RESULTS OF OPERATIONS

General

Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations-General, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 for certain general information about our principal products and costs.

Over the past several quarters we have made significant changes to our operations to improve profitability. We have refocused our business on the production of value-added ingredients and distillery products. We have realigned our production efforts and reduced excess inventories. By temporarily ceasing production at our Pekin facility, we now only produce minimal quantities of fuel grade alcohol as a co-product and, with the shutdown of our flour mill in Atchison in October 2008, we no longer sell mill feeds. Production of distillers feed has also decreased. As a result of these measures, revenues across all segments have declined from historic levels. However, we have experienced increased profitability during the quarter ended September 30, 2009, primarily due to our improved sales mix of value-added products, lower costs of grain and natural gas, and lower costs from restructuring as compared to the prior fiscal year.

Critical Accounting Policies and Estimates

Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, for a discussion of our critical accounting policies and the use of certain judgments and estimates in the preparation of our financial statements.

DEVELOPMENTS IN THE INGREDIENT SOLUTIONS SEGMENT

In order to become more efficient and effective and to improve our results, we have refocused our business on the production of our value-added products. We believe the steps we have taken have enabled us to return to profitability and be more competitive, while also allowing us to obtain financing that has enabled us to maintain operations.

By substantially exiting the commodity wheat gluten business and curtailing our commodity starch production, we have significantly reduced sales volumes of our lower margin protein and starch products. We continue to focus our manufacturing efforts on improving our consistency and capabilities for producing our higher-margin, specialty product lines. We are using an on-line Customer Relationship Management ("CRM") solution system that was implemented in fiscal 2009 to improve our ability to develop new sales of our product lines. Our commercialization functions are focused on increasing sales growth of our specialty products to the largest and most innovative producers of consumer packaged goods in the U.S.

DEVELOPMENTS IN THE DISTILLERY PRODUCTS SEGMENT

As previously mentioned in Developments in the Ingredient Solutions Segment, in order to become more efficient and effective and to improve our results, we have refocused our business on the production of our value-added products. We significantly reduced production of fuel grade alcohol and temporarily shut down our Pekin plant on January 29, 2009.

Food grade alcohol also saw a decline in production volume of 21.7 percent, which was largely attributable to the temporary closing of the Pekin facility. However, the idling of Pekin had no effect on our food grade alcohol customers as we are continuing to optimize food grade alcohol production capabilities at Atchison. Historically, we have produced a majority of all of our food grade alcohol at Atchison and a majority of all of our fuel grade alcohol at Pekin.

On March 31, 2009, we announced that we were considering our strategic options with respect to the Pekin facility. We continue to explore strategic alternatives with respect to this facility.

DEVELOPMENTS IN THE OTHER SEGMENT

On August 21, 2009, we sold our Kansas City, Kansas, facility for $3,585, with potential additional payments over the next three years based on the buyer's income from sales of our existing products to our existing customers during that period. The sale included all equipment used for the production and packaging of pet-related products, which principally include extruded plant-based resins and finished pet treats. We retained ownership of equipment that is used for the production of our Wheatex® textured wheat proteins, which are sold for use in meat extension and vegetarian product applications. This equipment is located in a separate section of the facility that we have leased for a period of three years and which is operated by a subsidiary of the buyer under a toll manufacturing arrangement.

SEGMENT RESULTS

The following is a summary of revenues and pre-tax profits / (loss) allocated to each reportable operating segment for the quarterly periods ended September 30, 2009 and 2008. For additional information regarding our operating segments, see Note 7-Operating Segments included under Part 1, Item 1, Financial Statements of this Form 10-Q and incorporated herein by reference.

                                  Quarter Ended
                         September 30,     September 30,
(in thousands)               2009              2008

Ingredient solutions
Net Sales               $        15,059   $        25,897
Pre-Tax Income (Loss)             2,297            (5,389 )
Distillery products
Net Sales                        31,373            71,382
Pre-Tax Income (Loss)             6,629           (12,926 )
Other
Net Sales                           652             1,741
Pre-Tax Income (Loss)               116               237

GENERAL

Consolidated earnings for the first quarter of fiscal 2010 increased compared to the same period in fiscal 2009 with net income of $3,738 on consolidated sales of $47,084 versus a net loss of $17,243 on consolidated sales of $99,020 in the first quarter of fiscal 2009. This increase in earnings was primarily the result of our improved sales mix of value-added products, significantly decreased cost of sales resulting primarily from lower grain costs, and lower costs from restructuring completed in fiscal year 2009. Earnings in the ingredient solutions segment increased over the same period in fiscal 2009 primarily due to an improved sales mix of value-added proteins and starches. Lower wheat flour prices for our protein and starch processes were also a factor in our ingredient solutions segment performance.

Earnings in our distillery products segment increased due to our significant exit from the volatile and lower-margin fuel alcohol market along with lower corn and natural gas prices, the former of which resulted in lower sales volume. The decrease in sales and earnings in the other segment for the first quarter fiscal 2010 as compared to the same period in fiscal 2009 was mainly a result of exiting the business line for pet products.

INGREDIENT SOLUTIONS

Total ingredient solutions sales revenue for the quarter ended September 30, 2009 decreased by $10,838, or 41.8 percent, compared to the quarter ended September 30, 2008. Revenues for commodity proteins and commodity starch decreased by $6,383 and $901, respectively, for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008. Commodity proteins and starch products with lower margins were significantly reduced as a part of management's strategy to focus on higher-margin, value-added products. Revenues for specialty starches decreased during the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008 by $2,609, or 23.7 percent, as a result of lower unit sales, partially offset by increased unit pricing. Revenues for specialty proteins for the quarter ended September 30, 2009 increased $727, or 15.2 percent over the quarter ended September 30, 2008, as a result of improved pricing as well as higher unit sales. While revenues for the ingredient solutions segment declined overall, margins improved during the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008 as a result of improved sales mix by reducing our emphasis on unprofitable product lines along with lower flour costs attributable to lower wheat prices. The per pound cost of flour for the quarter ended September 30, 2009 decreased by 27.9 percent over the quarter ended September 30, 2008.

DISTILLERY PRODUCTS

Total distillery products sales revenue for the quarter ended September 30, 2009 decreased $40,009, or 56 percent, compared to the quarter ended September 30, 2008. The majority of this decrease was attributable to the reduced production of fuel grade alcohol as a result of our decision to focus on food grade alcohol, which consistently has experienced more stable prices. The decrease in revenues related to fuel grade alcohol was $23,683, or 93.9 percent, compared to the quarter ended September 30, 2008. Food grade alcohol also saw a decline in revenues of $9,819 over the quarter ended September 30, 2008, which were attributable to both decreased volume of 21.7 percent as well as a decline in per-unit pricing. The decrease in volume was largely attributable to the temporary closing of the Pekin facility, which did produce some food grade alcohol. The decline in per-unit sales pricing mirrored a decrease in corn prices during the quarter ended September 30, 2009. Also contributing to this decrease in revenue was distillers feed revenue, which experienced a $6,507 reduction in revenue, or 60.4 percent, over the quarter ended September 30, 2008. The decrease was largely due to the decrease in production of 57.4 percent compared to the quarter ended September 30, 2008, primarily due to the idling of the Pekin facility and slightly lower unit pricing. While revenues for distillery products declined for the quarter ended September 30, 2009 as compared to the same quarter a year ago, margins improved due to a significant reduction in sales of lower margin fuel grade alcohol, along with a significant reduction in corn and natural gas prices. For the quarter ended September 30, 2009, the per-bushel cost of corn and the per-million cubic foot cost of natural gas averaged nearly 42.9 percent and 67.8 percent lower, respectively, than the quarter ended September 30, 2008. These lower costs contributed to the fiscal 2010 first quarter profit for the segment.

OTHER PRODUCTS

For the quarter ended September 30, 2009, revenues for other products, consisting primarily of plant-based biopolymers and pet products, decreased $1,089, or 62.6 percent, compared to the quarter ended September 30, 2008. Although the profit performance in this segment declined compared to the same quarter in the prior year, the gross margins in this segment as a percent of sales improved substantially due to a reduction of pet product sales and increased focus on improving cost efficiencies in our eco-friendly biopolymer area.

The decline in other segment sales revenue was primarily the result of decreased unit sales of 76.8 percent for our pet products for the quarter ended September 30, 2009 compared to the same quarter in the prior fiscal year. As described in Note 3, we sold the assets related to our pet products during the quarter.

SALES

Net sales for the quarter ended September 30, 2009 decreased $51.9 million, or 52.5 percent, compared to the quarter ended September 30, 2008, primarily as a result of our strategy to reduce sales of low and negative margin products across all operating segments. Decreased sales in the ingredient solutions segment were related to our exit from low margin commodity proteins and starch products. While unit pricing increased from a year ago for specialty starches, lower unit sales of specialty starches also contributed to the decreased sales in this segment. However, the decrease in sales was partially offset by the increase in revenues for specialty proteins as a result of improved pricing and unit sales. Sales in the distillery products segment as a whole decreased as a result of shifting the focus away from fuel grade alcohol to food grade alcohol. Revenues for food grade alcohol also declined as a result of unit pricing and decreased unit sales. Revenues for distiller's feed declined as a result of lower unit sales. Net sales for our other segment decreased mainly as the result of a decline in unit sales of pet products and, to a lesser extent, reduced sales of plant-based biopolymer products.

COST OF SALES

For the quarter ended September 30, 2009, cost of sales decreased $78.5 million, or 67.8 percent, compared to the quarter ended September 30, 2008. This decrease was primarily the result of temporarily ceasing production at the Pekin facility combined with the reduction of higher cost, low margin commodity products and lower raw material costs and other inputs used in the manufacturing process. Our lower raw material and energy costs were directly the result of lower grain prices experienced during the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008. These costs were also lower as the result of reduced grain and energy requirements resulting primarily from lower production and sales of fuel alcohol and commodity ingredients. The per-bushel cost of corn and the per-million cubic foot cost of natural gas averaged nearly 42.9 percent and 67.8 percent lower, respectively, than the quarter ended September 30, 2008. The per pound cost of flour for the quarter ended September 30, 2009 decreased by 27.9 percent compared to the quarter ended September 30, 2008. For the quarter ended September 30, 2009, cost of sales was 79.1% of net sales, which generated a gross profit margin of 20.9%. For the quarter ended September 30, 2008, cost of sales was 116.9% of net sales, which generated a negative gross margin of 16.9%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended September 30, 2009 decreased by $1,519, or 24.8 percent, compared to the quarter ended September 30, 2008. For the quarter ended September 30, 2009, the reduction in the Company's work-force primarily contributed to the decrease as compared to the quarter ended September 30, 2008. This reduction was a result of the restructuring and reduced production of unprofitable products.

OTHER INCOME, NET

Other income, net, decreased $20, or 48.8 percent, for the quarter ended September 30, 2009, respectively, compared to the quarter ended September 30, 2008. This decrease was principally attributable to changes in interest capitalized as well as to the effect of certain other non-recurring, non-operating revenue items.

INTEREST EXPENSE

Interest expense for the quarter ended September 30, 2009 increased $61, or 8.4 percent compared to the quarter ended September 30, 2008. This increase was the result of higher loan balances on long-term debt due to refinancing as compared to the same period in the prior year. The increase was partially offset by the reduced balance on our line of credit and lower interest rates.

EQUITY IN LOSS OF JOINT VENTURE

Equity in the loss of our joint venture was $48 for the quarter ended September 30, 2009. On July 17, 2007, we completed a transaction with Crespel and Dieters GmbH & Co. KG for the formation and financing of a joint venture, D.M. Ingredients, GmbH ("DMI"), located in Ibbenburen, Germany. DMI's primary operation is the production and tolling of the Wheatex® series of textured wheat proteins made from vital wheat gluten for marketing by the Company domestically and, through our partner and third parties internationally. Currently, the joint venture is utilizing a third party toller in the Netherlands to produce the Wheatex® products. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of September 30, 2009, we had invested $375 in DMI since July 2007.

For the quarter ended September 30, 2009, DMI incurred a net loss of $96 related to costs incurred for the initial implementation of operations. No sales revenue was reported. As a 50 percent joint venture holder, our equity in this loss was $48.

DMI's functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company's investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.

INCOME TAXES

For the quarter ended September 30, 2009, we had an income tax expense of $90 resulting in an effective rate of 2.4 percent. For the quarter ended September 30, 2008, our income tax benefit was $6,300 for an effective rate of 26.7 percent. This rate differs from our statutory rate primarily due to changes in the federal and state valuation allowance. Our valuation allowance as of September 30, 2009 is approximately $19,500. Management has determined that a valuation allowance was needed against federal and state deferred tax assets, consisting largely of net operating losses and credit carryforwards that are not more likely than not of being realized. As a result of filing our fiscal 2009 tax return and a carryback claim for our fiscal year 2009 tax loss, we received a tax refund of approximately $5,500 during October 2009. The expected refund exhausts our ability to carry back any further losses under current tax law. Since the end of the fiscal year ended June 30, 2009, there has been no material change in our uncertain tax positions.

NET INCOME

As the result of the factors outlined above, we experienced net income of $3,738 on sales of $47,084 in the quarter ended September 30, 2009 compared to a net loss of $17,243 on sales of $99,020 in the quarter ended September 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Our principal uses of cash are for the cost of raw materials and energy used in our production processes, salaries, debt service obligations on our borrowings and capital expenditures. Our principal sources of cash are revenues from the products we make and our revolving credit facility. We expect our sources of cash to be adequate to provide for our needs in fiscal 2010.

On August 25, 2009, we were required to make a deposit of approximately $1,600 to our surety bond carrier. This deposit secured our obligations under surety bonds maintained to meet regulatory requirements for distillery operations. Funds for this deposit were borrowed under the terms of the Credit Agreement. During the quarter ended September 30, 2009, we received approximately $925 in deposit refunds from vendors.

As a result of losses incurred during fiscal years 2009, we received a tax refund of approximately $5,500 during October 2009, which was used to pay down the $11,614 note to CILCO.

As noted elsewhere herein, we have taken steps to focus our business on the production of value-added products, which have improved our operating performance. As a result of the measures that we have taken combined with lower grain costs, operating costs have been reduced and cash flows from operating activities have increased.

The following table is presented as a measure of our liquidity and financial condition:

(Dollars in thousands)