Carrier Co., an Internet telephone networking company.

T. Kent Pugmire. Dr. Pugmire has served as a Director of the Company since June
1991. Since 1992, Dr. Pugmire has served as an independent technical consultant.
Previously, Dr. Pugmire was Executive Vice President of ARDE Inc. and worked as
a Program Manager for several companies, including TRW Space Systems Division,
Technion Inc., AVCO Missile and Space Systems (now a division of Textron),
General Electric Space Sciences Laboratory, and Boeing Propulsion and Mechanical
Systems Department.

James W. Quinn. Mr. Quinn has been a Director of the Company since May 2003. Mr.
Quinn is currently a Managing Director of Allen & Company LLC, an investment
banking firm. Since 1982, Mr. Quinn has served in various capacities at Allen &
Company and its affiliates, including head of the Corporate Syndicate Department
and Chief Financial Officer. Mr. Quinn served as a Director of Arguss from 1999
through 2002.

Peter L. Winslow. Mr. Winslow has been a Director of the Company since June
2003. Since 1992, Mr. Winslow has served in several executive capacities at
Fin-Net LLC and its predecessor company Fin-Net, Inc., a financial networking
company, where he currently serves as Chairman and Managing Director. Mr.
Winslow was the founder and President of Winslow, Evans & Crocker, Inc., a
brokerage and financial services company, and he served in several executive
capacities between 1992 and 2004. Since March 2002, Mr. Winslow has been
Managing Director of Family Capital Trust Company, N.A. Mr. Winslow was also a
Director of Jupiter National from 1991 to 1996. Mr. Winslow served as a Director
of Arguss from 1996 through 2002.

Executive Officers who are Not Directors

The following table sets forth the age and title of each executive officer of
the Company who is not a nominee director, as well as descriptions of such
person's additional business experience during the past five years.

Name Age Position
---- --- --------

Arthur F. Trudel 56 Senior Vice President and
Chief Financial Officer

Arthur F. Trudel. Mr. Trudel has been Senior Vice President and Chief Financial
Officer of the Company since May 2003 and a corporate officer of the Company
since January 2003. From 1997 to 2002, Mr. Trudel served as Chief Financial
Officer of Arguss. From 1988 to 1997, Mr. Trudel was Senior Vice President and
Chief Financial Officer of JHM Capital Corporation.

Audit Committee of the Board of Directors

The Board of Directors has an Audit Committee. During fiscal 2006, the committee
was comprised of Messrs. Quinn (Chairman), Jordan and Winslow. The committee
held 12 meetings during fiscal 2006. The members of the committee are all
independent directors under applicable SEC and Nasdaq rules. In addition, the
Board of Directors has determined that at least one of the independent directors
serving on the Audit Committee, Mr. Quinn, is an audit committee financial
expert, as that term has been defined by SEC rules.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's directors and executive
officers and persons who beneficially own more than 10% of the Company's common
stock (collectively, the "Reporting Persons") to file with the Commission (and,
if such security is listed on a national securities exchange, with such
exchange), various reports as to ownership of such common stock. Based solely
upon a review of copies of Section 16(a) reports and representations received by
the Company from Reporting Persons, and without conducting any independent
investigations of its own, the Company believes that the following Reporting
Persons failed to timely file Forms 3, 4 or 5 with the Commission during the
fiscal year ended January 31, 2006: Mr. Daniel Levinson was late with two
filings, MSR I SBIC LP was late with one filing and Mr. Kevin Thomas was late
with one filing.

Code of Ethics

We have adopted a Code of Ethics applicable to our principal executive officer
and our principal financial and accounting officer and executive vice president,
a copy of which was filed as an exhibit to our annual report on Form 10-KSB
filed with the SEC on April 27, 2004 and which is posted on our website at
www.arganinc.com. A copy of the Code of Ethics may also be obtained without
charge by writing to Mr. Arthur Trudel, Senior Vice President and Secretary,
Argan, Inc., One Church Street, Suite 302, Rockville, Maryland 20850.

ITEM 10. EXECUTIVE COMPENSATION

Compensation of Executive Officers

The following summary compensation table sets forth the aggregate compensation
paid to or earned by the President and Chief Executive Officer of the Company
and the most highly compensated executive officers of the Company (other than
the President and Chief Executive Officer) whose total annual salaries and
bonuses exceeded $100,000 for the year ended January 31, 2006 (the "Named
Executive Officers").

Long Term
Annual Compensation Compensation
---------------------------------- -------------------
Awards Payouts
------ -------
Fiscal Other
Year Annual Securities LTIP All Other
Name And Principal Ended Salary Bonus Compensation Underlying Payouts Comp.
Position January 31 ($) ($) ($) Options (#) ($) ($)(1)
----------------------------------------------------------------------------------------------------------------

Rainer H. Bosselmann 2006 $150,000 -- -- -- -- $900
Chief Executive 2005 $120,833 $50,000 -- -- -- $1,008
Officer and 2004 $83,333 -- -- -- -- --
President

(2)H. Haywood Miller III 2006 $150,000 -- -- -- -- $900
Executive Vice 2005 $120,833 $50,000 -- -- -- $1,008
President and 2004 $83,333 -- -- -- -- --
Secretary

Arthur F. Trudel, Jr 2006 $150,000 -- -- -- -- $1,500
Senior Vice 2005 $120,833 $50,000 -- -- -- $1,358
President 2004 $83,333 -- -- -- -- --

(1) Represents Company contributions under the Company's 401(k) Plan.

(2) Former Executive Vice President who resigned employment as of April 7, 2006.

Option Grants

No individual grants of stock options were made during the fiscal year ended
January 31, 2006 to any of the Named Executive Officers.

Option Exercises

The Named Executive Officers held no exercisable or unexercisable options during
the fiscal year ended January 31, 2006. No options were exercised by any of the
Named Executive Officers during the fiscal year ended January 31, 2006. For a
description of certain warrants held by Named Executive Officers, see "Security
Ownership of Certain Beneficial Owners and Management" below.

Description of the 2001 Stock Option Plan

In August 2001, the Board of Directors adopted and the stockholders of the
Company approved the 2001 Stock Option Plan (the "Stock Option Plan"). As
adopted in 2001, the Stock Option Plan authorized the issuance of options to
purchase a maximum of 33,333 shares of Common Stock. In April 2003, the Board of
Directors adopted and the stockholders of the Company approved an amendment to
the Stock Option Plan increasing the total number of shares of Common Stock
reserved for issuance under the Stock Option Plan to 250,000. The maximum number
of shares may be adjusted in certain events, such as a stock split,
reorganization or recapitalization. Officers, directors and employees of the
Company or its subsidiaries are eligible to receive non-qualified stock options
under the Stock Option Plan. Employees (including officers and directors who are
employees) of the Company or its subsidiaries are eligible to receive incentive
stock options under the Stock Option Plan. In the event incentive stock options
are granted, the aggregate fair market value of the Common Stock issuable under
such options for each option during any calendar year cannot exceed $100,000. To
the extent that an incentive stock option exceeds the $100,000 threshold, the
excess will be treated as a non-qualified stock option.

The Company receives no monetary consideration of the grant of options under the
Stock Option Plan. In the case of an incentive stock option, the exercise price
cannot be less than the fair market value (as defined in the Stock Option Plan)
of the Common Stock on the date the option is granted. If the optionee is a
stockholder who beneficially owns 10% or more of the outstanding Common Stock,
the exercise price of incentive stock options may not be less than 110% of the
fair market value of the Common Stock. The term of an option cannot exceed ten
years; provided, however, that the term of options granted to owners of 10% or
more of the outstanding shares of Common Stock cannot exceed five years.

The Stock Option Plan will terminate automatically and no options may be granted
after July 19, 2011 (the "Termination Date"); provided, however, that Stock
Option Plan may be terminated by the Board of Directors at any time prior to the
Termination Date. Termination of the Stock Option Plan will not affect options
that were previously granted.

Pursuant to the terms of the Stock Option Plan, the vesting with respect to all
issued and outstanding options to purchase Common Stock of the Company may
accelerate and become fully exercisable upon a change in control of the Company.

As of January 31, 2006, there were 73,000 options granted under the 2001 Stock
Option Plan.

Directors' Compensation

Each non-employee director of the Company receives a $2,500 annual fee, plus
$300 for each formal meeting attended. Directors are also reimbursed for
reasonable expenses actually incurred in connection with attending each formal
meeting of the Board of Directors or any committee thereof.

Employment and Severance Agreements

On January 3, 2005, the Company entered into substantially similar employment
agreements with (i) Rainer H. Bosselmann as its President and Chief Executive
Officer, and (ii) Arthur F. Trudel, Jr. as its Senior Vice President and Chief
Financial Officer (each, an "Executive").

Pursuant to the employment agreements, the Company agreed to employ each
Executive for an initial term of one year, which term will automatically renew
for successive one year periods unless the Company or the Executive provides at
least 90 days prior written notice of its or his election not to renew. The
agreements provide for each Executive to receive during the employment period an
annual base salary of $150,000, subject to increase (but may not be reduced)
from time to time in such amounts as the Company, in its reasonable discretion,
deems to be appropriate, and an annual bonus in the discretion of the Board of
Directors of the Company, subject to the satisfaction of reasonable performance
criteria established for the Executive with respect to such year. The agreements
further provide that each Executive may participate in any stock option,
incentive and similar plans established by the Company and shall be granted
stock options and other benefits similar to options and benefits granted to
other executives, subject in all cases to the satisfaction by the Executive of
the terms and conditions of such plans and to the reasonable exercise by the
Board of any discretion granted to it or them thereunder.

In addition, under the employment agreements, in the event that an Executive's
employment is terminated for any of the reasons specified below or there occurs
a "change in control", the Executive will receive as severance pay in a single
lump sum payment, an amount equal to 24 months of his base salary within 30 days
after the Executive's termination of employment or change of control, as the
case may be, based on 12 times the Executive's final full month salary at the
date the Executive's employment ceases or at the date of the change in control,
as the case may be, without reduction or offset for any other monies which the
Executive may thereafter earn or be paid. The reasons which cause severance pay
to be paid to an Executive include:

(i) termination by the Executive because of a material diminution of the
Executive's duties, authority or responsibility, or a material impairment
by action of the Company of his ability to perform his duties and
responsibilities, regardless of whether such diminution is accompanied by
a change in the Executive's title with the Company;

(ii) termination by the Executive because of a material breach by the
Company of any provision of the employment agreement, which breach
continues for a period of 30 days after written notice of such breach is
given by the Executive to the Company; and

(iii) termination by the Company at any time without cause, including
notice of non-renewal of the agreement.

Each Executive shall also be entitled for a period of 24 months from the
termination of his employment or a change in control, as the case may be, to the
continuation of all benefits provided to the Executive, excluding sick and
vacation time, subject to any applicable employee co-payments.

If an Executive's employment is terminated by the Company by reason of the
Executive's death, disability or "for cause" or voluntarily by the Executive for
any reason other than as set forth in the preceding paragraph, the Company will
not be obligated to make any payments to the Executive by reason of his
cessation of employment other than such amounts, if any, of his base salary that
have accrued and remain unpaid and such other amounts which may then otherwise
be payable to the Executive from the Company's benefit plans or reimbursement
policies, if any.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information concerning equity compensation plans
of the Company as of January 31, 2006:

Equity Compensation Plan Information

Number of securities
remaining available
for future issuance
under equity
Number of securities to be Weighted average compensation plans
issued upon exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column
warrants and rights warrants and rights (a))
(a) (b) (c)
-------------------------- -------------------- ---------------------

Equity compensation plans approved by security
holders 303,000(1) $7.77 171,000(2)

Equity compensation plans not approved by
security holders -- -- --

Total 303,000 $7.77 171,000

(1) Represents 73,000 shares issuable upon exercise of options granted under the
2001 Stock Option Plan as of January 31, 2006 and 230,000 shares issuable upon
exercise of warrants as described below.

(2) Represents 171,000 shares remaining available for grant under the 2001 Stock
Option Plan as of January 31, 2006.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of January 31, 2006
regarding the beneficial ownership of common stock by (A) each person known by
the Company to own beneficially more than five percent of the common stock, (B)
each director and director nominee of the Company, (C) each of the "Named
Executive Officers" (as defined in "Executive Compensation - Summary
Compensation Table"), and (D) all directors and nominees, named executive
officers and executive officers of the Company as a group. Unless otherwise
indicated, the address of each person named in the table below is c/o Argan,
Inc., One Church Street, Suite 302, Rockville, Maryland 20850.

-------------------------------------------------------------------------------------------
Number of Shares Percentage
Name Beneficially Owned(1) Beneficially Owned(1)

Kevin Thomas 1,677,937(2) 44.0%
MSR Advisors, Inc. 599,937(3) 14.7%
Wheatley Partners III, LLC 258,065(4) 6.8%
Rainer H. Bosselmann 322,560(5) 7.9%
DeSoto S. Jordan 5,000(6) *
Daniel A. Levinson 604,937(7) 14.9%
W.G. Champion Mitchell 5,000(8) *
T. Kent Pugmire 6,400(9) *
James W. Quinn 17,903(10) *
Peter L. Winslow 43,640(11) 1.1%
Arthur F. Trudel 70,000(12) 1.7%
All directors and nominees, named
executive officers and executive
officers as a group (9 persons) (13) 33.0%
-------------------------------------------------------------------------------------------

* Less than 1 %

(1) As used in this table, a beneficial owner of a security includes any person
who, directly or indirectly, through contract, arrangement, understanding,
relationship or otherwise has or shares (i) the power to vote, or direct the
voting of, such security or (ii) investment power which includes the power to
dispose, or to direct the disposition of, such security. In addition, a person
is deemed to be the beneficial owner of a security if that person has the right
to acquire beneficial ownership of such security within 60 days of the date
shown above.

(2) Based upon a Schedule 13D/A filed with the Commission by Kevin Thomas on
September 12, 2005. Mr. Thomas has sole voting and sole dispositive power with
respect to all of the shares as well as 76,645 issued to Mr. Thomas on December
8, 2005 in connection with the Earnback Agreement dated July 5, 2005.

(3) Based upon a Schedule 13D filed with the Commission by MSR Advisors, Inc.
and certain affiliates on September 23, 2005. Includes 549,937 shares of Common
Stock and warrants to purchase 50,000 shares of Common Stock beneficially owned
(in the aggregate) by MSR Advisors, Inc., a Delaware corporation ("MSRA"), MSR I
SBIC Partners, LLC, a Delaware limited liability company ("MSRI Partners"), MSR
I SBIC, L.P., a Delaware limited partnership ("MSRI"), and Tri-Lev LLC, a
Connecticut limited liability company ("Tri-Lev"). Of such 599,937 shares, MSRA
has sole voting and dispositive power with respect to 50,000 shares and shared
voting and dispositive power with respect to 549,937 shares; MSRI Partners has
sole voting and dispositive power with respect to 0 shares and shared voting and
dispositive power with respect to 599,937 shares; MSRI has sole voting and
dispositive power with respect to 546,937 shares and shared voting and
dispositive power with respect to 53,000 shares; and Tri-Lev has sole voting and
dispositive power with respect to 3,000 shares and shared voting and dispositive
power with respect to 596,937 shares. Daniel A. Levinson, a director of the
Company, is the President of MSRA and the Managing Member of MSRI Partners. MSRA
is the Manager of Tri-Lev. MSRI Partners is the General Partner of MSRI. The
business address of Mr. Levinson, MSRA, MSRI Partners, MSRI, and Tri-Lev is 8
Wright Street, Westport, Connecticut 06880. Each of Mr. Levinson, MSRA, MSRI
Partners, MSRI, and Tri-Lev (each an "MSRA Person") disclaims beneficial
ownership of all shares and warrants of the Company beneficially owned by the
other MSRA Persons, except to the extent such person has sole voting and
dispositive power with respect to such securities.

(4) Based upon a Schedule 13G filed with the Commission by Wheatley Partners
III, LLC and certain affiliates on May 6, 2003, includes 258,065 shares
beneficially owned (in the aggregate) by Wheatley Partners III, LLC, Wheatley
Partners III, L.P., Wheatley Associates III, L.P. and Wheatley Foreign Partners
III, L.P. Wheatley Partners III, LLC is the General Partner of Wheatley Partners
III, L.P., Wheatley Associates III, L.P. and Wheatley Foreign Partners III, L.P.
Of such 258,065 shares, Wheatley Partners III, LLC has sole voting and
dispositive power with respect to 0 shares and shared voting and dispositive
power with respect to 258,065 shares; Wheatley Partners III, L.P. has sole
voting and dispositive power with respect to 180,542 shares and shared voting
and dispositive power with respect to 77,523 shares; Wheatley Associates III,
L.P. has sole voting and dispositive power with respect to 38,135 shares and
shared voting and dispositive power with respect to 219,930 shares; and Wheatley
Foreign Partners III, L.P. has sole voting and dispositive power with respect to
39,388 shares and shared voting and dispositive power with respect to 218,677
shares. The business address of Wheatley Partners is 80 Cuttermill Road, Suite
311, Great Neck, NY 11021.

(5) Includes 238,710 shares owned by Mr. Bosselmann, 23,850 shares owned by Mr.
Bosselmann's wife (of which Mr. Bosselmann disclaims beneficial ownership), and
warrants to purchase 60,000 shares held by Mr. Bosselmann.

(6) Includes options to purchase 5,000 shares of common stock held by Mr.
Jordan, all of which are fully vested.

(7) Includes options to purchase 5,000 shares of common stock held by Mr.
Levinson, all of which are fully vested. Includes 549,937 shares and warrants to
purchase 50,000 shares beneficially owned (in the aggregate) by MSRA, MSRI
Partners, MSRI, and Tri-Lev. Mr. Levinson is the President of MSRA and the
Managing Member of MSRI Partners. MSRA is the Manager of Tri-Lev. MSRI Partners
is the General Partner of MSRI. The business address of Mr. Levinson is 8 Wright
Street, Westport, Connecticut 06880. Mr. Levinson disclaims beneficial ownership
of all shares and warrants of the Company beneficially owned by MSRA, MSRI
Partners, MSRI and Tri-Lev.

(8) Includes options to purchase 5,000 shares of common stock held by Mr.
Mitchell, all of which are fully vested.

(9) Includes options to purchase 5,000 shares of common stock held by Dr.
Pugmire, all of which are fully vested.

(10) Includes options to purchase 5,000 shares of common stock held by Mr.
Quinn, all of which are fully vested. Does not include 64,516 shares of common
stock held by Allen & Company, Incorporated. Mr. Quinn disclaims beneficial
ownership of the shares held by Allen & Company.

(11) Includes options to purchase 5,000 shares of common stock held by Mr.
Winslow, all of which are fully vested. The 43,640 shares held by Mr. Winslow
also include: 1,290 shares held by Mr. Winslow; 3,870 shares held by Mr. Winslow
as Trustee for Louise Condit Trust u/d FBO Elinor Winslow; 3,200 shares held by
Mr. Winslow as Trustee for Condit & EC Winslow 41 u/d Trust; 1,900 shares held
by Mr. Winslow as Trustee for Sears B. Condit Trust u/w; 25,800 shares held by
Mr. Winslow as Trustee for Sears B. Condit Trust u/l; and 2,580 shares held by
Mr. Winslow as Trustee for Andrew N. Winslow Trust u/w.

(12) Includes 10,000 shares owned by Mr. Trudel and warrants to purchase 60,000
shares held by Mr. Trudel.

(13) Includes warrants to purchase 60,000 shares of Common Stock held by Mr.
Bosselmann, warrants to purchase 60,000 shares of Common Stock held by Mr.
Trudel, warrants to purchase 50,000 shares of Common Stock held by MSR Advisors,
Inc. (of which Mr. Levinson is President), and options to purchase 30,000 shares
of Common Stock held by directors, named executive officers and executive
officers of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships and Related Transactions

On January 28, 2005, the Company sold and issued to MSR I SBIC, L.P., a Delaware
limited partnership ("MSR"), 129,032 shares (the "Shares") of common stock,
pursuant to a Subscription Agreement dated as of January 28, 2005 between the
Company and MSR (the "Subscription Agreement"). The Shares were issued at a
purchase price of $7.75 per share ("Share Price"), yielding aggregate proceeds
of $999,998. MSR is an entity controlled by Daniel Levinson, a director of the
Company.

Pursuant to the Subscription Agreement, the Company agreed to issue additional
shares of common stock to MSR in accordance with the Subscription Agreement
under certain conditions upon the earlier of (i) the Company's issuance of
additional shares of common stock having an aggregate purchase price of at least
$2,500,000 for a consideration per share less than the Share Price, subject to
certain exclusions; and (ii) July 31, 2005. Shares would be issued in amounts
determined by reference to the Company's prevailing thirty-day average stock
price. As of July 31, 2005, the conditions described above had not occurred, and
on August 16, 2005, the Company instructed the transfer agent to issue an
additional 95,321 shares of common stock to MSR. The issuance of additional
shares to MSR effectively reduced MSR's purchase price per common stock as set
forth in the Subscription Agreement.

During fiscal year ended January 31, 2006, the Company retained MSR under a
consulting agreement to assist in identifying and meeting potential equity
investors. Under this consulting arrangement, the Company paid MSR $100,000
during fiscal 2006.

On August 31, 2004, the Company entered into an Agreement and Plan of Merger, as
amended (the "Merger Agreement") with AGAX/VLI Acquisition Corporation, Vitarich
Laboratories, Inc. ("Vitarich") and Kevin Thomas (Thomas) whereby, among other
things, the Company issued to Kevin Thomas certain stock consideration which was
subject to adjustment in the event the Company raised or failed to raise
additional capital by a certain time period. On January 28, 2005, the Company,
Vitarich and Kevin Thomas entered into a letter agreement to extend the time
period of the condition to July 31, 2005. As of July 31, 2005, the condition had
not occurred. In accordance with the formula provided in the January 28, 2005
letter agreement to calculate the adjustment to the stock consideration, on
August 19, 2005, the Company instructed the transfer agent to issue to Kevin
Thomas 535,052 shares of common stock of the Company. Mr. Thomas currently owns
44% of the common stock of the Company.

On January 31, 2005, the Company entered into a debt subordination agreement
with Kevin Thomas for the cash portion of his Additional Consideration. The
subordinated note had an original maturity of August 1, 2006, a notional amount
of $3,292,000 and an interest rate of 10%. On May 5, 2006, the Company entered
into an extension with Thomas of the maturity of the note to August 1, 2007.

The Company leases administrative, manufacturing and warehouse facilities from
Thomas, who is an officer Vitarich Laboratories, Inc. ("VLI"), a wholly owned
subsidiary of the Company, and also from an employee who was the former owner of
Southern Maryland Cable, Inc., a wholly owned subsidiary of the Company. The
total expenses under these arrangements were $298,000 and $134,000 for the years
ended January 31, 2006 and 2005, respectively. The future minimum lease
commitments under these arrangements during each fiscal year ended January 31
through fiscal year ended January 31, 2010 are: 2007 - $298,000; 2008 -
$299,000; 2009 - $299,000; 2010 - $299,000; thereafter - $979,000 which totals
$2,174,000. In addition, the Company incurred $122,000 for improvements made by
Thomas to a manufacturing and warehouse facility which it leases from him.

The Company also entered into a supply agreement with an entity owned by Thomas
whereby the supplier committed to sell to the Company and the Company committed
to purchase on an as-needed basis, certain organic products. VLI made $47,000 in
purchases under the supply agreement for the period from acquisition (August 31,
2004) through January 31, 2005 and $189,000 for the year ended January 31, 2006.
On January 31, 2006, the Company owed $3,000 to the entity owned by Kevin
Thomas.

The Company also sells its products in the normal course of business to an
entity in which Thomas has an ownership interest. The pricing on such
transactions is consistent with VLI's general customer pricing for nonaffiliated
entities. VLI had approximately $242,000 in sales with this entity for the
period from acquisition (August 31, 2004) to January 31, 2005 and $587,000 for
the year ended January 31, 2006. On January 31, 2006, the affiliated entity owed
$157,000 to VLI net of an allowance for doubtful accounts of $0.

The Company owed Thomas $118,000 at January 31, 2006 due primarily to leasehold
improvements made to the Company's primary warehouse and manufacturing facility.

ITEM 13. EXHIBITS

Exhibit Description
No.
--------------------------------------------------------------------------------

3.1 Certificate of Incorporation, as amended.(5)

3.2 Bylaws.(1)

10.6 2001 Incentive Stock Option Plan.(2)

10.7 Financing and Security Agreement dated as of August 19, 2003 among
Puroflow Incorporated, Southern Maryland Cable, Inc. and Bank of
America, N.A. (3)

10.8 First Amendment to Financing and Security Agreement dated as of
February 27, 2004.(5)

10.9 Form of Subscription Agreement, dated as of April 29, 2003, by and
among the Company and Investors in the April 29, 2003 private
placement.(4)

10.10 Registration Rights Agreement, dated as of April 29, 2003, by and
among the Company and the Investors in the April 29, 2003 private
placement.(4)

10.11 Form of Common Stock Purchase Warrant dated April 29, 2003.(5)

10.12 Agreement and Plan of Merger dated July 17, 2003 by and between
Southern Maryland Cable, Inc., Puroflow Incorporated, and PFLW/SMC
Acquisition Corporation.(9)

10.13 Agreement and Plan of Merger dated as of August 31, 2004 by and
between Kevin J. Thomas, Vitarich Laboratories, Inc., Argan, Inc., and
AGAX/VLI Acquisition Corporation.(7)

10.14 Registration Right Agreement dated as of August 31, 2004 by and
between Argan, Inc. and Kevin J. Thomas .(6)

10.15 Employment Agreement dated as of August 31, 2004 by and between
AGAX/VLI Acquisition Corporation and Kevin J. Thomas.(6)

10.16 Third Amendment to Financing and Security Agreement as of August 19,
2003 dated as of August 31, 2004 by and among Argan, Inc., Southern
Maryland Cable, Inc., and AGAX/VLI Acquisition Corporation, as
borrowers, in favor of Bank of America, N.A., as lender.(6)

10.17 Amended and Restated Revolving Credit Note dated as of August 31, 2004
by and among Argan, Inc., Southern Maryland Cable, Inc., and AGAX/VLI
Acquisition Corporation, as Borrowers, in favor of Bank of America,
N.A., as lender. (6)

10.18 First Amendment to Term Note dated as of June 29, 2004 by and among
Argan, Inc., Southern Maryland Cable, Inc., as borrowers, and Bank of
America, N.A., as lender. (6)

10.19 Additional Borrowers Joinder Supplement dated as of August 31, 2004,
by and among Argan, Inc., the other Existing Borrowers (as such term
is defined in the agreement) and AGAX/VLI Acquisition Corporation, as
borrowers, and Bank of America, N.A., as lender. (6)

10.20 Employment Agreement dated as of January 3, 2005 by and between Argan,
Inc. and Rainer H. Bosselmann.(8)

10.21 Employment Agreement dated as of January 3, 2005 by and between Argan,
Inc. and H. Haywood Miller, III.(8)

10.22 Employment Agreement dated as of January 3, 2005 by and between Argan,
Inc. and Arthur F. Trudel, Jr.(8)

10.23 Debt Subordination Agreement dated as of January 31, 2005 by and among
Argan, Inc., Kevin J. Thomas, Southern Maryland Cable, Inc., and Bank
of America, N.A. (includes as Exhibit A, a Form of Subordinated Term
Note). (10)

10.24 Financing and Security Agreement dated as of August 19, 2003 among
Puroflow Incorporated, Southern Maryland Cable, Inc., and Bank of
America, N.A. (11)

10.25 Subscription Agreement dated as of January 28, 2005 between Argan,
Inc. and MSR I SBIC, L.P. (12)

10.26 Registration Rights Agreement dated as of January 28, 2005 between
Argan, Inc. and MSR I SBIC, L.P. (12)

10.27 Debt Subordination Agreement dated as of January 31, 2005 by and among
Argan, Inc., Kevin J. Thomas, Southern Maryland Cable, Inc. and Bank
of America, N.A. (13)

10.28 Fourth Amendment to Financing and Security Agreement dated as of April
8, 2005 among Argan, Inc., Southern Maryland Cable, Inc., Vitarich
Laboratories, Inc. and Bank of America, N.A. (14)

10.29 Second Amended and Restated Revolving Credit Note dated as of April 8,
2005 among Argan, Inc., Southern Maryland Cable, Inc., Vitarich
Laboratories, Inc. and Bank of America, N.A. (14)

10.30 Letter Agreement dated July 5, 2005 by and among Argan, Inc., Vitarich
Laboratories, Inc. and Kevin J. Thomas. (15)

10.31 Subordinated Term Note, effective as of June 30, 2005, issued by
Argan, Inc. to Kevin J. Thomas. (15)

10.32 Amended and Restated Debt Subordination Agreement, effective as of
June 30, 2005, by and among Argan, Inc., Kevin J. Thomas, Southern
Maryland Cable, Inc. and Bank of America, N.A. (15)

10.33 Letter Agreement dated January 28, 2005 by and among Argan, Inc.,
Vitarich Laboratories, Inc. and Kevin J. Thomas. (16)

10.34 Fifth Amendment to Financing and Security Agreement, dated as of
November 7, 2005, by and among Argan, Inc., Southern Maryland Cable,
Inc., Vitarich Laboratories, Inc. and Bank of America, N.A. (17)

14.1 Code of Ethics.(5)

-------------

(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on October 15,
1991, (Registration No. 33-43228).

(2) Incorporated by reference to the Company's Proxy Statement filed on
Schedule 14A with the Securities and Exchange Commission on August 6,
2001.

(3) Incorporated by reference to the Company's Form 10-QSB filed with the
Securities and Exchange Commission on December 12, 2003.

(4) Incorporated by reference to the Company's Form S-3/A filed with the
Securities and Exchange Commission on January 29, 2004.

(5) Incorporated by reference to Company's Form 10-KSB filed with the
Securities and Exchange Commission on April 27, 2004.

(6) Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on September 7, 2004.

(7) Incorporated by reference to the Company's Form 8-K/A filed with the
Securities and Exchange Commission on September 17, 2004.

(8) Incorporated by reference to the Company's Form 8-K dated January 3, 2005,
filed with the Securities and Exchange Commission on January 5, 2005.

(9) Incorporated by reference to the Company's Form 8-K dated July 17, 2003,
filed with the Securities and Exchange Commission on July 29, 2003.

(10) Incorporated by reference to the Company's Form 8-K dated January 31,
2005, filed with the Securities and Exchange Commission on February 4,
2005.

(11) Incorporated by reference to the Company's Form 10-QSB, filed with the
Securities and Exchange Commission on December 15, 2003.

(12) Incorporated by reference to the Company's Form 8-K, dated January 28,
2005, filed with the Securities and Exchange Commission on February 2,
2005.

(13) Incorporated by reference to the Company's Form 8-K, dated January 31,
2005, filed with the Securities and Exchange Commission on February 4,
2005.

(14) Incorporated by reference to the Company's Form 8-K, dated April 8, 2005,
filed with the Securities and Exchange Commission on April 14, 2005.

(15) Incorporated by reference to the Company's Form 8-K, dated July 5, 2005,
filed with the Securities and Exchange Commission on July 7, 2005.

(16) Incorporated by reference to the Company's Form 8-K, dated August 19,
2005, filed with the Securities and Exchange Commission on August 22,
2005.

(17) Incorporated by reference to the Company's Form 8-K, dated November 7,
2005, filed with the Securities and Exchange Commission on November 10,
2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Accountants

The following table shows the fees for professional services provided by Ernst &
Young LLP for the fiscal years ended January 31, 2006 and January 31, 2005.

2006 2005
-------- --------
Audit Fees $573,000 $428,000
Audit-Related Fees $5,000 $21,000
Tax Fees $38,500 $48,000
----------------------------------------
Total $616,500 $497,000

Audit Fees. This category includes the audit of the Company's annual financial
statements, review of financial statements included in the Company's Form 10-QSB
quarterly reports and services that are normally provided by the independent
auditors in connection with SEC registration statements, assistance with SEC
comment letters and accounting and reporting consultation for those fiscal
years.

Audit Related Fees. This category consists of professional services for due
diligence in connection with proposed acquisitions.

Tax Fees. This category consists of professional services rendered for tax
compliance, tax advice and tax planning.

Audit Committee Pre-Approval Policies and Procedures

Before an accountant is engaged by the Company to render audit or non-audit
services, the engagement is approved by the Company's Audit Committee.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

ARGAN, INC.

By: /s/ Rainer H. Bosselmann
Rainer H. Bosselmann
Chairman of the Board and Chief Executive Officer
Dated: May 15, 2006

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Name Title Date
---- ----- ----

/s/ Rainer H. Bosselmann Chairman of the Board May 15, 2006
--------------------------- and Chief Executive Officer
Rainer H. Bosselmann (Principal Executive Officer)

/s/ Arthur F. Trudel Senior Vice President May 15, 2006
--------------------------- and Chief Financial Officer and
Arthur F. Trudel Secretary (Principal Accounting
and Financial Officer)

/s/ DeSoto S. Jordan Director May 15, 2006
---------------------------
DeSoto S. Jordan

/s/ Daniel A. Levinson Director May 15, 2006
---------------------------
Daniel A. Levinson

/s/ T. Kent Pugmire Director May 15, 2006
---------------------------
T. Kent Pugmire

/s/ James W. Quinn Director May 15, 2006
---------------------------
James W. Quinn

/s/ Peter L. Winslow Director May 15, 2006
---------------------------
Peter L. Winslow

/s/ W. G. Champion Mitchell Director May 15, 2006
---------------------------
W. G. Champion Mitchell

EXHIBIT INDEX
-------------

Exhibit No. Description
--------------------------------------------------------------------------------
21 Subsidiaries of the Company.

23 Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.

31.1 Certification of CEO required by Section 302 of the Sarbanes-Oxley
Act of 2002.

31.2 Certification of CFO required by Section 302 of the Sarbanes-Oxley
Act of 2002.

32.1 Certification of CEO required by Section 906 of the Sarbanes-Oxley
Act of 2002.

32.2 Certification of CFO required by Section 906 of the Sarbanes-Oxley
Act of 2002.