The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The financial statements and the related notes are condensed and should be read in conjunction with the consolidated financial statements and related notes for the year ended July 31, 2009 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

The unaudited condensed consolidated financial statements include the accounts of the parent company and its subsidiaries.  All significant intercompany transactions are eliminated.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the statements contained herein.  Operating results for the three and the sixnine months ended January 31,April 30, 2010 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2010.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures.  Estimates are revised periodically.  Actual results could differ from these estimates.

Under the terms of our sales agreements with customers, we recognize revenue when risk of loss and title are transferred.  Upon shipment an invoice is generated that sets the fixed and determinable price.  Promotional reserves are provided for sales incentives made directly to consumers and customers and are netted against sales.  Sales returns and allowances are not material.  Selling, general and administrative expenses include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs,  depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses.

We evaluate our allowance for doubtful accounts utilizing a combination of a historical experience and a periodic review of our accounts receivable aging and specific customer account analysis.  A customer account is determined to be uncollectible when we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment.  We maintain and monitor a list of customers whose creditworthiness has diminished.

As part of our overall operations, we mine sorbent materials on property that we either own or lease.  A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material that is then used in a majority of our production processes.  These stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred.  We defer and amortize the pre-production overburden removal costs associated with opening a new mine.

During the normal course of our overburden removal activities we perform ongoing reclamation activities.  As overburden is removed from a pit, it is hauled to previously mined pits and used to refill older sites.  This process allows us to continuously reclaim older pits and dispose of overburden simultaneously, therefore minimizing the liability for the reclamation function.

Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees.  The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized.  Pre-production development costs on new mines and any prepaid royalties that can be offset against future royalties due upon extraction of the mineral are also capitalized.  All exploration related costs are expensed as incurred.

The results of operations for the sixnine months ending January 31,April 30, 2010 included an increase in cost of sales of approximately $400,000 related to an overstatement of supplies inventory at one of our manufacturing facilities as of July 31, 2009.  The overstatement of inventory had accumulated over a number of years and was the result of alleged theft.  This increase was offset by the expected receipt of insurance proceeds, related to the supplies inventory overstatement; a receivable for which was recordedwere received in the firstthird quarter of fiscal 2010.  The net effect of the two adjustments resulted in2010; therefore, there was no impact to net income.  We have determined that the adjustment to supplies inventory was not material to the first sixnine months of fiscal 2010 or any previously reported period.

Inventories are valued at the lower of cost (first-in, first-out) or market.  Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs.  We perform a quarterly review of our inventory items to determine if an obsolescence reserve adjustment is necessary.  The review surveys all of our operating facilities and sales groups to ensure that both historical issues and new market trends are considered.  The allowance not only considers specific items, but also takes into consideration the overall value of the inventory as of the balance sheet date.  The inventory obsolescence reserve values at January 31,April 30, 2010 and July 31, 2009 were $282,000$294,000 and $274,000, respectively.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The inputs used to measure fair value are prioritized into one of three categories based on the lowest level of input that is significant to the fair value measurement.  The categories in the hierarchy are:

The following table summarizes our financial assets and liabilities that were measured at fair value by level within the fair value hierarchy:

Cash equivalents are classified as Level 1 of the fair value hierarchy because they were valued using quoted market prices in active markets.  These cash instruments are primarily money market mutual funds.

Marketable equity securities were valued using quoted market prices in active markets and as such are classified as Level 1 in the fair value hierarchy.  These securities represent stock we own in one publicly traded company.company and are included in other assets on the condensed consolidated balance sheet.

Cash surrender value of life insurance is classified as Level 2.  The value was determined by the underwriting insurance company’s valuation models, which take into account the passage of time, mortality tables, interest rates, cash values for paid-up additions and dividend accumulations.  The cash surrender value represents the guaranteed value we would receive upon surrender of these policies as of January 31, 2010.  These life insurance policies are held on key employees.employees as of April 30, 2010.  The cash surrender value of life insurance is included in other assets on the condensed consolidated balance sheet.

The carrying values of investments in securities, accounts receivable, accounts payable and notes payable approximate their fair values at January 31,April 30, 2010 and July 31, 2009, due to the short maturity and nature of those balances and are not included in the above table.  The investments in securities consisted of U.S. Treasury securities carried at amortized cost.  The estimated fair value of long-term debt, including current maturities, was approximately $21,422,000$18,220,000 and $21,523,000 as of January 31,April 30, 2010 and July 31, 2009, respectively.

We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets and (2) valuing potential impairment loss related to long-lived assets.

We have funded the plan based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed underrequirements of various regulations.  During the Employee Retirement Income Security Actthird quarter of 1974, as amended.  We did not makefiscal 2010 we made a contribution of approximately $922,000 to our pension plan during the six months ended January 31, 2010.  We intend to make a contribution to the pension plan during the current fiscal year approximately equal to the annual actuarial determined cost.  We currently estimate this amount to be approximately $900,000.plan.  See Item 3. Quantitative and Qualitative Disclosures About Market Risk for a discussion of the potential impact of financial market fluctuations on pension plan assets and future funding contributions.

The components of the net periodic postretirement health benefit cost were as follows:

The medical cost trend assumption for postretirement health benefits was a graded rate starting at 9% and decreasing to an ultimate rate of 5% in 1% annual increments.

We have two operating segments:  Retail and Wholesale Products and Business to Business Products.  These segments are managed separately because each business has different customer characteristics.  Net sales and operating income for each segment are provided below.  Revenues by product line are not provided because it would be impracticable to do so.  The accounting policies of the segments are the same as those described in Note 1 of the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2009 filed with the SEC.

We do not rely on any operating segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine.  The unallocated asset category is the remainder of our total assets.  The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance.  The corporate expenses line includes certain unallocated expenses, including primarily salaries, wages and benefits, purchased services, rent, utilities and depreciation and amortization associated with corporate functions such as research and development, information systems, finance, legal, human resources and customer service.  Corporate expenses also include the annual incentive plan bonus accrual.

We determine the fair value of stock options and restricted stock issued under our long term incentive plans as of the grant date.  We recognize the related compensation expense over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service to the company.

Our 1995 Long Term Incentive Plan (the “1995 Plan”) provided for grants of both incentive and non-qualified stock options principally at an option price per share of 100% of the fair market value of our Class A Common Stock or, if no Class A Common Stock is outstanding, our Common Stock (“Stock”) on the date of grant.  Stock options were generally granted with a five-year vesting period and a 10-year term.  The stock options generally vest 25% two years after the grant date and 25% in each of the three following anniversaries of the grant date.  This plan expired for purposes of issuing new grants on August 5, 2005.  All stock issued from option exercises under this plan was from authorized but unissued stock.  All restricted stock issued was from treasury stock.

The Oil-Dri Corporation of America 2006 Long Term Incentive Plan (“2006 Plan”) permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash-based awards.  Our employees and non-employee directors are eligible to receive grants under the 2006 Plan.  The total number of shares of stock subject to grants under the 2006 Plan may not exceed 937,500.  Option grants covering 25,000 shares have been issued to our outside directors with a vesting period of one year and option grants covering 32,500 shares have been issued to employees with vesting similar to the vesting described above under the 1995 Plan.  In addition, 95,182 restricted shares have been issued under the 2006 Plan.

The Oil-Dri Corporation of America Outside Director Stock Plan (the “Directors’ Plan”) provides for grants of stock options to our directors, who are considered employees, at an option price per share of 100% of the fair market value of Common Stock on the date of grant.  Stock options have been granted to our directors for a 10-year term with a one year vesting period.  There are 56,25052,250 stock options outstanding as of January 31,April 30, 2010 and no stock options are available for future grants under this plan.  All stock issued under this plan were from treasury stock.

Our Board announced a five-for-four stock split on June 6, 2006.  The equitable adjustment of outstanding options to reflect a change in capitalization (such as a stock split) may require the recognition of incremental compensation expense if the adjustment is not determined to have been required by the actual terms of the equity incentive plan.  In keeping with historical practices, we adjusted the number of shares and the option prices to equitably adjust all outstanding stock options; however, the Directors’ Plan and the 1995 Plan may be deemed to have been discretionary, rather than required by the actual terms of these plans.  We therefore recognized additional stock-based compensation expense as a result of the modification in the secondthird quarter and the first sixnine months of fiscal 2009 of approximately $9,000$8,000 and $61,000,$69,000, respectively.  As of the end of fiscal 2009, all additional compensation expense had been recognized; therefore, no additional expense has been recognized in fiscal 2010.

There were no stock options granted in the first sixnine months of fiscal years 2010 or 2009.

Changes in our stock options during the first sixnine months of fiscal 2010 were as follows:

Our 1995 Plan and 2006 Plan both provide for grants of restricted stock.  The vesting schedule under the 1995 Plan has varied, but has generally been three years or less.  Grants issued under the 2006 Plan to date have vesting periods between two and five years.

Under the 2006 Plan, 5,182 restricted shares of Class B Stock were granted in the first sixnine months of fiscal 2010.  No shares of restricted stock were granted in the first sixnine months of fiscal 2009.

Included in our stock-based compensation expense in the secondthird quarter of fiscal years 2010 and 2009 was $79,000$76,000 and $73,000,$71,000, respectively, related to unvested restricted stock.  In the first sixnine months of fiscal years 2010 and 2009, the expense related to the unvested restricted stock was $151,000$227,000 and $148,000,$219,000, respectively.