The number of rice mills in Uganda has increased rapidly during the past decade, presumably in response to the increasing demand for rice milling services by rice farmers. However, recent studies show that despite the notable improvements in farmers’ access to milling services, some farmers still sell rice in unmilled form as paddy, which attracts a lower price than milled rice (grain). This study was undertaken with the overall objective of examining why some rice-growing households in Uganda sell milled rice and others don’t, and how this affects the profitability of rice production. Data for this study were collected in October 2009, through a survey of 194 rice farmers in Eastern Uganda by Makerere University and Japanese International Corporation Agency (JICA). Descriptive statistical methods of data analysis were used to characterize ricegrowing households by the form in which they sell rice; while the profitability of rice production was estimated using gross margin analysis and compared using the difference of mean test between households that sell milled rice and those that don’t. The factors influencing the proportion of rice sold as grain were analysed using the Tobit regression model. The surveyed households were grouped into three categories based on the form in which they sold their rice; “unmilled”, “milled” and “both”. Most of the sampled households (83%) sold all or part their rice as grain. On average, households which milled all their rice before selling were endowed with significantly bigger landholdings and households (family labor) than their cohorts in the “unmilled” and “both” categories. However, those who sold all their rice as paddy were faced with significantly longer distance to the nearest mill than households that milled all or part of their rice before sale. Profitability analysis show that rice production is associated with positive gross margins, regardless of the form in which it is sold, implying that rice production is a profitable venture. Although milling households incurred higher costs, they also had higher gross margins, implying that selling milled rice is more profitable than selling paddy. The price of milled rice, volume of harvested rice, household size, membership in rice-farmers’ group have significant and positive relationships with the proportion of rice sold as grain; while distance to the nearest rice mill is negatively and significantly associated with the proportion of rice sold as grain. Farmers should be encouraged and assisted to mill their rice before sale through training and extension, as well as other interventions that reduce the transactions costs of milling. Such interventions include; facilitating their access to yield-enhancing inputs to increase harvested volumes and helping them to market/mill their rice in groups. Also facilitating private entrepreneurs to set up milling plants closer to farmers through such measures as rural electrification and reduction of electricity tariffs; or to invest in mobile rice mills through improvement of the rural road network, for example, would go further to reduce the transactions costs of accessing milling services and encourage rice-milling before sale.