A method of processing stillage from fermentation derived alcohol is disclosed, including dry-grind ethanol production from corn, by fermentation with filamentous fungi. This produces high-value fungal biomass that can be recovered by screening, is easily dewatered and used as an animal feed, human food or as a source of nutraceuticals. The methodology uses an airlift reactor to enhance the morphology of the fungi for easy harvesting and separation of water for recycling and reuse and to recover added enzymes and mineral acid with the water. The process also separates oil from the stillage. The fungal processing removes organic substances from the water that are otherwise inhibitory to the reuse prospects for the water, i.e. suspended and dissolved organic matter, including glycerol, lactic and acetic acids. The process also separates oil from the stillage by enmeshing the oil in the fungal biomass and can produce more oil through cultivation of oleaginous fungi. This approach generates revenue from low value thin stillage, while substantially reducing stillage processing costs, mainly by averting the need for evaporation of the thin stillage.