SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                          FORM 10-KSB/A Amendment No. 1

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

                   For the fiscal year ended January 31, 2005

                                       OR

[ ]   TRANSITION REPORT UNDER 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.
                                   -----------
                 (Name of Small Business Issuer in Its Charter)

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

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

                                  301-315-0027
                          -----------------------------
                           (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:  (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  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $14,518,000

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Registrant was  approximately  $ 3,011,000 as of April 15, 2005,  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 April 15, 2005: 2,758,845

                       DOCUMENTS INCORPORATED BY REFERENCE

The  information  required  by  Items  9,  10,  11,  12  and 14 of  Part  III is
incorporated by reference to the  Registrant's  definitive proxy statement to be
filed  within  120 days after the end of the  fiscal  year  covered by this form
pursuant  to  Regulation  14A in  connection  with its 2005  Annual  Meeting  of
Stockholders.

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




                                   ARGAN, INC.
                         2005 FORM 10-KSB ANNUAL REPORT
                                TABLE OF CONTENTS

                                                                            Page

                                     PART I

ITEM 1.     Description of Business..........................................  2

ITEM 2.     Description of Property.......................................... 16

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 and Related Stockholder Matters ....... 17

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

ITEM 7.     Financial Statements............................................. 34

ITEM 8.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure......................................... 60

ITEM 8A.    Controls and Procedures.......................................... 60

ITEM 8B.    Other Information................................................ 60

                                  PART III

ITEM 9.     Directors, Executive Officers, Promoters and Control
             Persons; Compliance with Section 16(a) of The Exchange Act...... 60

ITEM 10.    Executive Compensation........................................... 61

ITEM 11.    Security Ownership of Certain Beneficial Owners and
            Management and Related StockholderMatters........................ 61

ITEM 12.    Certain Relationships and Related Transactions................... 61

ITEM 13.    Exhibits......................................................... 61


ITEM 14.    Principal Accountant Fees and Services........................... 63




                                     PART I

Amendment No. 1 Explanatory Note

On September 19, 2005, senior management and the Audit Committee of the Board of
Directors of the Company concluded that the Company's  financial  statements for
the fiscal year ended January 31, 2005 should be restated.

The  restatements  relate to the Company's  amendment of its  accounting  for an
investment made by MSR I SBIC, L.P. ("MSR") on January 28, 2005  ("Investment"),
for the value of the shares issued in the acquisition of Vitarich  Laboratories,
Inc.  (VLI) and for an  agreement  entered into with Kevin Thomas on January 28,
2005  with   respect   to  a  debt   subordination   and   related   concessions
("Concessions") given to Kevin Thomas ("Thomas") in connection with consummating
the agreement as described below.

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  prior to 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 is subject to
adjustment  for  changes in fair  value  subsequent  to  issuance.  The  Company
recorded a fair value  adjustment for a $1,000 gain and a $343,000 loss at April
30, 2005 and July 31, 2005 respectively,  which is also reflected as a change in
liability for the derivative  financial  instruments.  The fair value adjustment
was recorded as a change in the Company's other expenses or income,  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 additional  shares of
the Company's common stock on August 13, 2005.

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 Company also assumed  approximately  $1.6 million in debt.  The value of the
shares  issued in the  acquisition  of VLI has been revised to reflect the price
per share of $6.00 of the  Company's  common stock at August 31, 2004 as opposed
to $6.22,  the quoted  market  price of the stock two days  before and after the
acquisition date. The impact of this change was to reduce the amount of goodwill
and additional paid-in capital by $182,000. 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 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.  These


                                       1


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." The
Company has 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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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 Thomas.  The  amortization of
the deferred loan issuance  cost will  increase the  Company's  future  interest
expense  through  August 1, 2006,  the maturity date of the note, and reduce net
income.  The  charge  for  compensation  to Thomas was  classified  as  non-cash
compensation expense and increased net loss by $614,000 for the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value  subsequent  to issuance.  The fair value  adjustment of a
$22,000  gain and a  $1,609,000  loss at  April  30,  2005  and  July 31,  2005,
respectively, will also be reflected as a change in liability for the derivative
financial  instruments and as a change 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 additional shares of the Company's
common stock on September 1, 2005.

The information contained in this Amendment,  including the financial statements
and notes  thereto,  amends  Items 1, 6, and 7 of our  originally  filed  Annual
Report on Form  10-KSB  for the year  ended  January  31,  2005 (the  "2005 Form
10-KSB"),  in each case to reflect  the  adjustments  and  related  disclosures,
described  above and no other  information  in our  originally  filed  2005 Form
10-KSB is amended hereby. In addition,  currently dated  certifications from our
Chief  Executive  Officer  and Chief  Financial  Officer  have been  included as
exhibits to this Amendment.

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 category.

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.


                                       2


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  resulting  from any damages
from a breach of the  representations and warranties made by us pursuant to that
sale.  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 12 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,  2005,  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,"  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.

Recent Events

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 our common
stock,  pursuant to a  Subscription  Agreement  between the Company and Investor
(the  "Subscription  Agreement").  The Shares were issued at a purchase price of
$7.75 per share ("Share Price"),  yielding aggregate  proceeds of $999,998.  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 our  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  generating  aggregate  purchase  price of at
least $2,500,000 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 prior to 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 shares previously issued. Any additional shares issued would effectively
reduce the  Investor's  purchase price per share of common stock as set forth in
the Subscription Agreement.


                                       3


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.

Pursuant to the Merger Agreement,  in addition to the initial consideration paid
at closing,  the Company shall 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  shall be paid 50% in cash and 50% through
issuance of additional common stock of the Company.

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 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.  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.

Also in connection with the Merger Agreement,  Argan effected certain changes to
its existing credit facility with Bank of America,  N.A. ("BOA"),  pursuant to a
certain  Third  Amendment  to  Financing  and  Security  Agreement  (the  "Third
Amendment"),  dated as of August 31, 2004,  by and among Argan,  SMC and VLI, as
borrowers,  and BOA, as lender; a certain Amended and Restated  Revolving Credit
Note (the  "Amended  Revolving  Note"),  dated August 31, 2004, in the amount of
$3,500,000,  by and among Argan, SMC and VLI, as borrowers,  in favor of BOA, as
lender;  a certain  First  Amendment to Term Note (the "First  Amendment to Term
Note"), dated as of June 29, 2004, by and among Argan and SMC, as borrowers, and
BOA, as lender; and an Additional Borrowers Joinder Supplement (the "Supplement"
and together with the Third Amendment,  the Amended Revolving Note and the First
Amendment to Term Note, the "Financing Document Amendments"), dated as of August
31, 2004,  by and among Argan,  the other  Existing  Borrowers  (as such term is
defined in the Supplement) and VLI, as borrowers,  and BOA, as lender.  Pursuant
to the Financing Document Amendments,  Argan's existing credit facility with BOA
was principally amended to (i) increase the amount available for borrowing under
the revolving  credit  facility from  $1,750,000 to $3,500,000,  (ii) extend the
maturity date of the revolving  credit facility to May 31, 2005,  (iii) increase
the interest rate on the revolving  credit  facility to LIBOR plus 3.25% for the
remaining term of the facility, (iv) increase the interest rate on the term loan
facility  to LIBOR plus 3.45% from July 1, 2004 to the  maturity  date (July 31,
2006),  and (v) subject  borrowings  under the  revolving  credit  facility to a
borrowing base calculation based upon eligible accounts  receivable and eligible
inventory.  The Financing Document  Amendments also amended certain covenants to
require  the  ratio  of  funded  debt  to  earnings  before   interest,   taxes,
depreciation and amortization  ("EBITDA") to not exceed 2.5 to 1 (the first test
date being January 31, 2005) and to require a fixed charge coverage ratio of not
less than 1.25 to 1 (the first test date being  January 31, 2005.) The Financing
Document  Amendments also deleted covenants which had required Argan to maintain
certain minimum levels of liquidity and positive net income during the Company's
fiscal  quarters  ended  July  31,  2004  and  October  31,  2004.   Argan  drew
approximately $2.1 million under the BOA revolving credit facility in connection
with the Merger and for working capital for the newly acquired business.


                                       4


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
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  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 a letter  agreement dated January 28, 2005, the
Company has 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 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  prior to 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. 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.

Amendment of Financing Arrangements

On  April  8,  2005,  the  Company  agreed  to  amend  the  existing   financing
arrangements  with the BOA whereby the revolving line of credit was increased to
$4.25  million in maximum  availability,  expiring  May 31,  2006.  The  amended
financing arrangement waives the January 31, 2005 and April 30, 2005 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  test  date  being  July 31,  2005) and
requiring  pro forma fixed charge  coverage  ratio not less than 1.25 to 1 (with
the next test date being July 31,  2005).  BOA 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.  BOA has released
to the Company the $300,000 which it was holding in escrow as collateral.

At July 31, 2005, the Company failed to comply with the aforementioned financial
covenants. The Bank waived the failure for the measurement period ended July 31,
2005.  For future  measurement  periods,  the Bank  revised the  definitions  of
certain components of the financial covenants to specifically exclude the impact
of items  associated with  derivative  financial  instruments  such as valuation
gains and losses,  compensation  expense  and  non-cash  which are settled  with
non-cash  issuance  of the  Company's  common  stock  as well as  deferred  loan
issuance cost amortization.

VRP Letter of Intent

On October 28,  2004,  the Company  entered into a letter of intent with Vitamin
Research  Products,  Inc. ("VRP") to acquire all of the common stock of VRP. The
consummation  of the  transaction  is  contingent  upon  the  completion  of the
Company's due diligence,  the signing of definitive purchase and sale agreement,
approval of both companies' board of directors and other conditions.


                                       5


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

During the twelve  months ended January 31, 2005,  we provided  nutritional  and
whole-food  supplements  as well as personal  care  products to customers in the
global nutrition industry and also 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), and  CyberWize.com,  Inc. (C). SMECO accounted for  approximately  23% of
consolidated  net sales  during the twelve  months ended  January 31,  2005.  GD
accounted  for  approximately  14% of  consolidated  net sales during the twelve
months ended January 31, 2005.  During  fiscal year 2005,  GD has  substantially
reduced its level of activity on certain  contracts under which it used SMC as a
subcontractor.  During  fiscal year 2006,  we expect that GD will  substantially
increase its level of activity on certain contracts under which it uses SMC as a
subcontractor.  The Federal Government, through our contract with GD, has been a
major  customer for three years.  TVC and C have been  customers of VLI for five
and two years,  respectively,  and accounted for 17% and 8% of consolidated  net
sales for the twelve months ended January 31, 2005.

Backlog

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 in the next year.  At January 31, 2004,  we had a backlog of $5 million
to perform telecom infrastructure services during fiscal year 2005.


                                       6


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,  2005,  we had  approximately  164  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.


                                       7


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.  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,  Miller,  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 recently  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.


                                       8


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, 2005,  we had an  accumulated  deficit of  approximately  $5.5
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, 2005, we have  approximately $2.3 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.


                                       9


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


                                       10


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 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.

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.

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.


                                       11


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.


                                       12


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 two largest  telecom  infrastructure  services  customers,  General
Dynamics and Southern  Maryland Electric  Cooperative  (SMECO) currently account
for most of our  telecommunications  business.  General  Dynamics  accounted for
approximately  14% of  consolidated  net sales during the year ended January 31,
2005. SMECO accounted for approximately 23% of consolidated net sales during the
year ended  January 31, 2005.  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.


                                       13


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" and is traded on the Bulletin  Board System and
reported by the National  Quotation Service under the symbol "AGAX.OB." Prior to
our listing on the Boston  Stock  Exchange,  our common  stock was traded on the
Bulletin Board System and reported by the National  Quotation  Service under the
symbol  "PFLW.OB."  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
825,000  shares of our common  stock as initial  consideration  and we agreed to
issue  additional  shares  of our  common  stock if  certain  pro  forma  EBITDA
thresholds for the twelve months ending February 28, 2005 are met. We anticipate
that future  acquisitions  will require cash and issuances of our capital stock,


                                       14


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, 2005, there were approximately  2,759,000 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,  we agreed,  in connection  with our  acquisition  of VLI, to issue
additional shares of our common stock if certain pro forma EBITDA thresholds for
the twelve  months  ending  February  28, 2005 are met, as well as register  for
resale such  additional  shares of our common stock.  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 September 30, 2005,  our  executive  officers and directors as a group own
approximately 31% of our voting shares (giving effect to an aggregate of 260,000
shares of common stock that may be purchased upon exercise of warrants and stock
options  held  by our  executive  officers  and  directors  and  549,937  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 September 30, 2005,  Kevin J. Thomas,  our Senior  Operating
Executive,  owns approximately 43% of our outstanding voting shares. In addition
to the shares issued to Kevin Thomas at the acquisition of VLI, we issued to Mr.
Thomas  348,146  shares  of our  common  stock as  additional  consideration  in
connection with our acquisition of VLI.  Pursuant to the Letter  Agreement dated
January 28, 2005, the Company  issued  535,052  shares of our common stock.  The
number  of shares  issued  was  determined  under the  condition  in the  Letter
Agreement  whereby the Company did not  consummate an offering by July 31, 2005.
Pursuant to this condition,  shares to be issued were determined by reference to
the  Company's  prevailing  thirty day  average  stock  price at July 31,  2005.
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  67% 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.


                                       15


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.  VLI's  headquarters  are  located in Naples,
Florida in four  facilities  with one under monthly lease and three under leases
with expiration dates ranging from December 31, 2006 through August 7, 2009. Two
of the  facilities are leased from the former owner of VLI. VLI's plant includes
four buildings  which contain  warehouse  facilities with an aggregate of 26,000
square  feet,  office space with 8,000  square  feet,  as well as  manufacturing
facilities  with 10,000 square feet and laboratory  facilities 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  December
31, 2006 and  extensions  available  through  December  31,  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,
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

During the twelve  months ended  January 31, 2005,  Western  Filter  Corporation
(WFC)  notified  the  Company  in writing  that WFC  believes  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.

The Company has reviewed WFC's claim and believes that  substantially all of the
claims are without merit. The Company will vigorously contest WFC's claim.

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.

During the twelve months ended January 31, 2005, the Company recorded an accrual
for a loss related to this matter of $260,000 for  estimated  payments and legal
expenses related to WFC's claim that it considers to be probable and that can be
reasonably  estimated.  Although the ultimate amount of liability at January 31,
2005 that may result  from this  matter for which the  Company  has  recorded an
accrual 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.

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.


                                       16


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Boston Stock Exchange under the symbol AGX and
traded on the National  Association  of  Securities  Dealers,  Inc.,  Electronic
Bulletin Board System ("EBBS") under the symbol AGAX.

The following  table sets forth the high and low bid  quotations  for our common
stock for the periods indicated as reported by EBBS. 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, 2004
1st Quarter ....................................     $  8.00         $  6.10
2nd Quarter ....................................        8.50            7.75
3rd Quarter ....................................        8.55            6.60
4th Quarter ....................................        7.75            6.80

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

As of April 15, 2005, the Company had approximately 462 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.

                      Equity Compensation Plan Information

The Company has  authorized the following  equity  securities for issuance under
equity compensation plans at January 31, 2005:



                                                                                            Number of securities
                                                                                            remaining available for
                                    Number of securities to       Weighted average          future issuance under
                                    be issued upon exercise       exercise price of         equity 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
approved by security holders              312,000(1)                   $  7.77                    162,000(2)

Equity compensation plans not
approved by security holders                   --                           --                         --
                                          -------                      -------                    -------
Total                                     312,000                      $  7.77                    162,000
                                          =======                      =======                    =======




                                       17


      (1)   Represents  82,000 shares  issuable upon exercise of options granted
            under the 2001 Stock  Option Plan as of January 31, 2005 and 230,000
            shares issuable upon exercise of warrants as described below.

      (2)   Represents  162,000 shares  remaining  available for grant under the
            2001 Stock Option Plan as of January 31, 2005.

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  prior to 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 is subject to
adjustment  for  changes in fair  value  subsequent  to  issuance.  The  Company
recorded a fair value  adjustment for a $1,000 gain and a $343,000 loss at April
30,  2005 and July 31,  2005  respectively,  which is  reflected  as a change in
liability for the derivative  financial  instruments.  The fair value adjustment
was recorded as a change in the Company's  other  expense,  income,  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 additional  shares of
the Company's common stock on August 13, 2005.

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 Company also assumed $1.6 million in debt. The value of the shares issued in
the  acquisition of VLI has been revised to reflect the price per share of $6.00
of the Company's common stock at August 31, 2004 as opposed to $6.22, the quoted
market price of the stock two days before and after the  acquisition  date.  The
impact of this  change  was to reduce  the  amount of  goodwill  and  additional
paid-in capital by $182,000. 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.


                                       18


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.  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." The
Company has 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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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 Thomas.  The  amortization of
the deferred loan issuance  cost will  increase the  Company's  future  interest
expense  through  August 1, 2006,  the maturity date of the note, and reduce net
income.  The  charge  for  compensation  to Thomas was  classified  as  non-cash
compensation expense and increased net loss by $614,000 for the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value  subsequent  to issuance.  The fair value  adjustment of a
$22,000  gain and a  $1,609,000  loss at  April  30,  2005  and  July 31,  2005,
respectively,  will also be recorded as a change in liability for the derivative
financial  instruments and as a change 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 additional chares of the Company's
common stock on September 1, 2005.

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.

RESTATEMENT

On September 19, 2005, senior management and the Audit Committee of the Board of
Directors of the Company concluded that the Company's  financial  statements for
the fiscal year ended January 31, 2005 should be restated.

The  restatements  relate to the Company's  amendment of its  accounting  for an
investment made by MSR I SBIC, L.P. ("MSR") on January 28, 2005  ("Investment"),
for the  value  of the  shares  issued  in the  acquisition  of VLI,  and for an
agreement  entered  into with Kevin Thomas on January 28, 2005 with respect to a
debt subordination and related concessions ("Concessions") given to Kevin Thomas
("Thomas") in connection with consummating the agreement as described below.

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


                                       19


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  prior to 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 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 is subject to
adjustment  for  changes in fair  value  subsequent  to  issuance.  The  Company
recorded a fair value  adjustment for a $1,000 gain and a $343,000 loss at April
30, 2005 and July 31, 2005 respectively,  which is also reflected as a change in
liability for the derivative  financial  instruments.  The fair value adjustment
was recorded as a change in the Company's other expenses or income,  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 additional  shares of
the Company's common stock on August 13, 2005.

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 Company also assumed $1.6 million in debt. The value of the shares issued in
the  acquisition of VLI has been revised to reflect the price per share of $6.00
of the Company's common stock at August 31, 2004 as opposed to $6.22, the quoted
market price of the stock two days before and after the  acquisition  date.  The
impact of this  change  was to reduce  the  amount of  goodwill  and  additional
paid-in capital by $182,000. 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 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 raise 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.  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." The
Company has 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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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, 2006,  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 increased net loss by $614,000 for the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value at the Company's  interim reporting period ended April 30,
2005 and at the July 31, 2005. The fair value adjustment of a $22,000 gain and a


                                       20


$1,609,000 loss at April 30, 2005 and July 31, 2005, respectively,  will also be
reflected as a change in liability for the derivative  financial  instrument and
as a change  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 additional  shares of the Company's  common stock
on September 1, 2005.

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."

RECENT EVENTS

On September 19, 2005, senior management and the Audit Committee of the Board of
Directors of the Company concluded that the Company's  financial  statements for
the fiscal year ended January 31, 2005 should be restated.

The restatements relate to the Company's amendment for an investment made by MSR
I SBIC, L.P.  ("MSR") on January 28, 2005  ("Investment")  for the fair value of
the shares issued in the  acquisition  of VLI and for an agreement  entered into
with Kevin Thomas on January 28, 2005 with respect to a debt  subordination  and
related  concessions   ("Concessions")  given  to  Kevin  Thomas  ("Thomas")  in
connection with consummating the agreement.

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  prior to 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 is subject to
adjustment  for  changes in fair  value  subsequent  to  issuance.  The  Company
recorded a fair value  adjustment  of a $1,000 gain and a $343,000 loss at April
30,  2005 and July 31,  2005  respectively,  which will also be  reflected  as a
change in liability for the  derivative  financial  instruments.  The fair value
adjustment  was recorded as a change in the Company's  other  expenses or income
and net loss. The liability for derivative financial  instruments related to the
Investor was settled as a non-cash  transaction  by the  issuance of  additional
shares of the Company's common stock on August 13, 2005.

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 Company also assumed $1.6 million in debt. The value of the shares issued in


                                       21


the  acquisition of VLI has been revised to reflect the price of $6.00 per share
of the Company's common stock at August 31, 2004 as opposed to $6.22, the quoted
market price of the stock two days before and after the  acquisition  date.  The
impact of this  change  was to reduce  the  amount of  goodwill  and  additional
paid-in capital by $182,000. 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 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.  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." The
Company has 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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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, 2006,  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 increased net loss by $614,000 of the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value at the Company's  interim reporting period ended April 30,
2005 and at the July 31, 2005. The Company recorded a fair value adjustment of a
$22,000  gain and a  $1,609,000  loss at  April  30,  2005  and  July 31,  2005,
respectively,  which  is  also  reflected  as a  change  in  liability  for  the
derivative  financial instrument and as a change 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 additional  chares of
the Company's common stock on September 1, 2005.

Debtor  entered  into a certain  Financing  and Security  Agreement  dated as of
August 19,  2003,  as amended,  with Lender  whereby  Lender  extended to Debtor
certain  loans.  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.

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.


                                       22


On  April  8,  2005,  the  Company  agreed  to  amend  the  existing   financing
arrangements  with the Bank of America,  N.A. ("the Bank") whereby the revolving
line of credit was increased to $4.25 million in maximum availability,  expiring
May 31, 2006. The amended financing arrangements waives the January 31, 2005 and
April 30, 2005 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 test date being July
31, 2005) and requiring pro forma fixed charge coverage ratio not less than 1.25
to 1 (with the next test date being July 31, 2005). 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.  The Bank
has  released  to the  Company  $300,000  which  it was  holding  in  escrow  as
collateral.

At July 31, 2005, the Company failed to comply with the aforementioned financial
covenants. The Bank waived the failure for the measurement period ended July 31,
2005.  For future  measurement  periods,  the Bank  revised the  definitions  of
certain components of the financial covenants to specifically exclude the impact
of items  associated with  derivative  financial  instruments  such as valuation
gains and losses,  compensation expense and non-cash issuance amortization which
are settled with non-cash issuance of the Company's common stock.

On  October  31,  2003,  we  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 resulting from a breach of the  representations and warranties made by us
in connection  with that sale.  During the twelve months ended January 31, 2005,
WFC  notified  the  Company   asserting  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.

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.  The Company  has  reviewed  WFC's claim and
believes  that the claims are  substantially  without  merit.  The Company  will
vigorously contest WFC's claims.

During the twelve months ended January 31, 2005, the Company recorded an accrual
for loss and legal  expenses  related to this matter of $260,000 with respect to
this  claim.  (See Note 14 to the  Company's  consolidated  financial  and legal
expenses statements for further information.)

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,  2005,  there  were no  restrictions  with  respect to
dividends or other payments from VLI and SMC to Argan.

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 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.


                                       23


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.

Despite the  slowdown  during the twelve  months  ended  January 31, 2005 by our
primary  fixed  price  contract  customer,  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 3
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.

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.  Cost of goods and
finished  goods  inventory  sold 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 determined 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 $323,000 at January 31, 2005.

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.


                                       24


Inventories

Inventories  are stated at the lower of cost or market (net  realizable  value).
Cost is determined on the weighted  average  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

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  impairment  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.

Impairment of Goodwill

In  accordance  with SFAS No.  142,  we will  conduct  annually on November 1, a
review of our goodwill and intangible  assets with an indefinite  useful life to
determine  whether their carrying value exceeds their fair market value.  Should
this be the case,  a detailed  analysis  will be  performed  to determine if the
goodwill  and other  intangible  assets are  impaired.  We will also  review the
finite intangible  assets when events or changes in circumstances  indicate that
the carrying amount may not be recovered.

We will test for impairment of Goodwill and indefinite lived  intangible  assets
more  frequently if events or changes in  circumstances  indicate that the asset
might be impaired.

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 ("CCR's")

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.,  Verizon  Communications  and  Southern  Maryland  Electric  Cooperative.
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.  The
expected cash flows were discounted  based on a rate that reflects the perceived
risk of the CCR's,  the  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 Verizon and SMECO.

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 on the twelve months ended January 31, 2005.)

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. Based on the annual impairment test, no impairment was recorded.

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 on the twelve months ended January 31, 2005.)


                                       25


Proprietary Formulas

The Fair Value of the Proprietary  Formulas (PF's) was determined at the time of
the  acquisition  of VLI by  discounting  the cash flows expected from developed
formulations based on relative  technology  contribution and estimates regarding
product  lifecycle and development  costs and time. The expected cash flows were
discounted  based on a rate that  reflects the perceived  risk of the PF's,  the
estimated  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 proprietary  formulations  utilizing  estimated  historical  product
lifecycles and changes in technology.

Non-Contractual Customer Relationships

The  fair  value  of the  Non-Contractual  Customer  Relationships  (NCR's)  was
determined at the time of acquisition  of VLI by discounting  the net cash flows
expected from existing  customer  revenues.  Although VLI does not operate using
long-term contracts, historical experience indicates that customer repeat orders
due to the costs associated with changing suppliers.  VLI has had a relationship
of five  years or more with most of its  currently  significant  customers.  The
expected cash flows were discounted  based on a rate that reflects the perceived
risk of the NCR's,  the  estimated  weighted  average  cost of capital and VLI's
asset mix. We are amortizing the NCR's over a five year life based on the length
of VLI's significant customer relationships.

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,  2005,  we have net  operating  loss carry  forward  aggregating
$858,000 which expires in 2024 and 2025.

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 2005
and 2004  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.


                                       26


                              Pro Forma Disclosures

                      Years Ended January 31, 2005 and 2004



                                                                             2005              2004
                                                                         -----------       -----------
                                                                          Restated
                                                                                     
Net loss, as reported                                                    ($3,193,000)        ($597,000)
Add: Stock based compensation recorded in the financial statements                --             5,000
Deduct: Total stock-based employees compensation
expense determined under fair value based methods
for all awards, net of amounts already recorded                              (59,000)         (145,000)
                                                                         -----------       -----------

Pro forma net loss                                                       ($3,252,000)        ($737,000)
                                                                         ===========       ===========

Basic and diluted loss per share:

Basic and diluted - as reported                                                ($1.49)          ($0.41)

Based and diluted - pro forma                                                  ($1.51)          ($0.50)

Weighted average fair value of options granted                           $       2.23      $      3.58

Risk-free interest rate                                                          3.49%            3.28%

Expected volatility                                                                57%              60%

Expected life                                                                 5 years         10 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.

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.

Pursuant to the Merger Agreement,  in addition to the initial consideration paid
at closing,  the Company shall 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  shall  be  paid  50%  in  the  form  of a
subordinated  note and 50% through  issuance of  additional  common stock of the
Company.

The Merger  Agreement  also  provides  that, if between the closing date and the
payment date of the Additional Cash Consideration, 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 in the merger shall 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).


                                       27


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 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.

Also in connection with the Merger Agreement,  Argan effected certain changes to
its existing credit facility with Bank of America,  N.A. ("BOA"),  pursuant to a
certain  Third  Amendment  to  Financing  and  Security  Agreement  (the  "Third
Amendment"),  dated as of August 31, 2004,  by and among Argan,  SMC and VLI, as
borrowers,  and BOA, as lender; a certain Amended and Restated  Revolving Credit
Note (The  "Amended  Revolving  Note"),  dated August 31, 2004, in the amount of
$3,500,000,  by and among Argan, SMC and VLI, as borrowers,  in favor of BOA, as
lender;  a certain  First  Amendment to Term Note (the "First  Amendment to Term
Note"), dated as of June 29, 2004, by and among Argan and SMC, as borrowers, and
BOA, as lender; and an Additional Borrowers Joinder Supplement (the "Supplement"
and together with the Third Amendment,  the Amended Revolving Note and the First
Amendment to Term Note, the "Financing Document Amendments"), dated as of August
31, 2004,  by and among Argan,  the other  Existing  Borrowers  (as such term is
defined in the Supplement) and VLI, as borrowers,  and BOA, as lender.  Pursuant
to the Financing Document Amendments,  Argan's existing credit facility with BOA
was principally amended to (i) increase the amount available for borrowing under
the revolving  credit  facility from  $1,750,000 to $3,500,000,  (ii) extend the
maturity date of the revolving  credit facility to May 31, 2005,  (iii) increase
the interest rate on the revolving  credit  facility to LIBOR plus 3.25% for the
remaining term of the facility, (iv) increase the interest rate on the term loan
facility  to LIBOR plus 3.45% from July 1, 2004 to the  maturity  date (July 31,
2006),  and (v) subject  borrowings  under the  revolving  credit  facility to a
borrowing base calculation based upon eligible accounts  receivable and eligible
inventory.  The Financing Document  Amendments also amended certain covenants to
require  the  ratio  of  funded  debt  to  earnings  before   interest,   taxes,
depreciation and amortization  ("EBITDA") to not exceed 2.5 to 1 (the first test
date being January 31, 2005) and to require a fixed charge coverage ratio of not
less than 1.25 to 1 (the first test date being  January 31, 2005.) The Financing
Document  Amendments also deleted covenants which had required Argan to maintain
certain minimum levels of liquidity and positive net income during the Company's
fiscal quarters ended July 31, 2004 and October 31, 2004.

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.


                                       28


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.  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."  The Company has  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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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 Thomas.  The  amortization of
the deferred loan issuance  cost will  increase the  Company's  future  interest
expense  through  August 1, 2006,  the maturity date of the note, and reduce net
income.  The  charge  for  compensation  to Thomas was  classified  as  non-cash
compensation expense and increased net loss by $614,000 for the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value at the Company's  interim reporting period ended April 30,
2005 and at the July 31, 2005 settlement date. The Company recorded a fair value
adjustment  of a $22,000 gain and a  $1,609,000  loss at April 30, 2005 and July
31, 2005, respectively, which is also reflected as a change in liability for the
derivative  financial instrument and as a change 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 additional  shares of
the Company's common stock on September 1, 2005.

ACQUISITION OF SOUTHERN MARYLAND CABLE, INC.

On July 17,  2003,  we  acquired  all of the common  stock of SMC, a provider of
telecommunications   and  other   infrastructure   services   including  project
management,   construction   and   maintenance   to  the   Federal   Government,
telecommunications  and  broadband  service  providers,   as  well  as  electric
utilities.

The results of operations of SMC are included in the consolidated results of the
Company from July 17, 2003, the date of the acquisition.  The estimated purchase
price was approximately $4 million in cash, plus the assumption of approximately
$971,000 in debt.

We accounted for the  acquisition of SMC using 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  include  $1,600,000 and
$680,000 allocated to Contractual Customer Relationships ("CCR") and Trade Name,
respectively,  and  $1,680,000 to Goodwill.  We are  amortizing the CCR's over a
weighted  average life of seven years.  The Trade Name was determined to have an
indefinite useful life and is not being amortized.

During the twelve months ended January 31, 2005, we recorded  impairment  losses
for goodwill and intangible assets which were acquired in the acquisition.  (See
further  discussion  of our  resulting  operations  for the twelve  months ended
January 31, 2005.)

SALE OF MANUFACTURING OPERATIONS

On October 31, 2003,  we, as part of our plan to  reallocate  our capital to our
acquisition program, sold PI to WFC. The sales price of approximately $3,500,000
was satisfied in cash of which $300,000 is being held in escrow to indemnify WFC
from any damages resulting from a breach of representations and warranties under
the Stock  Purchase  Agreement.  We  recognized a gain on sale of  approximately
$167,000,  net of income taxes of $506,000.  We utilized net operating losses to
offset the gain on sale and thus,  have no current tax  liability in  connection
with the sale. The $506,000 is the amount of the Puroflow deferred tax assets at
the date of sale related to Puroflow  which has been sold.  In  accordance  with
SFAS No. 144 "Accounting  for the impairment or Disposal of Long-Lived  Assets,"
we classified  the  operating  results of PI as  discontinued  operations in the
accompanying statements of operations.


                                       29


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 the Consolidated Financial Statements.)

The  results  of  the   discontinued   operations  which  are  included  in  the
consolidated statements of operations for the year ended January 31, 2004 are as
follows:



                                                                                  Year Ended
                                                                               January 31, 2004
                                                                                  -----------
                                                                               
Net sales                                                                         $ 5,050,000
Cost of goods sold                                                                  3,834,000
                                                                                  -----------
Gross profit                                                                        1,216,000
Selling, general and administrative                                                 1,701,000
                                                                                  -----------
Loss from discontinued operations                                                    (485,000)
Other expense                                                                         (11,000)
                                                                                  -----------
Loss from discontinued operations before income tax provision                        (496,000)
Income tax provision                                                                  245,000
Gain from discontinued operations, net of income tax provision of $506,000            167,000
                                                                                  -----------
Net loss from discontinued operations                                             $  (574,000)
                                                                                  ===========


RESULTS OF OPERATIONS

COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2005 AND 2004

The following unaudited pro forma statements of operations summarize the results
of our  operations  for the years ended  January  31,  2005 and 2004,  as if the
acquisitions  of VLI and SMC were  completed on February 1, 2003.  The unaudited
pro forma  statements  of  operations  do not include the  operating  results of
Puroflow, which have been reclassified as discontinued operations.

The  unaudited  pro  forma  statements  of  operations  does not  purport  to be
indicative  of the  results  that  would  have  actually  been  obtained  if the
aforementioned acquisitions and disposition had occurred on February 1, 2003, or
that may be  obtained  in the  future.  VLI and SMC  previously  reported  their
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

                                                                      2005             2004
                                                                  ------------     ------------
                                                                    Restated
                                                                             
Net sales                                                         $ 24,131,000     $ 25,124,000
Cost of good sold                                                   18,313,000       18,736,000
                                                                  ------------     ------------
Gross profit                                                         5,818,000        6,388,000
Selling and general and administrative expenses, including
non-cash compensation expense of $614,000                            7,371,000        6,216,000

Impairment loss                                                      1,942,000               --
                                                                  ------------     ------------
(Loss) income from operations                                       (3,495,000)         172,000
Other expense, net                                                    (106,000)         (15,000)
                                                                  ------------     ------------
(Loss) income from continuing operations before income taxes        (3,601,000)         157,000
Income tax (benefit) provision                                        (866,000)          55,000
                                                                  ------------     ------------
Net (loss) income from continuing operations                       ($2,735,000)    $    102,000
                                                                  ============     ============


Pro Forma Net Sales

Pro forma net sales  were  $24,131,000  for the year  ended  January  31,  2005,
compared to pro forma net sales of  $25,124,000  for the year ended  January 31,
2004.  The decrease in pro forma net sales of $993,000 or 4% is due primarily to
a decrease  of $3.6  million  in net sales at SMC  attributed  primarily  to its
largest fixed price contract customer which reduced the level of activity on the
Company's  largest fixed price  contract.  VLI  experienced  approximately  $2.7
million in  increased  combined  revenues  from a new  customer and from its two
largest customers, TriVita Corporation and Cyberwize.com, Inc., which offset, in
part, the revenue decline at SMC.


                                       30


Pro Forma Cost of Goods Sold

For the  year  ended  January  31,  2005,  pro  forma  cost of  goods  sold  was
$18,313,000  or 76% of pro forma net sales compared to $18,736,000 or 75% of pro
forma net sales for the year ended  January  31,  2004.  SMC  experienced  lower
margins due to inefficiencies in downsizing its skilled workforce as the revenue
from its largest fixed price contract customer  declined.  Because initially SMC
expected  the  customer  to resume  normal  levels of  activity  for awarded and
in-process  projects and because rehiring of skilled technicians is problematic,
SMC did not immediately move to reduce its skilled workforce.  VLI experienced a
decrease of cost of goods sold as a percentage  of pro forma net sales of 1% due
to increased pricing which it passed onto its customer base.

Pro Forma Selling, General and Administrative Expenses

For  the  year  ended  January  31,  2005,   pro  forma   selling   general  and
administrative  expenses were  $7,371,000 or 31% of pro forma net sales compared
to  $6,216,000  or 25% of net sales for the year  January  31,  2004.  Pro forma
selling,  general and  administrative  expenses increased in connection with the
WFC claim ($260,000) and for the corporate management team whose efforts focused
on expansion into the  nutraceuticals  business and other industries  aggregated
$1,330,000 for the year ended January 31, 2005 compared to $978,000 for the year
ended January 31, 2004.  The corporate  team was in place for nine months during
the prior fiscal year  compared to twelve  months for the year ended January 31,
2005.  On January 28,  2005,  we entered  into an  agreement  with Kevin  Thomas
(Thomas) with respect to debt  subordination and related  concessions were given
to Thomas in connection with  consummating the agreement.  $614,000 of the costs
associated with the agreement were deemed to be compensation expense to Thomas.

Impairment of Goodwill and Intangibles

During the three months ended July 31, 2004,  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 three
months ended July 31, 2004,  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 has 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.  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 three months ended July
31, 2004.

During the three months ended July 31, 2004,  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.

Pro Forma Other Expense, Net

We had pro forma other  expense,  net of $106,000 for the year ended January 31,
2005  compared  to pro forma  other  expense,  net of $15,000 for the year ended
January 31,  2004.  Other pro forma  expense,  net  increased  primarily  due to
interest expense for borrowings  related to greater levels of inventory  on-hand
at VLI.

Pro Forma Income Tax (Benefit) Provision

AI's  effective  pro forma income tax benefit rate was 24% for the twelve months
ended  January  31,  2005  compared  to a 35% pro forma  income tax rate for the
twelve months ended January 31, 2004. We recorded a $740,000  impairment  charge
related to  goodwill  for the  twelve  months  ended  January  31,  2005 and the
aforementioned  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 pro
forma effective tax rate.


                                       31


LIQUIDITY AND CAPITAL RESOURCES

Cash Position and Indebtedness

We had $1.5 million in working capital at January 31, 2005,  including  $167,000
of cash and cash  equivalents.  In addition we had $1.7 million  available under
credit facilities.

Working  capital  decreased  by $6.8 million to $1.5 million at January 31, 2005
from $8.3 million at January 31, 2004.  This  decrease  was  primarily  due to a
decrease in cash and cash  equivalents  resulting from the acquisition of VLI in
August  2004.  The cash  portion of the  purchase  cost was  approximately  $6.6
million inclusive of all costs associated with the acquisition. In addition, the
liability for derivative financial  instruments of $1.3 million is recorded as a
current liability which will be settled in a non-cash issuance of common stock.

On January 28, 2005, we sold and issued to MSR I SBIC L.P.  (MSR) 129,032 shares
of common stock under a Subscription  Agreement at a purchase price of $7.75 per
share or approximately $1,000,000. Such proceeds were used by the Company to pay
down certain of its  existing  obligations.  We have agreed to issue  additional
shares upon the earlier of (i) the Company's  issuance of  additional  shares of
common stock having an  aggregate  purchase  price of at least $2.5 million at a
price per share less than that paid by MSR  subject to  certain  exclusions;  or
(ii)  July 31,  2005.  The  number  of  additional  shares  to be  issued  would
effectively  reduce  MSR's  purchase  price per common share as set forth in the
Agreement. MSR is an entity controlled by Daniel Levinson, one of our directors.

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 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.

Cash Flows

Net cash used in operations  for the year ended January 31, 2005 was  $2,213,000
compared with $278,000 of cash used in operations for the year ended January 31,
2004.  The increase in cash used in  operations is primarily due to our net loss
and decreases in accounts  payable as we paid vendors for  inventory  shipped to
VLI to support  sales growth and the new adaptogen  products,  much of which was
acquired prior to VLI's acquisition date.

Net cash used for investing  activities  was  $3,892,000  and $4,063,000 for the
twelve months ended January 31, 2005 and 2004,  respectively.  During the twelve
months ended January 31, 2005, we had cash of $6,650,000 used in the purchase of
VLI and cash provided by the net redemption of $3,000,000 in investments. During
the twelve months ended January 31, 2004, we had cash of $3,751,000  used in the
purchase of SMC, cash used in the net purchase of  investments of $3,000,000 and
cash of $3,200,000 provided by the sale of PI.

Net cash provided by financing  activities was $1,060,000 and $9,553,000 for the
twelve months ended January 31, 2005 and 2004,  respectively.  During the twelve
months ended January 31, 2005, we had $1 million in cash provided by the sale of
common  stock to MSR,  cash of  $3,109,000  provided  by the  amended  financing
arrangements with Bank of America, N.A. ("the Bank"), cash of $1,450,000 used in
payments  on the  amended  financing  arrangement,  cash of  $1,104,000  used in
payments  on term  debt  under  credit  lines and cash of  $507,000  used in the
acquisition  of VLI to pay a loan to  former  owner of VLI.  During  the  twelve
months ended January 31, 2004, we had cash of $9,635,000 provided from financing
activities from the private placement of 1.3 million shares of our common stock,
cash of $1,200,000  provided by the financing  arrangement with Bank of America,
cash of  $1,091,000  used in  payment  of term debt on credit  lines and cash of
$215,000 used in payment of PI's credit facilities.

In  August  2003,  we  entered  into  a  financing  arrangement  with  the  Bank
aggregating  $2,950,000 in available  financing in two  facilities - a revolving
line of credit  with  $1,750,000  in  availability,  expiring  July 31, 2004 and
bearing  interest  at LIBOR  plus  2.75%,  and a three  year  term  note with an
original  outstanding balance of $1,200,000,  expiring July 31, 2006 and bearing
interest at LIBOR plus 2.95%.  The proceeds  from the term note were used to pay
off the SMC lines of credit and for working capital.  As of January 31, 2005, we
had $600,000 outstanding under the term note.

In August 2004, the Company agreed to amend the existing financing  arrangements
with the Bank whereby the revolving line of credit was increased to $3.5 million
in maximum availability,  expiring May 31, 2005. 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.  The  aforementioned  three
year note remains in effect.

The amended  financing  arrangement  contains  financial as well as nonfinancial
covenants  including  requiring the ratio of debt to pro forma  earnings  before
interest,  taxes,  depreciation and amortization of 2.5 to 1(with the first test
date being  January 31, 2005) and  requiring a pro forma fixed  charge  coverage
ratio of 1.25 to 1(with the first test date being January 31, 2005),  as well as


                                       32


requirements for bank consent for acquisitions and divestitures.  At January 31,
2005,  the  Company was not in  compliance  with the ratio of debt to EBITDA and
received a waiver from the Bank with respect to the breach of the covenant.  The
Bank has waived  covenant  compliance  for January 31, 2005 and April 30,  2005.
Under the amended financing  arrangement,  the three-year note bears interest at
LIBOR plus 3.45% and the revolving  line of credit bears  interest at LIBOR plus
3.25%

The  amended  financing  arrangement   eliminates  certain  previously  existing
covenants  which had required the Company to maintain  certain minimum levels of
liquidity  and had required the Company to maintain  positive net income  during
the Company's fiscal quarters ended July 31, 2004 and October 31, 2004.

As of  January  31,  2005 the  Company  has  $1,659,000  outstanding  under  the
revolving  line of  credit.  Because  of the  disposition  of PI,  we  deposited
$300,000 as additional  collateral  in a restricted  cash account with the bank.
The Company  continues to pledge the majority of the Company's  assets to secure
the financing arrangements.

Subsequent  to  January  31,  2005,  the  Company  agreed to amend the  existing
financing  arrangements  whereby the  revolving  line of credit was increased to
$4.25 million in maximum availability,  expiring May 31, 2006. 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 criteria. The aforementioned  three-year note remains in effect and
the final monthly scheduled payment of $33,000 is due on July 31, 2006.

The  amended  financing  arrangements  waives the January 31, 2005 and April 30,
2005 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 test date  being July 31,  2005)
and  requiring  pro forma fixed  charge  coverage  ratio not less than 1.25 to 1
(with the next test date being July 31,  2005).  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.  The Bank
has  released  $300,000  to the  Company  which  it was  holding  in  escrow  as
collateral.

At July 31, 2005, the Company failed to comply with the aforementioned financial
covenants. The Bank waived the failure for the measurement period ended July 31,
2005.  For future  measurement  periods,  the Bank  revised the  definitions  of
certain components of the financial covenants to specifically exclude the impact
of items  associated with  derivative  financial  instruments  such as valuation
gains and  losses,  compensation  expense  which are settled  with the  non-cash
issuance of the Company's common stock and non-cash issuance amortization .

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 and operating leases
for our office, warehouse and manufacturing  facilities.  See Note 6 and Note 11
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, 2005 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              $1,143,000      $  662,000      $  391,000      $   90,000              --

Operating Leases             2,456,000         478,000         814,000         450,000      $  714,000
                            ----------      ----------      ----------      ----------      ----------

Total                       $3,599,000      $1,140,000      $1,205,000      $  540,000      $  714,000
                            ==========      ==========      ==========      ==========      ==========



                                       33


Customers

During the twelve  months ended January 31, 2005,  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),   and   CyberWize.com,   Inc.  (C).  SMECO   accounted  for
approximately  23% of  consolidated  net sales  during the twelve  months  ended
January 31, 2005. GD accounted for  approximately  14% of consolidated net sales
during the twelve  months  ended  January  31,  2005.  In fiscal  year 2005,  GD
substantially  reduced its level on certain contracts under which it used SMC as
a  subcontractor.  During  fiscal  2006 we expect an increase in levels on these
certain  contracts under GD. The Federal  Government,  through our contract with
GD, has been a major customer for three years.  TVC and C have been customers of
VLI for  five  and two  years,  respectively,  and  accounted  for 17% and 8% of
consolidated  net sales for the twelve months ended  January 31, 2005.  Combined
SMECO, GD, TVC and C accounted for  approximately  62% of consolidated net sales
during the twelve months ended January 31, 2005.

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 issued FASB Statement
No. 123  (revised  2004),  Share-Based  Payment  ("SFAS  123(R)").  SFAS  123(R)
supersedes  Accounting  Principles  Board Opinion No. 25,  Accounting  for Stock
Issued to Employees 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 the income statement based on their
fair values.  Pro forma  disclosure is no longer an  alternative.  We will adopt
SFAS 123(R) on February 1, 2006. We have not  determined  the impact of adopting
the new standard and are still evaluating the impact.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In the  Company's  2005 Form  10-KSB,  management  concluded  that its  internal
control over financial reporting was effective as of January 31, 2005. Recently,
management  determined that a material  agreement was not disclosed or accounted
for properly in the Company's  consolidated  financial  statements  for the year
ended  January 31, 2005 and that an error  occurred in the  application  of FIFO
(first in, first out) inventory  accounting in the quarter ended April 30, 2005.
As a result,  Management  has concluded  that the  restatement  of the Company's
financial  statements  for the fiscal  year ended  January  31, 2005 and for the
first  quarter  ended April 30, 2005 to account for the  agreement and to adjust
inventory  and cost of goods sold both  constitute  material  weaknesses  in the
Company's internal controls over financial reporting.  Specifically,  management
has identified  deficiencies in the design of the Company's process  surrounding
disclosure controls and in the operating  effectiveness of inventory  accounting
controls.

To address these material  weaknesses  and to mitigate these issues,  management
has  instituted a formalized  process for all members of senior  management  and
outside counsel to review all material agreements and filings with the SEC prior
to their release.  Material  agreements  will be accumulated at their  corporate
offices  for review and  evaluation.  In  addition,  the  Company  will begin to
receive sub certifications from their division level executives.  Management has
also enhanced the quality of their  accounting  expertise at the VLI  subsidiary
and have begun to  incorporate  a more  thorough  and  comprehensive  review and
monitoring process of the Company's subsidiaries financial information.  As part
of this comprehensive review, the Company has enhanced their review of inventory
cost and gross margin to detect errors associated with inventory valuation.

EFFECTS OF INFLATION ON BUSINESS

 Management  believes  that  inflation  has not  had 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.


                                       34


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

      Consolidated Balance Sheets at January 31, 2005 and 2004.

      Consolidated  Statements  of  Operations  for each of the two years in the
      period ended January 31, 2005.  Consolidated  Statements of  Stockholders'
      Equity for each of the two years in the period ended January 31, 2005.

      Consolidated  Statements  of Cash  Flows  for each of the two years in the
      period ended January 31, 2005.

      Notes to Consolidated Financial Statements.


                                       35


   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,  2005  and  2004,  and  the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
two years in the period ended  January 31, 2005.  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,  2005  and  2004,  and the  consolidated  results  of its
operations  and its cash  flows  for each of the two years in the  period  ended
January  31,  2005,  in  conformity  with  U.S.  generally  accepted  accounting
principles.

As  discussed  in  Note  2  to  the  consolidated   financial  statements,   the
consolidated  financial statements for the year ended January 31, 2005 have been
restated.

                                                 /s/ ERNST & YOUNG LLP

McLean, Virginia
April 8, 2005,
except for Note 2, as to which the date is
November 21, 2005.


                                       36


                                   ARGAN, INC.
                           Consolidated Balance Sheets



                                                               January 31, 2005     January 31, 2004
                                                               ================     ================
ASSETS                                                          Restated - See
                                                                    Note 2
CURRENT ASSETS:
                                                                                 
    Cash and cash equivalents                                    $    167,000          $  5,212,000
    Investments                                                            --             3,000,000
    Accounts receivable, net                                        2,951,000             1,523,000
    Receivable from affiliated entity, net                            112,000                    --
    Escrowed cash                                                     604,000               601,000
    Estimated earnings in excess of billings                          323,000               514,000
    Inventories, net                                                3,465,000                    --
    Prepaid expenses and other current assets                         622,000               150,000
                                                                 ------------          ------------
TOTAL CURRENT ASSETS                                                8,244,000            11,000,000
                                                                 ------------          ------------

Property and equipment, net                                         2,703,000             1,913,000
Issuance cost for subordinated debt                                   501,000                    --
Other assets                                                           35,000                    --
Contractual customer relationships, net                               564,000             1,476,000
Trade name                                                            224,000               680,000
Proprietary formulas, net                                           2,153,000                    --
Non-contractual customer relationships, net                         1,833,000                    --
Non-compete agreement, net                                          1,650,000                    --
Goodwill                                                            7,350,000             1,680,000
                                                                 ------------          ------------
TOTAL ASSETS                                                     $ 25,257,000          $ 16,749,000
                                                                 ============          ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                             $  1,803,000          $    918,000
    Billings in excess of estimated earnings                               --                20,000
    Due to affiliates                                                  47,000                    --
    Accrued expenses                                                1,187,000               488,000
    Liability for derivative financial instruments                  1,254,000                    --
    Deferred income tax liability                                     144,000               188,000
    Line of credit                                                  1,659,000                    --
    Current portion of long-term debt                                 662,000             1,092,000
                                                                 ------------          ------------
TOTAL CURRENT LIABILITIES                                           6,756,000             2,706,000
                                                                 ------------          ------------
Deferred income tax liability                                       2,520,000             1,064,000
Long-term debt                                                        481,000               109,000
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 - 2,762,078 shares issued
     at January 31, 2005 and 1,806,046 shares issued at
     January 31, 2004 and 2,758,845 shares outstanding
     at January 31, 2005 and 1,802,813 shares outstanding
     at January 31, 2004                                              414,000               270,000
   Warrants outstanding                                               849,000               849,000
   Additional paid-in capital                                      19,800,000            14,121,000
   Accumulated deficit                                             (5,530,000)           (2,337,000)
   Treasury stock at cost:
           3,233 shares at January 31, 2005 and 2004                  (33,000)              (33,000)
                                                                 ------------          ------------
TOTAL STOCKHOLDERS' EQUITY                                         15,500,000            12,870,000
                                                                 ------------          ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 25,257,000          $ 16,749,000
                                                                 ============          ============


                             See Accompanying Notes


                                       37


                                   ARGAN, INC.
                      Consolidated Statements of Operations



                                                                         Years Ended January 31
                                                                         2005               2004
                                                                     ============       ============
                                                                    Restated - See
                                                                        Note 2
                                                                                    
Net sales                                                            $ 14,518,000         $  6,780,000
Cost of goods sold                                                     11,333,000            5,184,000
                                                                     ------------         ------------
Gross profit                                                            3,185,000            1,596,000

Selling, general and administrative expenses, includes non-cash
     compensation expense of $614,000                                   5,424,000            1,912,000
Impairment loss                                                         1,942,000                   --
                                                                     ------------         ------------
     Loss from operations                                              (4,181,000)            (316,000)
                                                                     ------------         ------------

Interest expense                                                          124,000               47,000
Other income, net                                                          67,000               51,000
                                                                     ------------         ------------
    Loss from continuing operations before income taxes                (4,238,000)            (312,000)
Income tax benefit                                                      1,045,000              289,000
                                                                     ------------         ------------
Loss from continuing operations                                        (3,193,000)             (23,000)
                                                                     ------------         ------------
Loss from discontinued operations, net of income tax
      provision of $751,000                                                    --              574,000
                                                                     ------------         ------------
Net loss                                                              ($3,193,000)           ($597,000)
                                                                     ============         ============
Basic and diluted loss per share:
   Continuing operations                                             $    ( 1.49)         $     ( 0.02)
                                                                     ============         ============
   Discontinued operations                                                     --         $      (0.39)
                                                                     ============         ============
   Net loss                                                          $      (1.49)        $      (0.41)
                                                                     ============         ============

Weighted average number of shares outstanding:                          2,149,000            1,480,000
                                                                     ============         ============


                             See Accompanying Notes


                                       38


                                   ARGAN, INC.
                 Consolidated Statements of Stockholders' Equity
                  For the Years Ended January 31, 2005 and 2004




                                                                                                         NOTES
                                                                                                      RECEIVABLE
                                                                                                         FROM
                                             COMMON                      ADDITIONAL    ACCUMULATED    STOCKHOLDERS
                                             STOCK         WARRANTS       PAID-IN        DEFICIT      AND TREASURY
                              SHARES       PAR VALUE     OUTSTANDING      CAPITAL         TOTAL          STOCK           TOTAL
                            ----------   -------------   -----------   -------------   ------------   ------------   ------------
                                                                         Restated -     Restated -                    Restated -
                                                                         See Note 2     See Note 2                    See Note 2
                                                                                                
Balance at
  January 31, 2003             494,306   $      74,000   $        --   $   5,502,000   $ (1,740,000)  $    (39,000)  $   3,797,000

Private placement,
  net of offering
  cost of $472,000           1,303,974         196,000       849,000       8,590,000             --             --       9,635,000


Exercise of stock options        4,533              --            --          29,000             --             --          29,000

Other                               --              --            --              --             --          6,000           6,000

Net loss                            --              --            --              --       (597,000)            --        (597,000)
                            ----------   -------------   -----------   -------------   ------------   ------------   -------------

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 Options        2,000           1,000            --          11,000             --             --          12,000


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
                            ==========   =============   ===========   =============   ============   ============   =============


                             See Accompanying Notes


                                       39


                                   ARGAN, INC.
                      Consolidated Statements of Cash Flows



                                                                      Years Ended January 31
                                                                      2005             2004
                                                                  ==============    ============
CASH FLOWS FROM OPERATING ACTIVITIES:                             Restated - See
                                                                      Note 2

                                                                              
Net loss                                                          $   (3,193,000)    $  (597,000)
Adjustments to reconcile net loss to net cash
 used in operating activities:

  Depreciation and amortization                                        1,377,000         309,000
  Impairment loss on goodwill and intangibles                          1,942,000              --
  Non-cash stock option compensation expense                                  --           5,000
  Non-cash compensation expense                                          614,000              --
  Deferred income taxes                                               (1,108,000)       (320,000)

Changes in operating assets and liabilities:
  Accounts receivable, net                                               (57,000)       (109,000)
  Receivable from affiliated entity, net                                 (13,000)             --
  Estimated earnings in excess of billings                               191,000        (337,000)
  Due to Affiliate                                                        47,000              --
  Inventories, net                                                      (218,000)             --
  Prepaid expenses and other current assets                              (99,000)       (345,000)
  Accounts payable and accrued expenses                               (1,640,000)        473,000
  Billings in excess of estimated earnings                               (20,000)        (50,000)
  Other                                                                  (36,000)             --
  Non-cash charges and working capital changes of
   discontinued operations                                                    --         693,000
                                                                  --------------    ------------
    Net cash used in operating activities                             (2,213,000)       (278,000)
                                                                  --------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Southern Maryland Cable, Inc., net                              --      (3,751,000)
  Proceeds from sale of subsidiary, net of escrow
   funds held                                                                 --       3,200,000
  Purchase of Vitarich Laboratories, Inc., net                        (6,650,000)             --
  Purchase of investments                                             (9,000,000)    (30,000,000)
  Redemptions of investments                                          12,000,000      27,000,000
  Purchases of property and equipment                                   (242,000)       (424,000)
  Investing activities of discontinued operations                             --         (88,000)
                                                                  --------------    ------------
    Net cash used in investing activities                             (3,892,000)     (4,063,000)
                                                                  --------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from private placement  of common stock,
            net of offering costs                                             --       9,635,000
  Proceeds from sale of common stock                                   1,000,000              --
  Proceeds from exercise of stock options                                 12,000          24,000
  Proceeds from long-term debt facility                                       --       1,200,000
  Proceeds from short-term debt                                        3,109,000              --
  Payments on short-term debt                                         (1,450,000)             --
  Principal payments on credit lines                                  (1,104,000)     (1,091,000)
  Payment of former owner's loan to Vitarich Laboratories, Inc.         (507,000)             --
  Financing activities of discontinued operations                             --        (215,000)
                                                                  --------------    ------------
    Net cash provided  by financing activities                         1,060,000       9,553,000
                                                                  --------------    ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         5,212,000              --
                                                                  --------------    ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                  (5,045,000)      5,212,000
                                                                  --------------    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                          $      167,000    $  5,212,000
                                                                  ==============    ============
                             See Accompanying Notes


                                       40


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



                                                               Years Ended January 31
                                                               2005              2004
                                                           ==============    ============
                                                           Restated - See
                                                              Note 2
                                                                       
Supplemental disclosure of non-cash investing and
  Financing activities:
Cash paid during the period for:
  Interest                                                 $      124,000    $     36,000
                                                           ==============    ============
  Income taxes                                             $      373,000    $    101,000
                                                           ==============    ============
Issuance of warrants                                                   --    $    849,000
                                                           ==============    ============
Acquisitions of VLI and SMC:
Fair value of net assets acquired
  Accounts receivable                                      $    1,470,000    $  1,590,000
  Inventories                                                   3,247,000              --
  Other current assets                                            372,000         101,000
  Property and equipment                                        1,064,000       1,653,000
  Other non-current assets                                         42,000           6,000
                                                           --------------    ------------
  Total non-cash assets                                         6,195,000       3,350,000

  Accounts payable and accrued expenses                         3,209,000         775,000
  Short-term borrowings and current maturities of debt          1,191,000         427,000
  Other current liabilities                                            --         555,000
  Other non-current liabilities                                 2,564,000       1,546,000
  Long-term debt                                                  371,000         544,000
                                                           --------------    ------------
                                                                7,335,000       3,847,000

  Net non-cash assets acquired                                 (1,140,000)       (497,000)
  Cash and cash equivalents                                            --         288,000
                                                           --------------    ------------
  Fair value of net assets acquired                            (1,140,000)       (209,000)

                                                           --------------    ------------
  Excess of costs over fair value of net assets acquired       12,740,000       3,960,000

                                                           --------------    ------------
  Purchase price                                           $   11,600,000    $  3,751,000
                                                           ==============    ============

  Cash paid, net                                           $    6,650,000    $  3,751,000
  Stock issued                                                  4,950,000              --
                                                           --------------    ------------
  Purchase Price                                           $   11,600,000    $  3,751,000
                                                           ==============    ============


                             See Accompanying Notes


                                       41


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 from the breach
of representations and warranties under the Stock Purchase Agreement.  (See Note
12)

Management's Plans, Liquidity and Business Risks

As of January 31, 2005, the Company had an accumulated  deficit of $5.5 million.
Further,  as a result of recurring losses, the Company has experienced  negative
cash flows from  operations.  At January 31, 2005,  the Company had $1.7 million
available under its revolving line of credit with the Bank. The Company operates
in two unique and  distinct  markets.  The market for  nutritional  products  is
highly  competitive  and the telecom  and  infrastructure  services  industry is
fragmented and also very competitive.  The successful execution of the Company's
business  plan is dependent  upon the  Company's  ability to integrate  acquired
businesses and acquired 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 January 28, 2005, the Company  raised  approximately  $1 million  through the
issuance of 129,032  shares of common stock to an investor.  Such  proceeds were
used by the Company to pay down certain of its existing obligations. Pursuant to
the Agreement, the Company has agreed to issue additional shares of common stock
to the Investor  upon the earlier of (i) the  Company's  issuance of  additional
shares of common  stock  having an  aggregate  purchase  price of at least  $2.5
million  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  prior to 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 shares previously issued.  (See Note
9)

The Company also entered into an agreement  with the former owner of VLI,  Kevin
J.  Thomas  (Thomas)  to delay the  timing of the  payment  of  contingent  cash
consideration  to the  earlier of August 1, 2006 or the  Company's  issuance  of
additional  equity having an aggregate  purchase  price of more than $1 million,
Thomas would be paid the  remaining  contingent  consideration  up to the excess
over that amount  provided  that such payment  would not put Argan in default of
its current financing arrangement with the Bank. (See Note 4)

The  Company's  line of credit  was due to expire on May 31,  2005.  On April 8,
2005,  the  Company  renewed  its line of credit  with the Bank,  extending  the
maturity  date to May 31, 2006.  The  availability  under the line of credit was
increased to $4.25 million and the Bank released $300,000 in cash to the Company
which it was  holding in escrow as  collateral.  At July 31,  2005,  the Company
failed to comply with certain of its  financial  covenants.  The Bank waived the
failure for July 31, 2005. (See Note 8)


                                       42


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 - RESTATEMENT

On September 19, 2005, senior management and the Audit Committee of the Board of
Directors of the Company concluded that the Company's  financial  statements for
the fiscal year ended January 31, 2005 should be restated.

The  restatements  relate to the Company's  amendment of its  accounting  for an
investment made by MSR I SBIC, L.P. ("MSR") on January 28, 2005  ("Investment"),
for the  value  of the  shares  issued  in the  acquisition  of VLI,  and for an
agreement  entered  into with Thomas on January 28, 2005 with  respect to a debt
subordination  and  related  concessions  ("Concessions")  given  to  Thomas  in
connection with consummating the agreement as described below.

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  prior to 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 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 is subject to
adjustment  for  changes in fair  value  subsequent  to  issuance.  The  Company
recorded a fair value  adjustment  of a $1,000 gain and a $343,000 loss at April
30, 2005 and July 31, 2005 respectively,  which is also reflected as a change in
liability for the derivative  financial  instruments.  The fair value adjustment
was recorded as a change in the Company's other expenses or income and net loss.
The liability for derivative  financial  instruments related to the Investor was
settled as a non-cash  transaction  by the issuance of additional  shares of the
Company's common stock on August 13, 2005.

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 Company also assumed $1.6 million in debt. The value of the shares issued in
the  acquisition of VLI has been revised to reflect the price per share of $6.00
of the Company's common stock at August 31, 2004 as opposed to $6.22, the quoted
market price of the stock two days before and after the  acquisition  date.  The
impact of this  change  was to reduce  the  amount of  goodwill  and  additional
paid-in capital by $182,000. 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. (See
Note 4) 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.



                                       43


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.  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." The
Company has 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.

$501,000  of the  charge  related  to the  liability  for  derivative  financial
instruments is 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, 2006,  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 increased net loss by $614,000 for the year January 31,
2005.  The  derivative  financial  instrument  will be subject to adjustment for
changes in fair value at the Company's  interim reporting period ended April 30,
2005 and at July 31,  2005.  The fair value  adjustment  will be  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  additional  shares of the  Company's  common  stock on September 1,
2005.

As a result of the  revised  accounting  for  Investment  and  Concessions,  the
Company restated its financial statements,  which resulted in an increase in net
loss of  $614,000  and an increase in loss per share of $0.29 for the year ended
January 31, 2005.

The following  tables set forth the effects of the  restatement  on certain line
items within the Company's consolidated balance sheet as of January 31, 2005 and
consolidated statement of operations for the year ended January 31, 2005.



                                                       Previously
                                                        Reported        Restated
                                                      ============    ============
                                                                
Balance Sheet
Issuance cost for subordinated debt                   $         --    $    501,000
Goodwill                                              $  7,532,000    $  7,350,000
Total Assets                                          $ 24,938,000    $ 25,257,000
Liability for derivative financial instruments                  --    $  1,254,000
Total current liabilities                             $  5,502,000    $  6,756,000
Accumulated deficit                                   ($ 4,916,000)   ($ 5,530,000)
Additional paid-in capital                            $ 20,121,000    $ 19,800,000
Total Stockholders' Equity                            $ 16,435,000    $ 15,500,000
Total Liabilities and Stockholders' Equity            $ 24,938,000    $ 25,257,000

Statement of Operations
Selling, general and administrative expenses          $  4,810,000    $  5,424,000
Loss from continuing operations before income taxes   ($ 3,624,000)   ($ 4,238,000)
Loss from continuing operations                       ($ 2,579,000)   ($ 3,193,000)
Net Loss                                              ($ 2,579,000)   ($ 3,193,000)
Basic and diluted loss per share:
   Continuing Operations                              ($      1.20)   ($      1.49)
   Net Loss                                           ($      1.20)   ($      1.49)



                                       44


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  consolidated   financial   statements  include  AI  and  its  wholly  owned
subsidiaries. The preparation of consolidated financial statements in conformity
with GAAP  requires  management to make use of estimates  and  assumptions  that
affect the reported amount of assets and liabilities,  revenues and 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 and deferred taxes. Actual results could
differ from these estimates.

The Company's fiscal year ends on January 31. The results of companies  acquired
or  disposed  of during  the year are  included  in the  consolidated  financial
statements  from  the  effective  date of the  acquisition  or up to the date of
disposal.  All  significant  intercompany  balances and  transactions  have been
eliminated in consolidation.  The Company reflects, as discontinued  operations,
the  disposition  of its  wholly  owned  subsidiary,  PI, in 2003  according  to
Statement of Financial  Accounting  Standards No. 144 "Accounting for Impairment
or Disposal of Long-Lived Assets." (See Note 16)

Cash and Equivalents - Cash and 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.

Investments - The Company acquires various  financial  instruments with original
maturities  greater than three months.  The Company  considers  these  financial
instruments to be short-term investments.

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.

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

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.

The timing of billing to customers  varies  based on  individual  contracts  and
often  differs from the period of revenue  recognition.  These  differences  are
included in estimated earnings.

The retainage included in accounts  receivable,  net in the accompanying balance
sheets  represents  amounts  withheld by contract  with  respect to SMC accounts
receivable  was $53,000 at January 31,  2005 and none at January 31,  2004.  The
Company expects to collect substantially all 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 $13,000 at January 31, 2005 and none at
January 31, 2004.

Cost  Recognition  -  Southern  Maryland  Cable,  Inc. - Direct  contract  costs
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, 2005, the Company did not have any  uncompleted  contracts for which
it anticipated a significant loss.

Inventories  -  Inventories  are  stated  at the  lower of cost or  market  (net
realizable  value).  Cost  is  determined  on  the  weighted  average  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.



                                       45


Inventories at January 31, 2005 consist of the following:

                Raw materials     $3,206,000

                Work-in-process       61,000

                Finished goods       198,000
                                  ----------

                                  $3,465,000
                                  ==========

Property and Equipment - Property and  equipment are stated at historical  cost.
Depreciation is provided  principally  using the  straight-line  method over the
estimated  useful lives of the assets,  which are generally  from five to twenty
years. Maintenance and repairs (totaling $99,000 and $19,000 for the years ended
January 31, 2005 and 2004,  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.

Impairment of Long-Lived  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
discounted  present value of expected  future cash flows,  appraisals,  or other
pricing models as appropriate.

Goodwill  and  Other  Intangible  Assets - In June  2001,  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS")  No.  142  "Goodwill  and  Other  Intangible   Assets."  SFAS  No.  142
establishes  standards for goodwill and other  intangible  assets  acquired in a
business  combination,  eliminates  amortization  of  goodwill,  and sets  forth
methods  to  periodically  evaluate  goodwill  and other  intangible  assets for
impairment.  In accordance with SFAS No. 142, the Company  annually  conducts on
November 1, a review of its  Goodwill and other  intangible  assets to determine
whether their carrying value exceeds their fair market value.

The Company uses an estimate of future cash flows which are discounted  based at
a rate that reflects  perceived  risk of the Company and the estimated  weighted
average cost of capital.  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.  The Company  recorded an impairment
loss with respect to goodwill and intangible  assets for the twelve months ended
January 31, 2005. (See Note 5)

Contractual Customer  Relationships - The fair value of the Contractual Customer
Relations  (CCR's)  was  determined  at the  time of the  acquisition  of SMC by
discounting the cash flows expected from the Company's  continued  relationships
with  their  most  significant  customers.  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 reflected periods
beyond  those of the current  contracts in place.  The expected  cash flows were
discounted  based on a rate that reflects the perceived  risk of the CCR's,  the
estimated  weighted  average cost of capital and SMC's asset mix. The Company is
amortizing  the CCR's over a seven  year  weighted  average  life given the long
standing  relationships  SMC had with Verizon and SMECO. The Company recorded an
impairment  loss with respect to CCR's for the twelve  months ended  January 31,
2005. (See Note 5)

Trade  Name - The  fair  value  of the SMC  Trade  Name  was  estimated  using a
relief-from-royalty methodology. The Company has determined that the useful life
of the Trade Name is 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.

The Company,  using the  relief-from-royalty  method described above,  tests 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. The Company recorded an impairment loss with respect to Trade
Name for the twelve months ended January 31, 2005. (See Note 5)

Proprietary  Formulas - The Fair Value of the  Proprietary  Formulas  (PF's) was
determined at the time of the  acquisition of VLI by discounting  the cash flows
expected from developed  formulations based on relative technology  contribution
and estimates  regarding  product  lifecycle and development costs and time. The
expected cash flows were discounted based on the estimated  contributory life of
the proprietary  formulations  utilizing estimated historical product lifecycles
and changes in technology.  The Company is amortizing the PF's over a three-year
life based on the estimated  contributory  life of the proprietary  formulations
utilizing estimated historical product lifecycles and changes in technology.



                                       46


Non-Contractual  Customer  Relationships - The fair value of the Non-Contractual
Customer  Relationships (NCR's) was determined at the time of acquisition of VLI
by  discounting  the net cash flows  expected from existing  customer  revenues.
Although VLI does not operate using long-term contracts,  historical  experience
indicates that customers repeat orders due to the costs associated with changing
suppliers.  VLI has had a  relationship  of five  years or more with most of its
currently significant  customers.  The expected cash flows were discounted based
on a rate that reflects the perceived risk of the NCR's, the estimated  weighted
average cost of capital and VLI's asset mix. The Company is amortizing the NCR's
over a  five-year  life  based  on the  length  of  VLI's  significant  customer
relationships.

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.  The  Company is  amortizing  the NCA over five years,  the
length of the non-compete agreement.

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
$12,000 of research  and  development  expenses  during the twelve  months ended
January 31, 2005.

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, 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.

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.

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.

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.

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 four largest  customers,  Southern Maryland Electric  Cooperative  (SMECO),
TriVita Corporation (TVC),  General Dynamics Corp. (GD) and CyberWize.com,  Inc.
(C) accounted for 23%, 17%, 14%, and 8%,  respectively of consolidated net sales
for the year ended  January 31,  2005.  AI's three  largest  customers,  Verizon
Communications,  SMECO and GD account  for 19%,  26% and 51%,  respectively,  of
consolidated  net sales at January  31,  2004.  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.



                                       47



Income Per Share - (Loss)  income per share is computed  by  dividing  loss from
continuing operations, income (loss) from discontinued operations and net income
(loss) by the  weighted  average  number of common  shares  outstanding  for the
period.  Outstanding  stock options and warrants were  anti-dilutive  during the
years ended January 31, 2005 and 2004 due to the Company's loss from  continuing
operations.

Stock Option Plans - For the year ended January 31, 2004,  $5,000 in stock-based
compensation  cost is reflected in net loss for stock options whose vesting date
was  accelerated and which were  exercised.  All remaining  option grants had an
exercise  price  equal to or  greater  than the market  value of the  underlying
common  stock on the date of grant;  consequently  no cost was  reflected in net
loss for the year ended January 31, 2005.

The Company continues to apply APB Opinion No. 25 and related interpretations to
its stock-based  compensation  awards.  The fair value of the options granted in
fiscal  2005 and 2004  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 Pro Forma disclosures required by SFAS No. 148 are reflected below:



                                       48


                              Pro Forma Disclosures
                         For the years Ended January 31

                                                    2005              2004
                                               ==============     ===========
                                                  Restated -
                                                 See Note 2
Net loss, as reported                          ($   3,193,000)    ($  597,000)
Add:  Stock-based compensation recorded
  in the financial statements                              --           5,000
Deduct:  Total stock-based employee
  compensation expense determined under fair
  value based methods                                 (59,000)       (145,000)
                                               --------------     -----------

Pro forma net loss                             ($   3,252,000)    ($  737,000)
                                               ==============     ===========
Basic and diluted loss per share:

Basic and diluted - as reported                ($        1.49)    ($     0.41)
                                               ==============     ===========
Basic and diluted - pro forma                  ($        1.51)    ($     0.50)
                                               ==============     ===========

Weighted average fair value of options
  granted                                      $         2.23     $      3.58
Risk-free interest rate                                  3.49%           3.28%
Expected volatility                                        57%             60%

Expected life                                         5 years        10 years

Dividend yield                                              0%              0%


                                       49


IMPACT OF CHANGES IN ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board issued FASB Statement
No. 123 (revised 2004).  Share-Based Payment ("SFAS 123(R) supersedes Accounting
Principles  Board Opinion No. 25,  Accounting  for Stock Issued to Employees 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 the income  statement based on their fair values.  Pro forma
disclosure is no longer an alternative. AI will adopt SFAS 123(R) on February 1,
2006. The Company has not determined the impact of adopting the new standard and
is continuing its analysis of the impact.

NOTE 4 - ACQUISITIONS

Vitarich Laboratories, Inc.

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  customer
and exclusive vendor relationships and its well established position in the fast
growing global nutrition  industry which supports the premium paid over the fair
value of the tangible assets acquired.

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 estimated purchase price 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 contains provisions for 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 are met. To meet the EBITDA thresholds,  VLI must
have  adjusted  EBITDA  in  excess  of $2.3  million.  Results  in excess of the
adjusted  EBITDA  threshold  serve  as the  basis to  determine  the  amount  of
additional payment. (See Note 17)

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 will be recorded as an increase
in goodwill. (See Note 17)

The  Company's  preliminary  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  $6,410,000,  $2,500,000,  $2,000,000  and
$1,800,000,  respectfully,  allocated to goodwill,  Proprietary  Formulas  (PF),
Non-Contractual  Customer Relationships (NCR) and a Non-Compete Agreement (NCA).
The Company is  amortizing  PF over three years and NCR and NCA over five years.
Accumulated amortization is $347,000, $167,000 and $150,000 at January 31, 2005,
respectively  for PF, NCR and NCA. The  aggregate  amortization  for each of the
five succeeding years is:

2006   $1,593,000

2007    1,593,000

2008    1,246,000

2009      760,000

2010      444,000
       ----------

       $5,636,000
       ==========



                                       50


On January 31, 2005,  the Company  entered into a Debt  Subordination  Agreement
("Subordination Agreement") with Thomas, SMC (and together with the Company, the
"Debtor")  and  Bank  of  America,   N.A.  ("Lender")  to  reconstitute  certain
Additional  Consideration  that Debtor will owe to Thomas as subordinated  debt.
(See Note 2)

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.

Southern Maryland Cable, Inc.

On July 17,  2003,  the  Company  acquired  all of the  common  stock of SMC,  a
provider  of  telecommunications  and other  infrastructure  services  including
project  management,  construction  and  maintenance to the Federal  Government,
telecommunications  and  broadband  service  providers,   as  well  as  electric
utilities.

The  results  of  operations  of  the  acquired  company  are  included  in  the
consolidated  results  of the  Company  from  July  17,  2003,  the  date of the
acquisition. The purchase price was approximately $3.8 million in cash, plus the
assumption of approximately $971,000 in debt.

The Company  accounted for the  acquisition of SMC using the purchase  method of
accounting  whereby  the  excess  of cost  over  the  net  amounts  assigned  to
identifiable  assets acquired and  liabilities  assumed is allocated to goodwill
and  intangible  assets based on their  estimated fair values.  Such  intangible
assets  include  $1,600,000  and  $680,000  allocated  to  Contractual  Customer
Relationships ("CCR") and Trade Name, respectively,  and $1,680,000 to Goodwill.
The Company is amortizing  the CCR over a weighted  average life of seven years.
As of January 31, 2005,  accumulated  amortization  was $290,000,  excluding the
impairment loss. The Trade Name was determined to have an indefinite useful life
and is not being amortized.  SMC's amortization of CCR for each of the next four
years ended January 31, 2006,  2007,  2008 and 2009 is $103,000 and for the year
ended January 31, 2010 is $69,000.

The following unaudited pro forma statements of operations for the twelve months
ended January 31, 2005 and 2004 does not purport to be indicative of the results
that would have actually been obtained if the  aforementioned  acquisitions  had
occurred  on February  1, 2003,  or that may be obtained in the future.  The pro
forma presentation also excludes the discontinued  operations of PI. VLI and SMC
previously  reported  their 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 that
the  shares  issued in  connection  with the  private  offering  in April  2003,
discussed  in Note 9, and the  825,000  shares  issued  in  connection  with the
acquisition of VLI were outstanding since February 1, 2003.



                                                                   Years Ended January 31
Pro Forma Statement Operations                                     2005              2004
                                                               ==============    ============
                                                               Restated - See
                                                                   Note 2
                                                                           
Net Sales                                                      $   24,131,000    $ 25,124,000
Cost of goods sold                                                 18,313,000      18,736,000
                                                               --------------    ------------
Gross profit                                                        5,818,000       6,388,000
Selling, general and administrative expenses, including
    non-cash compensation expense of $614,000                       7,371,000       6,216,000
Impairment loss                                                     1,942,000              --
                                                               --------------    ------------
  (Loss) income from operations                                    (3,495,000)        172,000
Other expense, net                                                   (106,000)        (15,000)
                                                               --------------    ------------
(Loss) income from continuing operations before income taxes       (3,601,000)        157,000
Income tax (benefit) provision                                       (866,000)         55,000
                                                               --------------    ------------
Net (loss) income from continuing operations                   ($   2,735,000)   $    102,000
                                                               ==============    ============
(Loss) Income per share:

      - basic                                                  ($        1.04)   $       0.04
                                                               --------------    ------------
      - diluted                                                ($        1.04)   $       0.04
                                                               --------------    ------------
Weighted average shares outstanding:
                                                               --------------    ------------
      - basic                                                       2,631,000       2,624,000
                                                               --------------    ------------
      - diluted                                                     2,631,000       2,624,000
                                                               --------------    ------------



                                       51


NOTE 5 - IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

During the three months ended July 31, 2004,  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 three
months  ended  July 31,  2004,  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 three months ended July 31, 2004.

During the three months ended July 31, 2004,  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

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  "Subscription  Agreement").  The Shares were issued at a purchase
price of $7.75  per  share  ("Share  Price"),  yielding  aggregate  proceeds  of
$999,998.  (See Notes 2 and 18) 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  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.

In addition, the Company has agreed, pursuant to a Registration Rights Agreement
dated as of January  28,  2005  between  the  Company  and  Investor,  to file a
registration  statement relating to the resale of the Shares by Investor, or any
of Investor's successors or permitted assigns, not later than 180 days following
January 28, 2005, subject to certain  conditions.  The resale of the shares were
registered  under  the  Securities  Act of 1933  on Form  S-3,  filed  with  the
Securities and Exchange Commission on February 25, 2005.

The Company leases  administrative,  manufacturing and warehouse facilities from
individuals  who are  officers  of SMC and VLI.  The total  expense  under these
arrangements  were $134,000 and $72,000 for the years ended January 31, 2005 and
2004,   respectively.   The  future  minimum  lease   commitments   under  these
arrangements  during each fiscal year ended January 31 through fiscal year ended
January 31, 2010 is:

            2006   $  290,000

            2007      292,000

            2008      231,000

            2009      231,000

            2010      152,000

Thereafter            714,000
                   ----------
                   $1,910,000
                   ==========



                                       52


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 $47,000 in
purchases under the supply agreement for the period from acquisition (August 31,
2004) through  January 31, 2005. At January 31, 2005, AI had an $8,000 note with
the aforementioned seller-owned entity.

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 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.  At
January 31, 2005, the affiliated entity owed $112,000 to VLI net of an allowance
for doubtful accounts of $84,000.

NOTE 7 - PROPERTY AND EQUIPMENT

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

                                                                     Estimated
                                        2005          2004         Useful Lives
                                    -----------    -----------    -------------

Leasehold improvements              $   400,000    $   184,000    5 to 20 years
Machinery and equipment               2,093,000      1,079,000    5 to 7 years
Trucks                                  889,000        823,000    5 to 7 years
                                    -----------    -----------
                                      3,382,000      2,086,000

Less accumulated depreciation          (679,000)      (173,000)
                                    -----------    -----------
Property and equipment, net         $ 2,703,000    $ 1,913,000
                                    ===========    ===========

Depreciation  expense for the fiscal  years ended  January 31, 2005 and 2004 was
$508,000, and $173,000, respectively.

NOTE 8 - DEBT

In August,  2003, the Company entered into a financing  arrangement with Bank of
America,  N.A.  ("Bank")  aggregating  $2,950,000 in available  financing in two
facilities - a revolving line of credit with $1,750,000 in availability,  having
an initial expiration of July 31, 2004 and bearing interest at LIBOR plus 2.75%,
and a three year term note with an original  outstanding  balance of $1,200,000,
expiring  July 31, 2006 and bearing  interest at LIBOR plus 2.95%.  The proceeds
from the term note were used to pay off the SMC lines of credit and for  working
capital.

In August 2004, the Company agreed to amend the existing financing  arrangements
with the Bank whereby the revolving line of credit was increased to $3.5 million
in maximum availability,  expiring May 31, 2005. 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.  On April 8, 2005,  the
Company  agreed  to amend  the  existing  financing  arrangements  with the Bank
whereby the  revolving  line of credit was  increased to $4.25  million  maximum
availability,  expiring May 31, 2006. 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  met  certain  Bank  criteria.   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, 2005,  the Company
had $600,000  outstanding  under the term note and $1,659,000  outstanding under
the revolving line of credit.

The  amended  financing  arrangement  of  August  2004  contains  financial  and
nonfinancial  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 first test date being January 31, 2005); and requiring
a pro forma  fixed  charge  coverage  ratio of not less than 1.25 to 1 (with the
first test date being January 31, 2005);  and bank consent for  acquisitions and
divestitures.  The Company  continues  to pledge the  majority of the  Company's
assets to secure the financing  arrangements.  At January 31, 2005,  the Company
was  not in  compliance  with  the  ratio  of  debt  to  EBITDA.  The  financing
arrangements  amended on April 8, 2005 waives the January 31, 2005 and April 30,
2005 measurement 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 test date being July
31, 2005);  and requiring  pro forma fixed charge  coverage  ratio not less than
1.25 to 1 (with the next  test  date  being  July 31,  2005).  (See Note 2) 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.  In conjunction with the amendment,  the Bank also released to the
Company  $300,000,  which it was holding in escrow as  collateral  in connection
with the sale of PI.



                                       53


At July 31, 2005, the Company failed to comply with the aforementioned financial
covenants. The Bank waived the failure for the measurement period ended July 31,
2005.  For future  measurement  periods,  the Bank  revised the  definitions  of
certain components of the financial covenants to specifically exclude the impact
of items  associated with  derivative  financial  instruments  such as valuation
gains and losses,  compensation expense which are settled with non-cash issuance
of the Company's common stock and non-cash issuance amortization.

Information  regarding  the  three  year  term note as of  January  31,  2005 is
included in the table below:



                                                                       2005          2004
                                                                    ==========    ==========
                                                                            
Long term debt:  current                                            $  400,000    $1,000,000
Weighted average interest rate at January 31                               5.6%         4.35%

Weighted average borrowing outstanding throughout the fiscal year      800,000    $1,100,000
Weighted average interest rate during the fiscal year                      4.9%         4.30%

Maximum outstanding during the year                                 $1,000,000    $1,200,000
Principal paid during the fiscal year                               $  400,000    $  200,000



Minimum  repayments of principal on the term notes are as follows for the fiscal
year ending January 31:

                            2006   $400,000 
                            2007    200,000 
                                   -------- 
                           TOTAL   $600,000 
                                   ======== 
                           

The Company has also  separately  financed  vehicles and machinery which will be
substantially  repaid over the next 53 months with a weighted  average  interest
rate of 5.28% and 6.67% at  January  31,  2005 and 2004.  Information  regarding
these loans is included in the table below:

                             2005       2004
                           --------   --------
Long-term debt             $543,000   $201,000
Less:  Current portion      262,000     92,000
                           --------   --------
Long-term debt excluding
     current portion       $281,000   $109,000
                           ========   ========

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 Notes 2 and 18) 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. (See Notes 2 and 6)

On April 29, 2003,  the Company  completed a private  offering of  approximately
1,304,000  shares of common stock at a price of $7.75 per share. The proceeds of
the private offering were  approximately  $10,107,000  prior to giving effect to
offering costs of $472,000,  with additional future proceeds that may be derived
from the future  exercise  of 230,000  warrants  issued in  connection  with the
private  placement.  The warrants were issued at an exercise  price of $7.75 per
share and have a ten year term.  A portion of the net  proceeds  of the  private
placement  was used in the  acquisitions  of VLI and SMC and in final payment of
the Company's credit facility with U.S. Bancorp. The remaining net proceeds were
used for working capital.  The private offering was approved by shareholder vote
on April 15, 2003.



                                       54


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 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.

During fiscal 2004,  the Board granted  20,000 ISOs and 30,000 NSOs to employees
and Directors. The ISOs and NSOs were granted at $7.90 per share.

Stock option activity is as follows:

                                   No. of        Average
                                  Options     Exercise Price
                                ----------    --------------
Balance at January 31, 2003         18,000    $         7.77
Granted                             50,000    $         7.90
Exercised                           (5,000)   $         5.47
Forfeited                           (9,000)   $         7.98
                                ----------    --------------
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
                                ==========    ==============

At  January  31,  2005,  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 
                      --------   ----------   --------------- 
                                                              
                      $   7.75       37,000               5.1 
                      $   7.90       45,000               3.5 
                                 ----------   --------------- 
                                     82,000               4.2 
                                 ==========   =============== 
                      
At January  31,  2005 and 2004,  45,000 and 6,000  options,  respectively,  were
exercisable  at  a  weighted   average   exercise  price  of  $7.90  and  $5.70,
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, 2005,  there were 474,000  shares of the  Company's  common stock
reserved for issuance upon exercise of stock options and warrants.



                                       55


NOTE 11 - INCOME TAXES

Income tax  (benefit)  expense  related to continuing  operations  for the years
ended January 31, 2005 and 2004 is as follows:

                                                       2005             2004
                                                   ===========      ===========
Current:
Federal                                            $        --      $        --
State                                                   63,000           31,000
                                                   -----------      -----------
                                                        63,000           31,000
                                                   ===========      ===========

Deferred:
Federal                                               (934,000)        (268,000)
State                                                 (174,000)         (52,000)
                                                   -----------      -----------
                                                    (1,108,000)        (320,000)
                                                   -----------      -----------
Total tax benefit                                  ($1,045,000)     ($  289,000)
                                                   ===========      ===========

The actual  income tax  benefit  for the years  ended  January 31, 2005 and 2004
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:

                                                        2005             2004
                                                    -----------     -----------
                                                     Restated

Computed "expected" tax benefit                     ($1,441,000)    ($  106,000)
Increase (decrease) resulting from:
State income taxes, net                                (100,000)         17.000
Permanent differences (b)                               496,000           4.000
Net operating loss of discontinued
  operations (a)                                             --        (187,000)
Other                                                        --         (17,000)
                                                    -----------     -----------
                                                    ($1,045,000)    ($  289,000)
                                                    ===========     ===========

(a) The fiscal 2004 loss from  operations  generated  by  Puroflow  prior to its
disposition  is  included  in (loss)  income from  discontinued  operations  for
financial  reporting  purposes;  however,  such  loss  is  included  in  Argan's
consolidated taxable income (loss) for income tax reporting purposes.

(b)  Permanent  differences  for the year  ended  January  31,  2005,  include a
goodwill impairment charge and 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, 2005 and 2004 are as
follows:

                                                           2005          2004
                                                        ==========    ==========
Assets:

    Accrued bonus                                       $       --    $   58,000
    Inventory and receivable reserves                       56,000            --
    Accrued vacation                                        41,000            --
    Accrued WFC claim                                       98,000            --
    Net operating loss                                     324,000       187,000
                                                        ----------    ----------
                                                           519,000       245,000
                                                        ----------    ----------

Liabilities:

    SMC cash to accrual adjustment                         172,000       246,000
    Property and equipment                                 578,000       412,000
    Purchased intangibles                                2,429,000       832,000
    Other                                                   4 ,000         7,000
                                                        ----------    ----------
                                                         3,183,000     1,497,000
                                                        ----------    ----------
Net deferred tax liabilities                            $2,664,000    $1,252,000
                                                        ==========    ==========



                                       56


At January  31,  2005,  AI has a net  operating  loss  carryforward  aggregating
$858,000 which expires in 2024 and 2025.

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 3. Summarized  financial  information  concerning the Company's  reportable
segments is shown in the following tables:



                                                  For the Twelve Months Ended January 31, 2005

                                                          Telecom
                                      Nutraceutical    Infrastructure
                                       Products (1)       Services            Other          Consolidated
                                      --------------    --------------    --------------    --------------
                                                                             Restated          Restated
                                                                                 

Net sales                             $    6,805,000    $    7,713,000    $           --     $ 14,518 ,000
Cost of goods sold                         4,774,000         6,559,000                --        11,333,000
                                      --------------    --------------    --------------    --------------
     Gross profit                          2,031,000         1,154,000                --         3,185,000

Selling, general and administrative
   expenses, including non-cash
   compensation expense
   of $614,000                        $    1,630,000         1,590,000         2,204,000         5,424,000
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) from continuing
    operations before 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                          $      122,000    $      384,000    $        2,000    $      508,000
                                      ==============    ==============    ==============    ==============
Amortization of intangibles           $      664,000    $      166,000    $       39,000    $      869,000

                                      ==============    ==============    ==============    ==============
Goodwill                              $    6,410,000    $      940,000                --    $    7,350,000
                                      ==============    ==============    ==============    ==============
Total Assets                          $   19,128,000    $    5,007,000    $    1,122,000    $   25,257,000
                                      ==============    ==============    ==============    ==============


(1)   Operating  results of VLI are included since date of  acquisition,  August
      31, 2004.
(2)   Includes  $614,000  for  non-cash   compensation   expense  attributed  to
      concessions given Thomas (See Note 2).


                                       57


The  Company  has  customers  whose sales  represent  a  significant  portion of
enterprise and segment net sales. Nutraceutical sales to two customers,  TriVita
Corporation and  Cyberwize.com,  Inc.,  accounted for 17% and 8% of consolidated
net sales, respectively, while telecom infrastructure services to two customers,
Southern Maryland Electric Cooperative and General Dynamics Corp. aggregated 23%
and 14% respectively, of consolidated net sales.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

The  Company and its  subsidiaries  have  entered  into  various  non-cancelable
operating  leases for facilities,  machinery,  equipment and trucks.  Total rent
expense for all operating  leases  including  related parties was  approximately
$268,000   and  $75,000  for  the  years  ended   January  31,  2005  and  2004,
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, 2005:

      2006   $  478,000

      2007      449,000

      2008      365,000

      2009      298,000

      2010      152,000

Thereafter      714,000
             ----------

             $2,456,000
             ==========

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 14 - WESTERN FILTER CORPORATION LITIGATION

During the twelve  months  ended  January 31,  2005,  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.

The Company has reviewed WFC's claim and believes that  substantially all of the
claims are without merit. The Company will vigorously contest WFC's claim.

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.

During the twelve months ended January 31, 2005, the Company recorded an accrual
related to this matter of $260,000 for estimated payments and legal fees related
to WFC's  claim that it  considers  to be  probable  and that can be  reasonably
estimated.  Although the ultimate  amount of liability that may result from this
matter for which the Company has  recorded an accrual of $260,000 at January 31,
2005 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.

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  $17,000 and
$15,000 for the years ended January 31, 2005 and 2004, respectively.



                                       58


NOTE 16 - DISCONTINUED OPERATIONS

Sale of PI and Restatement of Financial Statements

On October 31, 2003,  AI, as part of its plan to  reallocate  its capital to its
acquisition program, sold PI to WFC. The sales price of approximately $3,500,000
was satisfied in cash of which $300,000 is being held in escrow to indemnify WFC
from any damages resulting from a breach of representation  and warranties under
the Stock  Purchase  Agreement.  (See Note 14) AI  recognized  a gain on sale of
approximately  $167,000,  net of income taxes of $506,000.  The Company utilized
net  operating  losses to offset the gain on sale and thus,  has no current  tax
liability.  The $506,000 is the amount of the deferred tax assets  related to PI
which has been  sold.  In  accordance  with  SFAS No.  144  "Accounting  for the
impairment  or disposal  of  Long-Lived  Assets,"  the  Company  classified  the
operating  results  of  PI  as  discontinued   operations  in  the  accompanying
statements of operations.

The  results  of  the   discontinued   operations  which  are  included  in  the
Consolidated  statement of operations  for the year ended January 31, 2004 is as
follows:

                                                                   Year Ended
                                                                January 31, 2004
                                                                ---------------
Net sales                                                       $     5,050,000
Cost of goods sold                                                    3,834,000
                                                                ---------------
Gross profit                                                          1,216,000
Selling, general and administrative expenses                          1,701,000
                                                                ---------------
Operating (loss) income from discontinued operations                   (485,000)
Other (expense) income                                                  (11,000)
                                                                ---------------
 (Loss) income from discontinued operations
            before income taxes                                        (496,000)
     Income tax expense                                                 245,000
Gain from discontinued operations, net of
     income tax expense of $506,000                                     167,000
                                                                ---------------
(Loss) income from discontinued operations                      $      (574,000)
                                                                ===============

RESEARCH AND DEVELOPMENT EXPENSES OF DISCONTINUED OPERATIONS

Research  and  development   expenditures  are  expensed  as  incurred  and  are
approximately $78,000 for the year ended January 31, 2004.

SEGMENT REPORTING OF DISCONTINUED OPERATIONS

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information"  establishes  standards for reporting  information  about operating
segments  in  interim  financial   reports  issued  to  stockholders.   It  also
establishes  standards for related  disclosures  about products and services and
geographic areas.  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.

PI's two reportable  segments were aerospace  filter  manufacturing  and air bag
filter  manufacturing.  PI  manufactured  both  lines  of  filters  at a  single
manufacturing  facility  utilizing in common PI's employees,  physical plant and
sales force. Puroflow manufactured and sold a broad range of filtration products
for  original  equipment  manufacturers,   military  users,  government  direct,
automotive and aviation aftermarket users, as well as a number of commercial and
industrial applications.

PI's  reportable  segments  were  primarily  two  categories of products sold to
different   customers.   The   respective   segments  had  common  use  of  PI's
manufacturing  employees and facilities,  as well as selling and  administrative
employees. Financial information concerning PI's reportable segments is shown in
the following tables.



                                       59


                                   YEAR ENDED
                                January 31, 2004

                       Aerospace        Air Bag
                     Manufacturing   Manufacturing      Total
                     -------------   -------------   ----------
External sales       $   4,053,000   $     997,000   $5,050,000
Cost of goods sold       3,082,000         752,000    3,834,000
                     -------------   -------------   ----------
Gross profit         $     971,000   $     245,000   $1,216,000
                     =============   =============   ==========

PI operated out of one manufacturing facility and did not identify commonly used
assets and  related  costs for an  individual  segment.  In  addition,  selling,
general and administrative costs were not separately captured for each segment.

NOTE 17 - SUBSEQUENT EVENTS

On August 31, 2004, AI acquired VLI under a merger  agreement,  which  provides,
that in addition to the initial  consideration  of $6,050,000 and 825,000 shares
of AI common stock,  Thomas,  the former owner,  shall have the right to receive
additional  consideration  equal to (1) 5.5 times the adjusted EBITDA of VLI for
the twelve months ended February 28, 2005,  (b) less the initial  consideration.
The merger agreement  provided that the additional  consideration  would be paid
one-half in cash and one-half in AI common stock.  AI's preliminary  estimate of
the  additional   consideration  is  approximately  $2.7  million  in  cash  and
approximately  350,000  shares  of AI  common  stock.  The cash  portion  of the
additional   consideration  will  be  paid  on  August  1,  2006  subject  to  a
subordination agreement entered into between AI and Kevin Thomas. (See Note 4)

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

None.

ITEM 8A. CONTROLS AND PROCEDURES.

In the  Company's  2005 Form  10-KSB,  management  concluded  that its  internal
control over financial reporting was effective as of January 31, 2005. Recently,
management  determined that a material  agreement was not disclosed or accounted
for properly in the Company's  consolidated  financial  statements  for the year
ended  January 31, 2005 and that an error  occurred in the  application  of FIFO
(first in, first out) inventory  accounting in the quarter ended April 30, 2005.
As a result,  Management  concluded that the Company's financial  statements for
the fiscal year ended January 31, 2005 and for the first quarter ended April 30,
2005 were  required to be restated  to account for the  agreement  and to adjust
inventory and cost of goods sold.  Further,  management  concluded  that both of
these  errors  resulted  from  material  weaknesses  in the  Company's  internal
controls over  financial  reporting.  Specifically,  management  has  identified
deficiencies  in the  design of the  Company's  process  surrounding  disclosure
controls and in the operating effectiveness of inventory accounting controls.

To address these material  weaknesses  and to mitigate these issues,  management
has instituted  more formalized  processes for all members of senior  management
and outside  counsel to review all material  agreements and filings with the SEC
prior  to  their  release.  Material  agreements  will be  accumulated  at their
corporate offices for review and evaluation. In addition, the Company will begin
to receive sub certifications  from their division level executives.  Management
has  also  enhanced  the  quality  of  their  accounting  expertise  at the  VLI
subsidiary  and have begun to  incorporate  a more  thorough  and  comprehensive
review  and  monitoring   process  of  the  Company's   subsidiaries   financial
information.  As part of this  comprehensive  review,  the Company has  enhanced
their review of cost and gross margin to detect errors associated with inventory
valuation.

ITEM 8B. OTHER INFORMATION

None.

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

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 is 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. Haywood Miller, Executive Vice President and Secretary,
Argan, Inc., One Church Street, Suite 302, Rockville, Maryland 20850.

The remaining  information required under this item is incorporated by reference
to the Company's  Proxy Statement for the 2005 Annual Meeting of Stockholders to
be filed within 120 days of the end of the fiscal year covered by this report.



                                       60


ITEM 10. EXECUTIVE COMPENSATION

The  information  required under this item is  incorporated  by reference to the
Company's  Proxy  Statement for the 2005 Annual  Meeting of  Stockholders  to be
filed within 120 days of the end of the fiscal year covered by this report.

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

The  information  required under this item is  incorporated  by reference to the
Company's  Proxy  Statement for the 2005 Annual  Meeting of  Stockholders  to be
filed within 120 days of the end of the fiscal year covered by this report.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required under this item is  incorporated  by reference to the
Company's  Proxy  Statement for the 2005 Annual  Meeting of  Stockholders  to be
filed within 120 days of the end of the fiscal year covered by this report.

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)



                                       61


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)

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.



                                       62


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  Information  required under this item is  incorporated  by reference to the
Company's  Proxy  Statement for the 2005 Annual  Meeting of  Stockholders  to be
filed within 120 days of the end of the fiscal year covered by this report.


                                       63


                                   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:  December 2, 2005

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                            December 2, 2005
------------------------------
Rainer H. Bosselmann                and Chief Executive Officer
                                    (Principal Executive Officer)

  /s/  Arthur F. Trudel             Senior Vice President                            December 2, 2005
------------------------------
Arthur F. Trudel                    and Chief Financial Officer
                                    (Principal Accounting and Financial Officer)

  /s/  H. Haywood Miller            Executive Vice President                         December 2, 2005
------------------------------
H. Haywood Miller and Secretary


  /s/  DeSoto S. Jordan             Director                                         December 2, 2005
------------------------------
DeSoto S. Jordan

  /s/  Daniel A. Levinson           Director                                         December 2, 2005
------------------------------
Daniel A. Levinson

  /s/  T. Kent Pugmire              Director                                         December 2, 2005
------------------------------
T. Kent Pugmire

  /s/  James W. Quinn               Director                                         December 2, 2005
------------------------------
James W. Quinn

  /s/  Peter L. Winslow             Director                                         December 2, 2005
------------------------------
Peter L. Winslow

  /s/  W. G. Champion Mitchell      Director                                         December 2, 2005
------------------------------
W. G. Champion Mitchell




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                                  EXHIBIT INDEX

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


                                       65