Form 10-Q3

10-Q 1 form10q3sam_080608.htm Form 10-Q3


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

     |X|  Quarterly  Report  Pursuant  to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934


          For the quarterly period ended June 27, 2008

          Or

     | |  Transition  Report Pursuant to Section 13  or 15(d) of the  Securities
          Exchange Act of 1934

                        Commission file number 001-13403

                         AMERICAN ITALIAN PASTA COMPANY
             (Exact name of registrant as specified in its charter)

                Delaware                              84-1032638
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

     4100 N. Mulberry Drive, Suite 200                   64116
          Kansas City, Missouri                        (Zip Code)
(Address of principal executive offices)

               Registrant's telephone number, including area code:
                                 (816) 584-5000

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                         if changed since last report)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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 | |

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated  filer, a non-accelerated  filer, or a smaller reporting company.
See definitions of "large accelerated filer,"  "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

           Large accelerated filer | |              Accelerated filer |X|

            Non-accelerated filer | |            Smaller reporting company | |
 (Do not check if a smaller reporting company)

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
                                                       Yes | | No |X|

     As of August 1, 2008, the Registrant had 19,357,415 shares of common stock,
par value $0.001 per share, outstanding.


                         AMERICAN ITALIAN PASTA COMPANY
                                    Form 10-Q
               Fiscal Quarter and Nine Months Ended June 27, 2008


                                Table of Contents


Part I - Financial Information                                                                            Page

         Item 1.           Consolidated Financial Statements (unaudited)                                     1

                           Consolidated Balance Sheets at June 27, 2008 and September 28, 2007               1

                           Consolidated Statements of Operations for the three and nine months ended         2
                           June 27, 2008 and June 29, 2007

                           Consolidated Statement of Stockholders' Equity for the
                           nine months ended June 27, 2008                                                   3

                           Consolidated Statements of Comprehensive Income for the three and
                           nine months ended June 27, 2008 and June 29, 2007                                 4

                           Consolidated Statements of Cash Flows for the nine months ended
                           June 27, 2008 and June 29, 2007                                                   5

                           Notes to Consolidated Financial Statements                                        6

         Item 2.           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations                                                        13

         Item 3.           Quantitative and Qualitative Disclosures About Market Risk                       20

         Item 4.           Controls and Procedures                                                          20

Part II - Other Information

         Item 1.           Legal Proceedings                                                                21

         Item 1A.          Risk Factors                                                                     23

         Item 2.           Unregistered Sales of Equity Securities and Uses of Proceeds                     23

         Item 3.           Defaults Upon Senior Securities                                                  23

         Item 4.           Submission of Matters to a Vote of Security Holders                              23

         Item 5.           Other Information                                                                23

         Item 6.           Exhibits                                                                         23

Signature Page

Exhibit Index


PART I. FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS


                         AMERICAN ITALIAN PASTA COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                    Unaudited
                      (in thousands, except share amounts)

                                                                              June 27, 2008     September 28, 2007
ASSETS
Current assets:
     Cash and cash equivalents                                               $      6,398           $     16,635
     Short-term investments                                                         3,406                      -
     Trade and other receivables, net                                              52,637                 38,279
     Inventories                                                                   72,367                 44,443
     Prepaid expenses and other current assets                                      7,322                  7,629
     Deferred  income taxes                                                         1,952                  2,381
                                                                             ------------           ------------
Total current assets                                                              144,082                109,367
Property, plant and equipment, net                                                311,525                316,109
Brands and trademarks                                                              83,876                 83,282
Other assets                                                                       18,587                 19,205
                                                                             ------------           ------------
Total assets                                                                 $    558,070           $    527,963
                                                                             ============           ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                            $ 30,861               $ 19,195
     Accrued expenses                                                              31,582                 31,523
     Current portion of deferred revenues                                              99                     99
     Income taxes payable                                                               -                  1,082
     Current maturities of long-term debt                                           2,174                  1,963
                                                                             ------------           ------------
Total current liabilities                                                          64,716                 53,862
Long-term debt, less current maturities                                           239,900                240,000
Income taxes payable                                                                1,858                      -
Deferred income taxes                                                              35,078                 35,286
Litigation settlement                                                              23,000                 26,500
Deferred revenue, less current portion                                                322                    397
                                                                             ------------           ------------
Total liabilities                                                                 364,874                356,045
Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.001 par value:
         Authorized shares - 10,000,000                                                 -                      -
         Issued and outstanding shares - none
     Class A common stock, $.001 par value:
         Authorized shares - 75,000,000                                                22                     21
         Issued and outstanding shares -  21,550,433 and
         19,387,259, respectively, at June 27, 2008;
         20,832,627 and 18,674,628, respectively, at September 28, 2007
     Class B common stock, par value $.001
         Authorized shares - 25,000,000                                                 -                      -
         Issued and outstanding - none
     Additional paid-in capital                                                   252,193                247,492
     Treasury stock,  2,163,174 shares at June 27, 2008 and                      (52,059)               (52,029)
         2,157,999 shares at September 28, 2007, at cost
     Accumulated other comprehensive income                                        20,810                 15,352
     Accumulated deficit                                                         (27,770)               (38,918)
                                                                             ------------           ------------
Total stockholders' equity                                                        193,196                171,918
                                                                             ------------           ------------
Total liabilities and stockholders' equity                                       $558,070               $527,963
                                                                             ============           ============

   See accompanying notes to the unaudited consolidated financial statements.

                                       1


                         AMERICAN ITALIAN PASTA COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                    Unaudited
                    (in thousands, except per share amounts)


                                                  Three Months Ended                      Nine Months Ended
                                           June 27, 2008       June 29, 2007      June 27, 2008       June 29, 2007
                                           -------------       -------------      -------------       -------------

Revenues                                      $ 155,844           $ 97,158           $ 407,135           $ 288,056
Cost of goods sold                              130,847             77,441             325,563             222,357
                                              ---------          ---------           ---------           ---------
Gross profit                                     24,997             19,717              81,572              65,699

Selling and marketing expense                     7,112              4,778              19,250              15,337
General and administrative expense               10,331              8,086              29,833              24,918

(Gains) losses related to long-lived assets         109               (23)                 344                (68)
                                              ---------          ---------           ---------           ---------
Operating profit                                  7,445              6,876              32,145              25,512
Interest expense, net                             6,662              7,057              20,706              22,215

Other (income) expense, net                       (190)               (57)                 224               (195)
                                              ---------          ---------           ---------           ---------

Income (loss) before income taxes                   973              (124)              11,215               3,492

Income tax provision (benefit)                      (5)                108               (601)                 (3)
                                              ---------          ---------           ---------           ---------
Net income (loss)                                   978          $   (232)           $  11,816           $   3,495
                                              =========          =========           =========           =========


Net income (loss) per common share (basic)    $    0.05          $  (0.01)           $    0.62           $    0.19

Weighted-average common shares outstanding
    (basic)                                      19,387             18,437              18,988              18,671
                                              =========          =========           =========           =========

Net income (loss) per common share
    (diluted)                                 $    0.05          $  (0.01)           $    0.62           $    0.18

Weighted-average common shares outstanding
    (diluted)                                    19,644             18,437              19,172              18,958
                                              =========          =========           =========           =========

   See accompanying notes to the unaudited consolidated financial statements.

                                       2


                         AMERICAN ITALIAN PASTA COMPANY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                    Unaudited
                                 (in thousands)


                                                          Nine Months Ended
                                                            June 27, 2008

Class A Common Shares
     Balance, beginning                                             20,833
     Issuance of shares of common stock                                717
                                                                  --------
     Balance, ending                                                21,550
                                                                  ========

Class A Common Shares - par value
     Balance, beginning                                           $     21
     Issuance of shares of common stock                                  1
                                                                  --------
     Balance, ending                                              $     22
                                                                  ========

Additional Paid-in Capital
     Balance, beginning                                           $247,492
     Issuance of shares of common stock                              3,679
     Tax impact of expired stock options                           (1,003)
     Stock based compensation                                        2,025
                                                                 ---------
     Balance, ending                                               252,193
                                                                 =========

Treasury Stock, at cost
     Balance, beginning                                          $(52,029)
     Purchases of treasury stock                                      (30)
                                                                 ---------
     Balance, ending                                             $(52,059)
                                                                 =========

Accumulated Other Comprehensive Income
     Foreign currency translation adjustment:
     Balance, beginning                                          $  15,352
     Change during the period                                        5,458
                                                                 ---------
     Balance, ending                                             $  20,810
                                                                 =========

Accumulated Deficit
     Balance, beginning                                          $(38,918)
     Additional tax related liabilities upon adoption of FIN 48      (668)
     Net income                                                     11,816
                                                                 ---------
     Balance, ending                                             $(27,770)
                                                                 =========

Total Stockholders' Equity                                       $ 193,196
                                                                 =========

    See accompanying notes to the unaudited consolidated financial statements

                                       3


                         AMERICAN ITALIAN PASTA COMPANY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                    Unaudited
                                 (in thousands)


                                              Three Months Ended                      Nine Months Ended
                                       June 27, 2008       June 29, 2007      June 27, 2008       June 29, 2007
                                       -------------       -------------      -------------       -------------


Net income (loss)                            $  978            $ (232)            $ 11,816           $  3,495

Other comprehensive income:

        Foreign currency translation
          adjustments                           (7)              2,822               5,458              2,300
                                       -------------       -------------      -------------      -------------

Comprehensive income                         $  971            $ 2,590            $ 17,274           $  5,795
                                       =============       =============      =============      =============

   See accompanying notes to the unaudited consolidated financial statements.

                                       4


                         AMERICAN ITALIAN PASTA COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    Unaudited
                                 (in thousands)


                                                                           Nine Months Ended
                                                                  June 27, 2008          June 29, 2007
                                                                  -------------          -------------

OPERATING ACTIVITIES:
Net income                                                          $  11,816                $  3,495
Adjustments to reconcile net income to net cash
       provided by operations:
       Depreciation and amortization                                   18,040                  17,459
       Amortization of deferred financing fees                          1,512                     941
       (Gains) losses related to long-lived assets                        344                    (68)
       Unrealized loss on short-term investment                           171                       -
       Provision for doubtful accounts                                    293                     243
       Provision for inventory obsolescence                               956                     709
       Stock-based compensation expense                                 2,100                   1,449
       Deferred income tax benefit                                      (781)                   (546)
       Changes in operating assets and liabilities:
           Trade and other receivables                               (13,621)                 (1,098)
           Inventories                                               (28,185)                 (3,552)
           Prepaid expenses and other current assets                      447                     713
           Accounts payable and accrued expenses                       10,384                   2,055
           Income taxes                                                 (140)                     241
           Other                                                      (1,368)                   (208)
                                                                  -----------            ------------
Net cash provided by operating activities                               1,968                  21,833

INVESTING ACTIVITIES:
Redemption of short-term investments                                    3,802                       -
Additions to property, plant and equipment                            (8,467)                 (6,816)
Short-term investments under orderly liquidation                      (7,379)                       -

Proceeds from disposal of property, plant and equipment                    43                     111
                                                                  -----------            ------------
Net cash used in investing activities                                (12,001)                 (6,705)

FINANCING ACTIVITIES:
Proceeds from issuance of debt                                         11,147                       -
Principal payments on debt                                           (11,247)                (18,000)
Purchase of treasury stock                                               (30)                   (140)
Deferred financing costs                                                (539)                   (308)
                                                                  -----------            ------------
Net cash used in financing activities                                   (669)                (18,448)
Effect of exchange rate changes on cash                                   465                     153
                                                                  -----------            ------------
Net decrease in cash and cash equivalents                            (10,237)                 (3,167)
Cash and cash equivalents, beginning of period                         16,635                  22,805
                                                                  -----------            ------------
Cash and cash equivalents, end of period                             $  6,398            $     19,638
                                                                  ===========            ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest                                            $    19,431            $     21,382
                                                                  ===========            ============
Cash paid for income taxes                                        $       198            $        192
                                                                  ===========            ============
Cash received from income taxes                                   $        55            $          -
                                                                  ===========            ============
Stock issued in relation to settlement liability                  $     3,500            $          -
                                                                  ===========            ============

   See accompanying notes to the unaudited consolidated financial statements.

                                       5

AMERICAN ITALIAN PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended June 27,
2008 are not necessarily indicative of the results that may be expected for the
fiscal year ended September 26, 2008. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 28,
2007.

American Italian Pasta Company (the "Company" or "AIPC") uses a 52/53 week
financial reporting cycle with a fiscal year that ends on the last Friday of
September or the first Friday of October. The Company's first three fiscal
quarters end on the Friday last preceding December 31, March 31, and June 30 or
the first Friday of the following month. For purposes of this Form 10-Q, all
fiscal quarters presented included 13 weeks of activity.

2. SHORT-TERM INVESTMENTS

As of September 28, 2007, the Company had $9.2 million invested in the Columbia
Strategic Cash Portfolio Fund (Columbia Fund), administered by a subsidiary of
Bank of America, which is an enhanced money fund that allowed immediate
withdrawal of funds. On December 10, 2007, when the investment balance was $7.4
million, Columbia determined that the underlying securities had liquidity issues
and notified the Company that the fund would begin an orderly liquidation and
dissolution of assets to its investors. The balance in the Columbia Fund at June
27, 2008 was $3.4 million. The underlying assets are valued at fair value and as
of June 27, 2008 the Company has recorded valuation losses on this investment of
$0.2 million. Through June 27, 2008, the Company has recovered approximately
$3.8 million of the pre-liquidation investment balance. The remaining investment
of $3.6 million is to be recovered as the liquidation progresses. The Company
believes that the entire balance will be recovered. During the nine-month period
ended June 27, 2008, the Company has received $0.3 million of interest income
from the Columbia Fund.

3. INVENTORIES

Inventories are carried at standard costs adjusted for capitalized variances,
which approximate the lower of cost, determined on a first-in, first-out (FIFO)
basis, or market. The Company periodically reviews its inventory for
slow-moving, damaged or discontinued items and provides reserves to reduce such
items identified to their recoverable amount.

Inventories consist of the following (in thousands):

June 27, 2008 September 28, 2007

Finished goods $ 51,906 $ 30,713
Raw materials, additives, packaging materials and work-in-process 21,686 14,373
Reserves for slow-moving, damaged and discontinued inventory (1,225) (643)
-------- --------
$ 72,367 $ 44,443
========= ========

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (in thousands):


                                          June 27, 2008      September 28, 2007

Land and improvements                        $ 12,176              $ 11,867
  Buildings                                   114,219               112,434
Plant and mill equipment                      358,163               348,617
Furniture, fixtures and equipment              32,131                30,848
                                             --------              --------
                                              516,689               503,766
Accumulated depreciation                    (217,952)             (199,369)
                                             --------              --------
                                              298,737               304,397
Spare parts, net of reserve                     8,264                 8,154
Construction in progress                        4,524                 3,558
                                             --------              --------
                                             $311,525              $316,109
                                             =========             ========


5.   SHORT TERM DEBT

As of June 27, 2008, the Company had short-term  debt comprised of two revolving
credit facilities at its Italian subsidiary totaling $2.2 million.  These credit
facilities  bear  interest  at an average  rate of 5.6% and mature in  September
2008.  These  revolving  credit  facilities  are  secured  by  Italian  accounts
receivables  and other assets.  The Company's U.S.  credit facility (see note 6)
limits the  outstanding  debt owed by its Italian  subsidiary to $5.0 million in
the aggregate.  The Company is in compliance with this limitation as of June 27,
2008.

6.   LONG-TERM DEBT

As of June 27,  2008,  the  balance of the term loan was $239.9  million and its
revolving credit facility had no outstanding balance (the U.S. credit facility).
The U.S.  credit  facility,  as  amended,  is  comprised  of term loan and a $30
million revolving U.S. credit facility.  The Company had outstanding  letters of
credit under its revolving credit facility totaling  approximately  $3.0 million
and $2.3  million as of June 27,  2008 and  September  28,  2007,  respectively.
Accordingly, under the U.S. credit facility the Company had additional borrowing
capacity of $27.0  million and $27.7  million as of June 27, 2007 and  September
28, 2007, respectively. The U.S. credit facility is secured by substantially all
of our assets and  provides  for  interest  at either  LIBOR rate plus 600 basis
points or at an  alternate  base rate  calculated  as prime  rate plus 500 basis
points.  The  interest  rate in  effect  at June  27,  2008 was 9.6% on the U.S.
facility.  Under the amended U.S. credit  facility,  we were required to deliver
our fiscal year 2005, 2006 and 2007 audited financial  statements to our lenders
by June 30, 2008 at which time the  interest  rate would  decrease to 550 points
over LIBOR. During June 2008, the Company delivered the financial  statements to
its lenders in accordance with the amended facility and, effective July 3, 2008,
the interest rate was decreased to 550 points over LIBOR.

The U.S.  facility  has a  five-year  term  expiring  in March 2011 and does not
require any scheduled principal payments. Principal pre-payments are required if
certain  events  occur in the  future,  including  the sale of  certain  assets,
issuance of equity and the  generation  of "excess cash flow" (as defined in the
credit agreement).

Our U.S. credit facility  contains  restrictive  covenants which include,  among
other things,  financial  covenants  requiring  minimum and cumulative  earnings
levels and  limitations  on the payment of  dividends,  stock  purchases and our
ability to enter into  certain  contractual  arrangements.  The  Company  was in
compliance with these financial  covenants as of June 27, 2008 and September 28,
2007.

7.   CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000

On October 28, 2000,  the U.S.  government  enacted the  "Continued  Dumping and
Subsidy Offset Act of 2000" (the "Act"),  commonly known as the Byrd  Amendment,
which provided that assessed  anti-dumping and subsidy duties  liquidated by the
Department  of Commerce on Italian and Turkish  imported  pasta after October 1,
2000 would be  distributed  to  affected  domestic  producers.  The  legislation
creating the dumping and subsidy  offset  payment  provides for annual  payments
from the U.S.  government.  The Company  records the Byrd  Amendment  payment as
revenue  in the  quarter  in which  the  amount,  and the right to  receive  the
payment, can be reasonably determined.

During the nine-month periods ended June 27, 2008 and June 29, 2007, the Company
received and recognized as revenue  $4,640,000 and $2,959,000,  all of which was
recorded  in the first  quarter  of fiscal  years  2008 and 2007,  respectively.
Effective   October  1,  2007,   the  Act  was   repealed,   resulting   in  the
discontinuation  of future  distributions

                                       7


to affected  domestic  producers for duties  assessed after such date. It is not
possible to reasonably estimate amounts, if any, to be received in the future on
duties assessed prior to October 1, 2007.

8.   INCOME TAXES

In June 2006,  the Financial  Accounting  Standard  Board  ("FASB")  issued FASB
Interpretation No 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - an
interpretation  of FASB Statement No. 109,  Accounting for Income Taxes.  FIN 48
clarifies the  accounting  for  uncertainty  in income taxes in an  enterprise's
financial  statements  in  accordance  with SFAS No. 109  Accounting  for Income
Taxes. This  interpretation  prescribes a recognition  threshold and measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition of tax benefits,  classification on the balance sheet,
interest  and  penalties,   accounting  in  interim  periods,  disclosures,  and
transition.

The Company  adopted FIN 48 effective  September  29,  2007.  As a result of the
adoption,   the  Company  recognized   additional  tax  related  liabilities  of
approximately  $0.7  million  resulting  in a reduction  to  beginning  retained
earnings.  In addition,  the Company reclassified  approximately $1.2 million of
income tax  liabilities  from a current  liability  classification  to a current
receivable  and a  non-current  liability  classification,  as  payment  of  the
liability  is not  anticipated  within one year of the balance  sheet date.  The
Company also recorded approximately $0.2 million of deferred tax assets relating
to the tax  benefits  associated  with  interest  expense and  federal  benefits
associated  with state tax expenses.  As of September 29, 2007, the gross amount
of unrecognized tax benefits,  including  penalty and interest was approximately
$2.3  million.  If  recognized,  approximately  $2.1  million  would  affect the
Company's  effective  tax  rate.  As of June  27,  2008,  the  gross  amount  of
unrecognized tax benefits, including penalty and interest was approximately $2.4
million.  If recognized,  approximately  $2.2 million would affect the Company's
effective tax rate.

The Company  files  income tax  returns in the U.S.  federal  jurisdiction,  the
United Kingdom,  the  Netherlands,  Italy and various state  jurisdictions.  The
Company has also made an evaluation of the potential  impact of  assessments  by
state jurisdictions in which it has not filed tax returns.  The Internal Revenue
Service has examined and proposed  adjustments to the tax returns for the fiscal
years ended 2002  through  2004.  This  examination  was  concluded in the third
quarter  of  this  fiscal  year  with  no  material   change  from  the  amounts
anticipated.

As of the  September  29, 2007  adoption date of FIN 48, the federal tax returns
for fiscal years ended 2004 through 2007 remain open, although the IRS completed
an  examination  for the fiscal year ended 2004 during 2008. In addition,  state
and foreign tax returns for the fiscal years ended 2003 through 2007 are open to
audit under the  statute of  limitations.  As of the end of each  quarter of the
current fiscal year, it is not anticipated  that any of the net unrecognized tax
benefits will be recognized in the next twelve months.

As permitted by FIN 48, the Company has  classified  interest and penalties as a
component of income tax expense.  Estimated interest and penalties classified as
a component  of income tax expense  totaled  approximately  $0.1 million for the
quarter ended June 27, 2008.  Accrued  interest and penalties  were $0.7 million
and $0.6 million as of June 27, 2008 and September 29, 2007, respectively.

The Company  recorded an income tax benefit of $0.6  million for the nine months
ended June 27,  2008.  The benefit is  attributable  primarily to a reduction in
valuation   allowance  during  the  current  year  against  deducible  temporary
differences  related to stock  options  as well as a tax  benefit  from  foreign
operations.

The Company  also  reduced the  deferred  tax assets  recorded  for equity based
compensation  programs by  approximately  $1.0 million relating to stock options
that expired  unexercised.  This was recorded as a debit to  additional  paid in
capital and is not a component of the Company's  total income tax expense or its
effective tax rate.

9.   EQUITY INCENTIVE PLANS

Effective October 1, 2005, the Company adopted Statement of Financial Accounting
Standard No. 123 (revised 2004), "Share Based Payment" (SFAS No. 123R) using the
modified prospective method. Under SFAS No. 123R, the Company is required to
recognize, as expense, the estimated fair value of all share based payments to
employees.

                                       8


Under SFAS No. 123R,  the Company  recognized  compensation  expense  related to
stock option awards and stock  appreciation  rights of  $1,218,000  and $692,000
during the nine month period ending June 27, 2008 and the  comparable  period in
fiscal 2007, respectively.

A summary of the Company's stock option activity, and related information, is as
follows:

                                                                                                  Weighted
                                                                                                  Average
                                                                                                 Remaining
                                                                               Weighted         Contractual
                                                            Number of          Average              Term
                                                             Shares         Exercise Price       (in years)

         Outstanding at September 28, 2007                    940,164          $ 30.19               4.3
              Cancelled/Expired                             (159,903)          $ 26.77
                                                          -----------
         Outstanding at June 27, 2008                         780,261          $ 30.89               4.0
                                                          ===========

         Vested or expected to vest at June 27, 2008          772,419          $ 30.91               4.0

         Exercisable at June 27, 2008                         718,996          $ 31.06               3.8


A summary of the  Company's  stock  appreciation  rights  activity,  and related
information, is as follows:

                                                                                                     Weighted
                                                                                                     Average
                                                                                                     Remaining
                                                                  Weighted          Aggregate       Contractual                                                     Number of          Average           Intrinsic             Term
                                                 Shares        Exercise Price      Value            (in years)

           Outstanding at September 28, 2007    1,230,783          $7.00           $  1,894,000         5.8
                Granted                           954,868          $7.43
                                              -----------
           Outstanding at June 27, 2008         2,185,651          $7.19           $  9,416,672         5.7
                                              ===========

           Vested or expected to vest at        1,943,526          $7.19           $  7,430,050         5.6
           June 27, 2008

           Exercisable at June 27, 2008           294,047          $6.94           $  1,339,780         5.0


As of  June  27,  2008,  the  Company  had  $3,561,000  of  future  unrecognized
compensation costs related to stock options and stock appreciation rights. These
costs are expected to be recognized over a weighted average period of 2.7 years.

10.  RESTRICTED STOCK

During the nine months ended June 27, 2008, the Company issued 154,263 shares of
restricted stock to employees of the Company with a weighted-average  grant date
values of $7.73 under the Company's 2000 Equity  Incentive Plan, as amended (the
"2000 Plan").  The Company has recorded  expense on the  restricted  stock as it
vests equal to the fair value at the end of each reporting period, in accordance
with SFAS No. 123R. The Company maintains certain  restricted stock compensation
plans for which employees are allowed to elect to have taxes withheld at amounts
greater than minimum required amounts triggering variable  accounting  treatment
in fiscal 2007 and prior.  The awards  contained either a cliff or straight line
vesting provision and, therefore, expense is recognized over the vesting period.
The compensation  expense is calculated  under an accelerated  vesting method in
accordance  with FASB  Interpretation  28,  "Accounting  for Stock  Appreciation
Rights and Other Variable Stock Option or Award Plans".  The  compensation  cost
recognized was $807,000 and $647,000  during the nine months ended June 27, 2008

                                       9


and June 29, 2007, respectively.  At June 27, 2008, unrecognized cost related to
restricted  stock awards  total  approximately  $2,012,000.  These costs will be
recognized over a weighted average period of 2.4 years.

The Company's restricted stock activity is as follows:

                                                                  Weighted Average
                                                                     Grant Date
                                             Number of Shares        Fair Value

    Outstanding at September 28, 2007            226,326         $       7.77
    Granted                                      154,263                 7.73
    Vested                                      (34,562)                 7.30
    Forfeited                                      (266)                36.56
                                            ------------         ------------
    Balance at June 27, 2008                     345,761         $       7.77
                                            ============         ============

11.  EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income  available to common
shareholders by the weighted average number of common shares outstanding for the
period.  Diluted earnings per share is computed by dividing net income available
to common shareholders,  increased by the weighted average number of outstanding
common  shares  and  incremental  shares  that may be issued  in future  periods
related to outstanding stock options and stock appreciation rights, if dilutive.
When calculating  incremental  shares related to outstanding  share options,  we
apply the  treasury  stock  method.  The  treasury  stock  method  assumes  that
proceeds,   consisting  of  the  amount  the  employee  must  pay  on  exercise,
compensation  cost  attributed to future  services and not yet  recognized,  and
excess tax  benefits  that would be credited to  additional  paid-in  capital on
exercise of the share options, are used to repurchase  outstanding shares at the
average  market price for the period.  The treasury stock method is applied only
to share grants for which the effect is dilutive.

 The  computations  of basic and diluted  earnings  per share are as follows (in
thousands, except share and per share data):

                                                                   Three Months Ended
                                                 June 27, 2008                            June 29, 2007
                                      -------------------------------------    ------------------------------------

                                                    Weighted                                 Weighted
                                                     Average        Per                       Average
                                          Net        Shares        Share                      Shares      Per Share
                                        Income     Outstanding     Amount      Net Loss     Outstanding    Amount

Basic earnings per share                 $978        19,387         $0.05       $ (232)       18,437      $ (0.01)
                                         ====                       =====       =======                   ========

Effect of dilutive securities:
  Stock options and stock appreciation
  rights                                                257                                        -
                                                     ------                                   ------
Diluted earnings per share               $ 978       19,644         $0.05       $ (232)       18,437      $ (0.01)
                                         =====       ======         =====       =======       ======      ========


                                                                   Nine Months Ended
                                                 June 27, 2008                            June 29, 2007
                                      -------------------------------------    ------------------------------------
                                                    Weighted                                Weighted
                                                     Average        Per                      Average
                                          Net        Shares        Share          Net         Shares      Per Share
                                        Income     Outstanding     Amount        Income    Outstanding      Amount

Basic earnings per share               $11,816      18,988         $0.62        $ 3,495       18,671       $ 0.19
                                       =======                     =====        =======                    ======

Effect of dilutive securities:
  Stock options and stock appreciation
  rights                                               184                                      287
                                                    ------                                   ------
Diluted earnings per share             $11,816      19,172         $0.62        $ 3,495       18,958       $ 0.18
                                       =======                     =====        =======                    ======

                                       10





Anti-dilutive securities consisting of options to purchase the Company's Class A
common stock  accounting  for  2,257,380 and shares for the  nine-month  periods
ended June 27, 2008, and 1,484,308  shares for the nine-month  period ended June
29, 2007, were excluded from the calculation of diluted  weighted average common
shares as the effect.

12.  LAWSUITS AND CONTINGENCIES

Governmental Investigations and Other Matters:

•    Beginning  in the  late  summer  of 2005,  the  Company  received  document
     requests  and formal  subpoenas  from the  Enforcement  Division of the SEC
     relating  to  its  accounting   practices,   financial   reporting,   proxy
     solicitation  and other  matters in  connection  with a formal,  non-public
     investigation  by the SEC staff of the  Company  and  certain  persons  and
     entities  employed by or  associated  with the Company.  The United  States
     Attorney's  Office for the Western  District  of Missouri  ("DOJ") has also
     been  investigating  these matters and has been  coordinating  with the SEC
     staff. The Company has had, and is continuing to have, discussions with the
     SEC staff,  and separately with the DOJ,  regarding the conclusion of their
     investigation activities and of their respective views of appropriate bases
     on which to reach mutually acceptable  settlements.  Such settlements could
     result  in a  Deferred  Prosecution  Agreement,  which  could  include  the
     assignment of a corporate monitor,  continued  cooperation with any ongoing
     investigations  and/or  a  monetary  fine.  Due to the  status  of  ongoing
     discussions with the DOJ and SEC staff, the Company cannot estimate a range
     of possible loss that could result from a monetary  fine, if any. There can
     be no  assurance  that any  settlement  would not have a  material  adverse
     effect on our business,  financial condition, results of operations or cash
     flows. The Company is cooperating with these investigations.

•    On October 28, 2005, the Company  received notice from the Employee Benefit
     Security  Administration of the U.S.  Department of Labor ("EBSA") that the
     EBSA was  commencing an  investigation  regarding its 401(k) plan. The EBSA
     visited  the  Company's  offices on January  18,  2006 to review  requested
     information  and  interview its Director of Human  Resources  regarding the
     401(k) plan. The Company is cooperating  with the EBSA and has provided the
     EBSA with all requested information.

•    During the Company's  ongoing  analysis of financial  matters,  it reviewed
     transactions  reported to the U.S.  Department  of Commerce (the "DOC") for
     the period July 1, 2002 through June 30, 2003 in the antidumping proceeding
     on pasta imported from Italy. Based on the data reported by the Company and
     its  Italian  subsidiary,   Pasta  Lensi,   S.r.l.,  the  DOC  revoked  the
     Anti-Dumping  Order ("AD Order")  with  respect to Pasta Lensi.  During its
     investigation,  information  came to the Company's  attention  that certain
     data reported to the DOC was incorrect and as a result, Pasta Lensi may not
     have been eligible for  revocation of the AD Order.  The Company  disclosed
     the issue to the DOC. Simultaneously, the Company provided this information
     to the DOJ, which requested further information on this matter. As a result
     of the Company's disclosure to the DOC, it published notice on February 22,
     2008 in the Federal Register of its preliminary  determination to reinstate
     Pasta Lensi in the existing  antidumping  duty order at a cash deposit rate
     of 45.6%. The preliminary determination applies, on a prospective basis, to
     all imports of subject  products  from and after  February 22, 2008. A cash
     deposit  rate of 45.6%  would  have a  significant  adverse  impact  to our
     working capital position. The Company has appealed this determination.  The
     Company has  substantially  mitigated  the impact of this order by changing
     its  ingredient to organic  semolina in March 2008,  thereby  manufacturing
     products for import into the U.S. that are exempt from the antidumping duty
     order.  Based on the  Company's  review,  the Company does not believe this
     order will have a material effect on its financial condition.

Each of these matters is ongoing and involves  various  risks and  uncertainties
that could have a material adverse effect on our business, results of operations
and financial condition.

Litigation Claims and Disputes:

•    Beginning in August, 2005, seven lawsuits containing similar allegations of
     misrepresentations   and  omissions   concerning  the  Company's  financial
     statements  and asserting  both  derivative and direct claims were filed in
     the United  States  District  Court for the  Western  District  of Missouri
     against  the  Company,  certain of its  current  and former  directors  and
     officers,  and its former  independent  registered  public accounting firm,
     Ernst & Young,

                                       11


     LLP. These lawsuits were  consolidated into a single lawsuit asserting both
     derivative  and direct claims.  On June 16, 2006,  the Court  dismissed the
     derivative  claims because the plaintiffs  failed to make a required demand
     on the Company's  Board of Directors.  By stipulation  of settlement  filed
     with the Court on October 29, 2007, the Company agreed to settle all claims
     alleged  in  the  lawsuit,  including  those  alleging  violations  of  the
     Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  On February 12,
     2008, the Court granted final approval of the settlement. The settlement of
     the federal securities class action lawsuit was for $25 million,  comprised
     of $11 million in cash, to be provided by the Company's  insurers,  and $14
     million in the Company's common shares.  Under the terms of the settlement,
     on March  27,  2008,  class  counsel  received  527,903  common  shares  in
     satisfaction  of the Court  approved  fee  award.  The class  will  receive
     approximately  930,000  common  shares,  subject  to  adjustment  upward or
     downward,  based  upon  the  Company's  stock  price  as  provided  in  the
     stipulation  of  settlement.  The  settlement  was  recorded  in the fourth
     quarter of fiscal year 2005.

•    In November 2005, a shareholder  derivative action was filed in the Circuit
     Court of Jackson County,  Missouri.  The plaintiff  alleges that certain of
     the Company's  former  officers and directors are liable to the Company for
     breaches  of  fiduciary  duties  and  aiding and  abetting  such  breaches,
     corporate waste, gross mismanagement,  unjust enrichment,  abuse of control
     based upon the Company's  accounting  practices  and  financial  reporting,
     insider selling and  misappropriation  of information,  and that its former
     independent registered public accounting firm, Ernst & Young LLP, is liable
     for professional negligence and accounting malpractice, aiding and abetting
     breaches of fiduciary  duties and breach of contract.  The Company is named
     as a nominal defendant in this matter. The plaintiff seeks equitable relief
     and unspecified  compensatory and punitive damages.  On March 13, 2008, the
     Company reached an agreement in principle,  subject to court  approval,  to
     settle this  action.  The  proposed  settlement  requires  the  adoption of
     certain  governance  reforms by the Company and payment of $1.5  million in
     attorney's fees and costs to counsel for the plaintiff,  which payment will
     be made under our insurance  policies.  The  settlement was recorded in the
     first quarter of fiscal year 2006.

•    In September  2006,  another action was filed in the United States District
     Court  for  the  Western  District  of  Missouri.   The  plaintiff  asserts
     derivative  claims  against  certain of the  Company's  former and  current
     officers and directors for breaches of their  fiduciary  duties relating to
     the Company's accounting practices and financial reporting.  Plaintiff also
     asserts claims on behalf of a putative class against the Company's  current
     directors for failing to schedule or hold an annual  meeting for 2006.  The
     Company is named as a nominal  defendant.  The plaintiff seeks  unspecified
     monetary  damages on the Company's  behalf and an order  requiring  that an
     annual  meeting be scheduled  and held.  On February  12,  2007,  the Court
     stayed all further  proceedings in the suit until forty-five days after the
     Company's issuance of restated financial results,  and required the Company
     to provide monthly reports regarding the status of its restatement process.
     On March 13, 2008, the Company  reached an agreement in principle,  subject
     to court approval,  to settle this action on a consolidated  basis with the
     November 2005 shareholders derivative action described above.

•    On March 7,  2007,  a lawsuit  was  filed in the  Delaware  Chancery  Court
     against the Company  alleging that no annual  meeting of  shareholders  had
     been held  since  February  7, 2005,  and  requesting  that the  Company be
     compelled  to convene an annual  meeting.  Proceedings  in that  matter are
     currently  stayed by  agreement  of the  parties.  On March 13,  2008,  the
     Company reached an agreement in principle,  subject to court  approval,  to
     settle this action as part of the  resolution  of the other two  derivative
     actions.

Each of these  actions is  ongoing,  and the  Company  continues  to defend them
vigorously.  Although  the  Company  cannot  predict the outcome of any of these
actions,  an adverse result in one or more of them could have a material adverse
effect on its business, results of operations and financial condition.

From time to time and in the  ordinary  course of its  business,  the Company is
named as a defendant in legal proceedings  related to various issues,  including
worker's  compensation claims, tort claims and contractual  disputes.  While the
resolution of such matters may have an impact on the Company's financial results
for the  period  in which  they are  resolved,  the  Company  believes  that the
ultimate  disposition  of  these  matters  will  not,  individually  or  in  the
aggregate,  have a material  adverse  effect upon its  business or  consolidated
financial statements.

Indemnification and Pending Litigation Obligations:

The Company has  incurred  and will  continue  to incur  significant  expense on
behalf  of the  Company  and on behalf of the  several  individuals  to whom the
Company  has   indemnification   obligations   related  to  certain  claims  and

                                       12


investigations  involving the Company and these  individuals.  In addition,  the
Company continues to incur significant  expense related to the completion of its
historical audits and SEC reporting  requirements.  The expenses the Company has
incurred  through the June 27, 2008,  in connection  with all of these  matters,
including those  associated with its restatement and pending legal matters,  net
of insurance proceeds,  were $41.8 million, which includes $9.8 million incurred
during the nine-month period ending June 27, 2008.


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The  discussion  set forth below,  as well as other  portions of this  quarterly
report  on  Form  10-Q  ("Quarterly  Report"),  contains  statements  concerning
potential  future  events.  Such  forward-looking   statements  are  based  upon
assumptions  by our  management,  as of  the  date  of  this  Quarterly  Report,
including  assumptions about risks and uncertainties  faced by AIPC. Readers can
identify these forward-looking statements by their use of such verbs as expects,
anticipates,  believes or similar verbs or conjugations of such verbs. If any of
our assumptions prove incorrect or should unanticipated circumstances arise, our
actual  results  could  materially   differ  from  those   anticipated  by  such
forward-looking  statements.  The  differences  could be  caused  by a number of
factors or combination of factors  including,  but not limited to, those factors
identified in our Annual Report on Form 10-K for our fiscal year ended September
28, 2007. That report has been filed with the Securities and Exchange Commission
(the "SEC" or the  "Commission")  in  Washington,  D.C.  and can be  obtained by
contacting the SEC's public  reference  operations or through the SEC's web site
on the World Wide Web at http://www.sec.gov.  Readers are strongly encouraged to
consider those factors when evaluating any such forward-looking  statements.  We
will not update  any  forward-looking  statements  in this  Quarterly  Report to
reflect future events or developments.

The following table sets forth certain data from our Consolidated  Statements of
Operations,  expressed  as a  percentage  of  revenues,  for each of the periods
presented.


                                                         Three Months Ended                  Nine Months Ended
                                                  ---------------------------------- ----------------------------------
                                                   June 27, 2008    June 29, 2007     June 27, 2008     June 29, 2007
                                                   -------------    -------------     -------------     -------------

   Revenues:
      Retail                                            70.5%             75.0%             74.4%            76.4%
      Institutional                                      29.5              25.0              25.6             23.6
                                                  -----------      ------------      ------------      -----------

   Total revenues                                       100.0             100.0             100.0            100.0
   Cost of goods sold                                    84.0              79.7              80.0             77.2
                                                  -----------      ------------      ------------      -----------

   Gross profit                                          16.0              20.3              20.0             22.8
   Selling and marketing expense                          4.6               4.9               4.7              5.3
   General and administrative expense                     6.6               8.3               7.3              8.7
   (Gains) losses related to long-lived assets              -                 -               0.1                -
                                                  -----------      ------------      ------------      -----------

   Operating profit                                       4.8               7.1               7.9              8.8
   Interest expense, net                                  4.3               7.3               5.1              7.7
   Other (income) expense                               (0.1)             (0.1)                 -             (0.1)
                                                  -----------      ------------      ------------      -----------
   Income (loss) before income taxes                      0.6             (0.1)               2.8              1.2
   Income tax provision (benefit)                           -               0.1             (0.1)                -
                                                  -----------      ------------      ------------      -----------

   Net income (loss)                                     0.6%            (0.2)%              2.9%             1.2%
                                                 ============      ============      ============      ===========

Overview

We are a Delaware  Corporation and we were incorporated and commenced operations
in 1988.  We believe we are the largest  producer  and  marketer of dry pasta in
North America, by volume,  based on data available from A.C. Nielsen,  published
competitor  financial  information,  industry sources such as the National Pasta
Association,  suppliers, trade magazines and our own market research. We believe
our vertically-integrated  facilities and highly efficient production facilities
focused  primarily on specific market segments and our highly skilled  workforce
make us an  efficient  company  and enable us to produce  high-quality  pasta at
competitive  costs.  We believe that our


                                       13



product  strategy of offering  branded,  private  label,  imported and specialty
products,  our scalable production facilities and our key customer relationships
create competitive advantages.

We generate revenues in two customer markets:  retail and institutional.  Retail
market revenues  include the sales of our pasta products to customers who resell
the pasta in retail channels (including sales to grocery retailers, club stores,
mass merchant,  drug and discount stores) and encompasses  sales of our branded,
private label and imported products.  These revenues represented 70.5% and 75.0%
and  74.4% and 76.4% of our total  revenue  for the three  month and nine  month
periods ended June 27, 2008 and June 29, 2007,  respectively.  The Institutional
market includes both food service distributors that supply restaurants,  hotels,
schools  and  hospitals,  as well as food  processors  that use  pasta as a food
ingredient.  Food service  customers include  businesses and organizations  that
sell  products  to  restaurants,  healthcare  facilities,  schools,  hotels  and
industrial caterers and multi-unit restaurant chains that procure directly.  The
institutional  market  represented  29.5%  and  25.0% and 25.6% and 23.6% of our
total revenue for the three month and nine month periods ended June 27, 2008 and
June 29, 2007, respectively.

Average  sales  prices  for  our   non-branded   products   vary   depending  on
customer-specific packaging and raw material requirements, product manufacturing
complexity  and other  service  requirements.  Average  prices  for our  branded
products  are also  based on  competitive  market  factors.  Average  retail and
institutional  prices  will also vary due to  changes in the  relative  share of
customer  revenues and item specific  sales volumes  (i.e.,  product sales mix).
Generally,  average  retail  sales  prices are higher than  institutional  sales
prices. Selling prices of our branded products are higher than selling prices in
our other business units,  including private label. Revenues are reported net of
cash discounts, product returns, and promotional and slotting allowances.

We have several  arrangements with institutional  customers that provide for the
"pass-through" of direct material cost and certain other cost changes as pricing
adjustments.  The  pass-throughs are generally limited to actual changes in cost
and, as a result,  impact margins in periods of changing  costs and prices.  The
pass-throughs are generally  effective 30 to 90 days following such cost changes
and  thereby  reduce the  long-term  exposure  of our  operating  results to the
volatility of raw material costs. These  pass-through  arrangements also require
us to pass on the benefits of any price decreases in raw material costs.

Our  cost  of  goods  sold  consists  primarily  of  raw  materials,  packaging,
manufacturing  costs  (including   depreciation)  and  distribution   (including
transportation)  costs. A significant portion of our cost of goods sold is durum
wheat.  We purchase  durum wheat on the open  market  and,  consequently,  those
purchases are subject to fluctuations in cost. Since mid-2006, durum prices have
increased  substantially  and we  anticipate  these  costs to remain at or above
these  historically  high levels  throughout  fiscal 2008. We manage some of our
durum wheat cost risk  through  cost  "pass-through"  arrangements  in long-term
contracts,  as discussed above,  and advance purchase  contracts for durum wheat
which are generally a few months.  For our non pass-through  customers,  we seek
price increases to cover our costs.

We  seek  to  achieve  low-cost  production  through  vertical  integration  and
investment  in the  most  current  pasta-making  assets  and  technologies.  The
manufacturing- and distribution-related capital assets that have been or will be
acquired to support this strategy are depreciated over their respective economic
lives.  Depreciation  expense is a component of inventory cost and cost of goods
sold.

Critical Accounting Policies

This  discussion and analysis  encompass our results of operations and financial
condition as reflected in our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States.  The  preparation  of financial  statements in  conformity  with
accounting  principles  generally  accepted in the United  States  requires  our
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  financial  statements  and  reported  amounts of  revenues  and
expenses  during the reporting  periods.  On an ongoing  basis,  our  management
evaluates its estimates and judgments, including those related to the impairment
of long-lived and intangible  assets,  the method of accounting for  share-based
compensation, and the estimates used to record allowances for doubtful accounts,
reserves  for  slow-moving,  damaged and  discontinued  inventory,  reserves for
obsolete  spare  parts,   promotional   allowances,   income  tax  accruals  and
derivatives.  Our  management  bases its  estimates  and  judgments  on relevant
factors,  the  results of which form the basis for  making  judgments  about the
carrying  values of assets and  liabilities  that are not readily  apparent from
other sources. See the critical accounting policies section in our Annual Report
on Form 10-K for the fiscal year ended September 28, 2007 for a complete


                                       14


listing of our significant  accounting  policies.  In addition to those critical
accounting policies, we adopted the following new critical accounting policy.

Income Taxes:  Effective September 29, 2007, we adopted the Financial Accounting
Standard Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes - an  interpretation  of FASB Statement No. 109,  Accounting for
Income Taxes.  FIN 48 prescribes a comprehensive  model for how companies should
recognize,   measure,  present,  and  disclose  in  their  financial  statements
uncertain tax positions taken or expected to be taken on a tax return. Under FIN
48, tax positions are initially  recognized in the financial  statements when it
is more likely than not the position will be sustained  upon  examination by the
tax authorities.  Such tax positions are initially and subsequently  measured as
the  largest  amount of tax  benefit  that is  greater  than 50% likely of being
realized upon ultimate settlement with the tax authority assuming full knowledge
of the position and all relevant facts.  Application of FIN 48 requires numerous
estimates  based  on  available  information.  We  consider  many  factors  when
evaluating and estimating our tax positions and tax benefits,  which may require
periodic  adjustments and which may not accurately  anticipate  actual outcomes.
The  cumulative  effect of applying the  provisions of FIN 48 was reported as an
adjustment to the opening balance of retained  earnings.  The cumulative  effect
adjustment does not include items that would not be recognized in earnings, such
as the effect on tax positions related to business combinations.  For additional
information  related to our adoption of FIN 48, see note 8 of these consolidated
financial statements.

QUARTER ENDED JUNE 27, 2008 COMPARED TO QUARTER ENDED JUNE 29, 2007

Revenues:  Revenues increased $58.7 million, or 60.5%, to $155.8 million for the
three months ended June 27, 2008, from $97.1 million for three months ended June
29, 2007. Revenues increased $4.2 million, or 4.3%, due to volume increases, and
increased $54.5 million, or 56.1%, due to higher average selling prices.

Revenues for the Retail market  increased  $36.9  million,  or 50.7%,  to $109.8
million for the three  months ended June 27,  2008,  from $72.9  million for the
three months ended June 29, 2007.  Revenues increased $2.6 million, or 3.5%, due
to volume increases,  and increased $34.4 million or 47.2% due to higher average
selling prices.

Revenues for the Institutional  market increased $21.8 million or 89.7% to $46.0
million the three months ended June 27, 2008,  from $24.3  million for the three
months ended June 29, 2007.  Revenues  increased  $1.4  million,  or 5.9% due to
volume  increases and increased  $20.3  million,  or 83.7% due to higher average
selling prices and changes in sales mix.

Cost of goods  sold:  Cost of goods  sold  increased  $53.4  million or 69.0% to
$130.8  million for the three months ended June 27, 2008 from $77.4  million for
the three months ended June 29, 2007. As a percentage of revenues, cost of goods
sold  increased to 84.0% for the  three-month  period ended June 27, 2008,  from
79.7% for the three-month period ended June 29, 2007. The increase was primarily
due to significantly higher durum prices and higher commodity and transportation
costs.

Gross profit:  Gross profit  increased $5.3 million,  or 26.9%, to $25.0 million
for the three month  period ended June 27,  2008,  from $19.7  million for three
month  period ended June 29,  2007.  Gross  profit as a  percentage  of revenues
decreased to 16.0% for the three month period ended June 27, 2008 from 20.3% for
the three month period  ended June 29,  2007.  The decrease in gross profit as a
percent of revenue is directly  related to increases in durum,  commodities  and
transportation costs that were not offset by higher selling prices.

Selling and marketing  expense:  Selling and marketing  expense  increased  $2.3
million,  or 47.9%,  to $7.1 million for the  three-month  period ended June 27,
2008, from $4.8 million for  three-month  period ended June 29, 2007. The change
is  primarily  due to an  increase  in  consulting  expenses  of  $0.9  million,
brokerage commission costs of $0.8 million, and stock based compensation charges
of $0.3 million.  The consulting expenses relate primarily to an analysis of the
pasta category and our market  placement,  the increased broker costs are due to
higher  commissions  due to  increased  selling  prices,  and  the  increase  in
stock-based  compensation is due principally to fluctuations in the value of the
Company's stock.  Those increases were offset by a decrease in consumer spending
due to timing.  Selling  and  marketing  expense,  as a  percentage  of revenue,
decreased to 4.6% for the three-month  period ended June 27, 2008, from 4.9% for
the  comparable  prior year  period.  This  decrease  in expense as a percent of
revenue  reflects the impact of higher  product  selling prices during the three
month  period  ended June 27,  2008  versus the  comparable  period of the prior
fiscal year.


                                       15


General and administrative expense: General and administrative expense increased
$2.2 million,  or 27.2%,  to $10.3 million for the three month period ended June
27, 2008,  from $8.1 million for the  comparable  period last year.  General and
administrative  expenses as a percentage  of revenues  decreased to 6.6% for the
three-month  period ended June 27, 2008,  from 8.3% for the  three-month  period
ended June 29, 2007.  The change in general and  administrative  expense was due
primarily  to an increase of  non-investigation  related  professional  fees and
consulting services of $1.7 million and an increase in compensation and benefits
of $0.5  million,  and an increase  in  stock-based  compensation  costs of $0.6
million  due to  variable  accounting  on  restricted  stock.  The  increase  in
professional  and  consulting  services  includes  an  initiative  to review the
Company's supply chain and operations.  The increase in stock-based compensation
is due principally to fluctuations in the value of the Company's  stock.  During
the three-month  periods ending June 27, 2008 and June 29, 2007, the Company was
continuing  to  undergo  the  investigation   process  and  restatement  of  its
historical  financial  statements.  As a result  of this  process,  the  Company
incurred  certain  professional  fees  including  legal,   forensic  accounting,
independent registered public accounting firm fees, public relations and Alvarez
& Marsal fees.  During the three month period ended June 27, 2008,  $2.4 million
of  professional  fees related to the restatement and pending legal matters were
recorded compared to $3.3 million during the comparable period of fiscal 2007, a
decrease of $0.9 million.  The increase in compensation  expense and decrease in
investigation  related  costs is due, in part,  to the addition of the Company's
new CEO in January 2008 and the  conclusion  of the  agreement  with Alverez and
Marsal.

Operating  profit:  Operating  profit for the three-month  period ended June 27,
2008, was $7.4 million,  an increase of $0.5 million as compared to $6.9 million
reported  for the  three-month  period  ended June 29,  2007.  Operating  profit
decreased as a percentage of revenues to 4.8% for three-month  period ended June
27, 2008, from 7.1% for the three-month  period ended June 29, 2007, as a result
of the factors discussed above.

Interest expense,  net:  Interest expense for the three-month  period ended June
27, 2008, was $6.7 million,  decreasing 5.6% from the $7.1 million  reported for
the  three-month  period ended June 29, 2007.  The decrease is  attributable  to
lower average  borrowings  outstanding and by lower interest rates.  The average
interest  rate in effect during  three-month  period ended June 27, 2008 and the
three-month period ended June 29, 2007 was 10.2% and 11.4%, respectively.

Income tax  expense/benefit:  Income tax benefit was less than $0.1  million for
the three month period ending June 27, 2008,  and the income tax expense for the
three month period ending June 29, 2007 was $0.1 million, and reflects effective
income  tax  rates of (0.0)%  and  0.1%,  respectively.  The  effective  rate is
substantially  below  statutory  rates primarily due to a reduction in valuation
allowance  during the  current  year  against  deducible  temporary  differences
related to stock options as well as a tax benefit from foreign operations.

Net income:  Net income for the three-month period ended June 27, 2008, was $1.0
million,  an  increase  of $1.2  million  from  the  $0.2  million  loss for the
three-month  period  ended June 29, 2007,  as a result of the factors  discussed
above.  Net income as a percentage of net revenues was 0.6% versus (0.2)% in the
prior year.

Diluted income per common share was $0.05 for the three-month  period ended June
27, 2008,  compared to a loss of $(0.01) for the  three-month  period ended June
29, 2007.

NINE MONTHS ENDED JUNE 27, 2008 COMPARED TO NINE MONTHS ENDED JUNE 29, 2007

Revenues: Revenues increased $119.0 million, or 41.3%, to $407.1 million for the
nine-months  ended June 27, 2008, from $288.1 million for nine-months ended June
29, 2007. Revenues increased $3.6 million, or 1.3%, due to volume increases, and
increased  $113.7  million,  or 39.5%,  due to higher  average  selling  prices.
Revenues  increased by $1.7 million due to an increase in payments received from
the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000.

Revenues for the Retail market  increased $82.9, or 37.7%, to $302.8 million for
the  nine-months  ended June 27, 2008,  from $219.9 million for the  nine-months
ended June 29, 2007.  Revenues  increased  $3.8 million,  or 1.8%, due to volume
increases  and $77.4  million  or 29.1% due to higher  average  selling  prices.
Revenues  increased by $1.7 million due to an increase in payments received from
the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000.


                                       16


Revenues for the Institutional market increased $36.2 million or 53.2% to $104.3
million  the  nine-months  ended  June 27,  2008,  from  $68.1  million  for the
nine-months ended June 29, 2007. There was a negligible  increase due to volume,
with  increases  in higher  average  selling  prices  and  changes  in sales mix
accounting for the change.

Cost of goods  sold:  Cost of goods sold  increased  $103.2  million or 46.4% to
$325.6  million for the nine months ended June 27, 2008 from $222.4  million for
the nine months ended June 29, 2007. As a percentage of revenues,  cost of goods
sold  increased to 80.0% for the  nine-month  period  ended June 27, 2008,  from
77.2% for the nine-month  period ended June 29, 2007. The increase was primarily
due to significantly higher durum prices and higher commodity and transportation
costs.

Gross profit:  Gross profit increased $15.9 million,  or 24.2%, to $81.6 million
for the nine month period ended June 27, 2008, from $65.7 million for nine month
period ended June 29, 2007.  Gross profit as a percentage of revenues  decreased
to 20.0% for the nine month  period  ended June 27, 2008 from 22.8% for the nine
month period  ended June 29, 2007.  The decrease in gross profit as a percent of
revenue  is  directly   related  to   increases   in  durum,   commodities   and
transportation costs that were not offset by higher selling prices.

Selling and marketing  expense:  Selling and marketing  expense  increased  $3.9
million,  or 25.5%,  to $19.2 million for the  nine-month  period ended June 27,
2008,  from $15.3 million for nine-month  period ended June 29, 2007. The change
is  primarily  due to an  increase  in  consulting  expenses  of $.9,  brokerage
commission costs of $1.8 million, compensation and benefits of $0.3 million, and
an  increase of travel of $0.2  million.  Selling and  marketing  expense,  as a
percentage  of revenue,  decreased  to 4.7% for the nine month period ended June
27,  2008,  from 5.3% for the  comparable  prior year period.  This  decrease in
expense as a percent of revenue  reflects the impact of higher  product  selling
prices  during the first  nine  months of the  current  fiscal  year  versus the
comparable period of the prior fiscal year.

General and administrative expense: General and administrative expense increased
$4.9  million,  or 19.7%,  to $29.8 million for the nine month period ended June
27, 2008,  from $24.9 million for the comparable  period last year.  General and
administrative  expenses as a percentage  of revenues  decreased to 7.3% for the
nine-month period ended June 27, 2008, from 8.7% for the nine-month period ended
June 29, 2007. The change was due primarily to an increase of  non-investigation
related  professional fees and consulting  services of $2.8 million, an increase
in compensation and benefits of $0.7 million,  and compensation costs under SFAS
123R of $0.5 million.  During the  nine-month  periods  ending June 27, 2008 and
June 29, 2007, the Company was continuing to undergo the  investigation  process
and  restatement of its  historical  financial  statements.  As a result of this
process,  the  Company  incurred  certain  professional  fees  including  legal,
forensic accounting,  independent registered public accounting firm fees, public
relations and Alvarez & Marsal fees. During the nine month period ended June 27,
2008, $9.6 million of  professional  fees related to the restatement and pending
legal  matters  were  recorded  compared to $9.8 million  during the  comparable
period of fiscal 2007, a decrease of $0.2 million.

Operating  profit:  Operating  profit for the  nine-month  period ended June 27,
2008,  was $32.1  million,  an  increase  of $6.6  million as  compared to $25.5
million  reported for the  nine-month  period ended June 29, 2007 as a result of
the factors  discussed  above.  Operating profit as a percentage of revenues was
7.9% for the  nine-month  period ended June 27, 2008 and 8.8% for the nine-month
period ended June 29, 2007.

Interest expense, net: Interest expense for the nine-month period ended June 27,
2008, was $20.7 million, decreasing 6.8% from the $22.2 million reported for the
nine-month  period ended June 29, 2007.  The decrease is  attributable  to lower
average borrowings outstanding and by lower interest rates. The average interest
rate in effect during  nine-month  period ended June 27, 2008 and the nine-month
period ended June 29, 2007 was 10.7% and 11.4%, respectively.

Income tax benefit:  Income tax benefit for each of the nine-month  period ended
June 27,  2008 and June 29, 2007 was $0.6  million  and less than $0.1  million,
respectively,  and  reflects  effective  income tax rates of (5.4)% and  (0.1)%,
respectively.   The  effective  rate  is  substantially  below  statutory  rates
primarily  due to a reduction  in  valuation  allowance  during the current year
against deducible  temporary  differences  related to stock options as well as a
tax benefit from foreign operations.


                                       17


Net income:  Net income for the nine-month period ended June 27, 2008, was $11.8
million,  an increase of $8.3 million  from the $3.5 million for the  nine-month
period  ended June 29, 2007,  as a result of the factors  discussed  above.  Net
income as a percentage of net revenues was 2.9% versus 1.2% in the prior year.

Diluted income per common share was $0.62 for the  nine-month  period ended June
27, 2008, compared to $0.18 for the nine-month period ended June 29, 2007.

Liquidity and Capital Resources

Our primary  sources of liquidity are cash provided by operations and borrowings
under our credit facility.  Cash and cash  equivalents  totaled $6.4 million and
net working capital totaled $80.4 million at June 27, 2008.

As of September 28, 2007, we had $9.2 million invested in the Columbia Strategic
Cash  Portfolio Fund (Columbia  Fund),  administered  by a subsidiary of Bank of
America,  which is an enhanced money fund that allowed  immediate  withdrawal of
funds.  On December  10, 2007,  when the  investment  balance was $7.4  million,
Columbia  determined  that the underlying  securities  had liquidity  issues and
notified us that the fund would begin an orderly  liquidation and dissolution of
assets to its  investors.  The balance in the Columbia Fund at June 27, 2008 was
$3.4 million.  The underlying assets are valued at fair value and as of June 27,
2008 we have  recorded  valuation  losses on this  investment  of $0.2  million.
Through  June 27,  2008,  we have  recovered  approximately  $3.8 million of the
pre-liquidation  investment balance. The remaining investment of $3.6 million is
to be  recovered  as the  liquidation  progresses.  We  believe  that the entire
balance will be recovered.  During the nine-month period ended June 27, 2008, we
have received $0.3 million of interest income from the Columbia Fund.

As of June 27, 2008, we had a $239.9  million term loan facility that matures in
March 2011. In addition, we had a $30 million revolving credit facility.  During
the nine month period  ending June 27, 2008,  we borrowed and repaid $10 million
under the revolving  credit  facility to take  advantage of favorable  grain and
commodity purchases and delivery opportunities. There was no balance outstanding
on the  revolving  facility as of June 27,  2008.  However,  we had  outstanding
letters of credit  totaling  approximately  $3.0 million.  Both  facilities  are
secured by substantially all of our assets.

Our credit facility contains  restrictive  covenants which include,  among other
things, financial covenants requiring minimum and cumulative earnings levels and
limitations  on the payment of  dividends,  stock  purchases  and our ability to
enter into certain  contractual  arrangements.  We do not currently expect these
limitations to have a material  effect on business or results of operations.  We
were in compliance with the restrictive covenants at June 27, 2008.

At this time, the current and projected  borrowings under our credit facility do
not exceed the facility's available commitment. Absent any significant increases
in our historical  levels of professional fees and  indemnification  obligations
expenditures,  we believe  that net cash  expected to be  provided by  operating
activities and the cash available  through our existing  credit facility will be
sufficient to meet our expected  capital and liquidity needs for the foreseeable
future.

During the nine months ended June 27, 2008,  our net cash  provided by operating
activities totaled $1.9 million compared $21.8 million for the nine months ended
June 29, 2007, a decrease of $19.9 million.  This decrease is due principally to
an increase in our  investment  in inventory of $24.7  million due to higher raw
material costs and increased  production.  The increase in these  inventories is
offset by higher  accounts  payable and accrued  expenses of $8.2  million.  The
increase  in sales  prices  and  volume  resulted  in an  increase  in  accounts
receivable of $12.5 million.

Cash  used  in  investing  activities  principally  relates  to  investments  in
production and distribution,  milling and management  information system assets.
Capital  expenditures  were $8.5  million  and $6.8  million for the nine months
ended June 27, 2008 and June 29, 2007, respectively.

During the nine  months  ended  June 27,  2008,  our net cash used by  financing
activities  amounted to $0.7 million,  which included the payment of $.5 million
of financing  costs to our bank related to the December 27, 2007 amendment and a
$0.1 million mandatory principal payment under the provisions of our U.S. credit
facility.  In  addition,  during the nine month  period  ended June 27, 2008 the
Company drew $10.0 million on its line of credit to finance inventory  purchases
and advance payments, which was repaid during the period. Our Italian subsidiary


                                       18


drew $1.1 million under revolving credit facilities during the nine month period
ended June 27, 2008, which was repaid during the period.

During the nine  months  ended  June 29,  2007,  our net cash used in  financing
activities  amounted  to $18.4  million,  which is  primarily a result of a $8.0
million  voluntary  principal payment on our term loan from excess cash reserves
and a one-time  $10.0  million  voluntary  pre-payment  of the term loan without
incurring a pre-payment  penalty, as permitted under the March 2007 amendment of
our U.S. credit facility.

We currently use cash  generated from  operations to fund capital  expenditures,
repayment of debt and working capital requirements.


Impact of Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value,  establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP"), and expands disclosures about
fair  value  measurements.  SFAS No.  157 does not  require  any new fair  value
measurements  in financial  statements,  but  standardizes  its  definitions and
guidance in GAAP. Thus, for some entities, the application of this statement may
change current  practice.  SFAS No. 157 will be effective  beginning  January 1,
2008.  Management  believes the adoption of this  pronouncement  will not have a
material impact on its consolidated financial statements.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and Financial  Liabilities".  SFAS No. 159 permits entities to
choose to measure many financial  instruments,  and certain other items, at fair
value.  SFAS No. 159 applies to reporting  periods  beginning after November 15,
2007.  Management  believes the adoption of this  pronouncement  will not have a
material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, "Business  Combinations".  This
statement   establishes  a  framework  to  disclose  and  account  for  business
combinations.  The  adoption  of the  requirements  of  SFAS  No.  141R  applies
prospectively  to business  combinations for which the acquisition date is on or
after  fiscal  years  beginning  after  December  15,  2008 and may not be early
adopted.  Management believes the adoption of this pronouncement will not have a
material impact on its consolidated financial statements.

In March  2008,  the FASB issued SFAS No.  161,  "Disclosures  about  Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133". SFAS No. 161
requires  enhanced   disclosures  about  an  entity's   derivative  and  hedging
activities,  including how an entity uses derivative instruments, how derivative
instruments  and  related  hedged  items are  accounted  for under SFAS No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities",   and  how
derivative  instruments  and related  hedged items affect an entity's  financial
position,  financial performance, and cash flows. The provisions of SFAS No. 161
are effective for financial  statements  issued for fiscal years beginning after
November 15, 2008,  and interim  periods  within those fiscal  years.  We do not
expect  the  adoption  of  SFAS  No.  161  to  have  a  material  impact  on its
consolidated financial statements.

In December 2007, the SEC issued the Staff Accounting  Bulletin ("SAB") No. 110,
which amends SAB No. 107 by extending  the usage of a  "simplified"  method,  as
discussed in SAB No. 107, in  developing  an estimate of expected term of "plain
vanilla"  share  options  in  accordance  with  SFAS  No.  123  (revised  2004),
Share-Based  Payment.  This simplified  method continues to be permitted,  under
certain  circumstances,  for  companies  that do not  have  access  to  adequate
historical data about employee  exercise  behavior to estimate  expense on stock
options. Management believes that it has sufficient historical exercise data and
has  historically  recorded  expenses based on expectations of future  behavior.
Accordingly,  Management  does not  believe  SAB 110 will  have an impact on its
financial statements.

In May 2008,  the Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Statement No. 162, "The Hierarchy of Generally Accepted Accounting  Principles."
This statement identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial  statements of
nongovernmental  entities  that  are  presented  in  conformity  with  generally
accepted  accounting  principles  ("GAAP") in the United States.  This statement
will be effective 60 days  following  the SEC's  approval of the Public  Company
Accounting  Oversight Board ("PCAOB") amendments to AU Section 411, "The Meaning
of Present Fairly in


                                       19


Conformity with Generally Accepted Accounting  Principles." We do not expect the
adoption  of  this  statement  to  have  a  material  impact  on  its  financial
statements.

In  April  2008,  the  FASB  issued  FASB  Staff  Position  ("FSP")  FAS  142-3,
"Determination  of the Useful Life of  Intangible  Assets."  This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine  the useful life of a recognized  intangible  asset under FASB
Statement No. 142,  "Goodwill and Other  Intangible  Assets." The intent of this
FSP is to  improve  the  consistency  between  the useful  life of a  recognized
intangible  asset under Statement 142 and the period of expected cash flows used
to measure the fair value of the asset under FASB  Statement No. 141R, and other
U.S. generally  accepted  accounting  principles.  This FSP is effective for our
interim and annual financial statements beginning in fiscal 2010. The Company is
in the process of  evaluating  the impact,  if any, that the adoption of FSP No.
FAS 142-3 will have on its financial statements

Effect of Inflation

We continued to  experience  inflationary  cost  increases in certain  operating
costs, including raw materials,  utilities, freight, insurance and benefit costs
during the three month period ended June 27, 2008.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For  quantitative  and qualitative  disclosures  about market risk, see Item 7A,
"Quantitative  and  Qualitative  Disclosures  About Market  Risk," of our Annual
Report on Form 10-K for the year ended  September  28,  2007.  Our  exposures to
market risk have not changed materially since September 28, 2007.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Disclosure Controls and Procedures

         We maintain disclosure controls and procedures (as such term is defined
         in Rules  13a-15(e)  and  15d-15(e)  under the  Exchange  Act) that are
         designed to provide reasonable  assurance that information  required to
         be disclosed in the reports we file or submit under the Exchange Act is
         recorded,  processed,  summarized and reported  within the time periods
         specified in the SEC's rules and forms,  and that such  information  is
         accumulated and  communicated  to our  management,  including our Chief
         Executive Officer and our Chief Financial Officer,  as appropriate,  to
         allow timely decisions regarding required disclosure.  In designing and
         evaluating  the   disclosure   controls  and   procedures,   management
         recognized  that  any  controls  and  procedures,  no  matter  how well
         designed  and  operated,  can  provide  only  reasonable  assurance  of
         achieving the desired control  objectives,  and management  necessarily
         was  required to apply its  judgment  in  evaluating  the  cost-benefit
         relationship of possible controls and procedures.

         Our management,  with the  participation of our Chief Executive Officer
         and Chief Financial  Officer,  has evaluated the  effectiveness  of our
         disclosure  controls and procedures as of June 27, 2008.  Based on that
         evaluation  and due to the  existence  of  material  weaknesses  in our
         internal control over financial reporting,  our Chief Executive Officer
         and Chief Financial Officer have concluded that our disclosure controls
         and procedures were not effective as of June 27, 2008.

         Management  believes  that all of the material  weaknesses,  except for
         internal  audit,  described  under the caption "Item 9A -- Controls and
         Procedures" in the Company's  Annual Report on Form 10-K for the fiscal
         year ended  September 28, 2007 existed as of June 27, 2008,  and we are
         continuing to address  deficiencies in the Company's internal controls.
         Certain of these  remediation  actions are described  under the caption
         "Item 9A -- Controls and Procedures" in the Company's  Annual Report on
         Form 10-K for the fiscal  year ended  September  28,  2007.  Efforts to
         remediate and test our internal  control over  financial  reporting are
         continuing  and are  expected  to continue  throughout  fiscal 2008 and
         beyond.

     (b) Changes in Internal Control Over Financial Reporting

         During the third quarter of fiscal 2008, the Company has become current
         in its filing  requirements  of the SEC through the  submission  of its
         Annual Report on Form 10-K for fiscal years 2005,  2006 and 2007.


                                       20


          With this filing, the Company's quarterly  reporting  requirements are
          also met. The Company has formed an effective Disclosure Committee for
          the review of its Form 10-K and Form 10-Q's.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Pending Litigation; Indemnification Obligations

Since August, 2005, a number of substantially similar class action lawsuits have
been filed and  consolidated  into a single action in the United States District
Court for the Western  District of Missouri styled In re American  Italian Pasta
Company  Securities  Litigation  (Case No.  05-CV-0725-W-ODS).  The consolidated
amended  complaint names us as a defendant and certain of our former and current
officers and directors,  and our former independent registered public accounting
firm,  Ernst & Young LLP. It generally  alleges that the defendants  made public
statements concerning our financial results that were false and misleading.  The
plaintiffs seek unspecified  monetary damages for alleged  violations of Section
10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder,
and alleged violations of Section 20(a) of the Securities  Exchange Act of 1934.
The  consolidated   amended  complaint  also  asserted   purported   shareholder
derivative  claims  against  various  of our  current  and former  officers  and
directors for breaches of their fiduciary duties and unjust enrichment,  against
certain of our former  officers  for  violation of the  Sarbanes-Oxley  Act, and
against Ernst & Young LLP for professional  negligence,  accounting malpractice,
and aiding and abetting breaches of fiduciary duty. These allegations  generally
related to our accounting practices and financial reporting,  as well as claimed
improper insider trading and the claimed improper award of bonuses to certain of
our officers and  directors.  The court  subsequently  dismissed the  derivative
claims.  The  case  has  been  certified  as a class  action  on  behalf  of all
purchasers of our common stock on or after January 23, 2002, and who held shares
on August 9, 2005.

By a stipulation of settlement with us and our named former and current officers
and directors  ("settling  defendants"),  executed on October 26, 2007 and filed
with the Court on October 29,  2007,  lead counsel for  plaintiffs  and settling
defendants  agreed to settle the consolidated  action. On February 12, 2008, the
Court gave final  approval  to the  settlement.  The  settlement  of the federal
securities class action lawsuit was for $25 million, comprised of $11 million in
cash,  to be provided  by our  insurers,  and $14 million in our common  shares.
Under the terms of the  settlement,  on March 27, 2008,  class counsel  received
527,903 common shares in satisfaction of the Court approved fee award. The class
will receive approximately  930,000 common shares,  subject to adjustment upward
or downward, based upon the Company's stock price as provided in the stipulation
of settlement.  The settlement was recorded in the fourth quarter of fiscal year
2005.

In November 2005, a shareholder derivative action styled Haag v. Webster, et al.
(Case  No.  05-CV-33137)  was  filed in the  Circuit  Court of  Jackson  County,
Missouri.  The petition names as defendants  certain of our former  officers and
directors and our former independent  registered public accounting firm, Ernst &
Young LLP. We are named as a nominal  defendant.  The petition  alleges that the
defendants  are liable to us for  breaches  of  fiduciary  duties and aiding and
abetting such breaches, corporate waste, gross mismanagement, unjust enrichment,
and  abuse  of  control  based  upon  our  accounting  practices  and  financial
reporting; that certain former and current officers and directors are liable for
breaches  of  fiduciary  duties for  insider  selling  and  misappropriation  of
information;  and that Ernst & Young is liable for  professional  negligence and
accounting  malpractice,  aiding and abetting  breaches of fiduciary  duty,  and
breach  of  contract.  The  petition  seeks  equitable  relief  and  unspecified
compensatory and punitive damages. The proposed settlement requires the adoption
of certain  governance  reforms by the Company  and  payment of $1.5  million in
attorney's  fees and costs to counsel for the  plaintiff,  which payment will be
made under our  insurance  policies.  The  settlement  was recorded in the first
quarter of fiscal year 2006.

On  September  6, 2006,  an action  styled  Chaiet v.  Allen,  et al.  (Case No.
06-744-CV-W-DW)  was filed in the United States  District  Court for the Western
District of Missouri. The complaint asserts claims against certain of our former
and current  officers  and  directors  for  breaches of their  fiduciary  duties
relating to our  accounting  practices and financial  reporting.  Plaintiff also
asserts claims on behalf of a putative  class against our current  directors for
failing  to  schedule  or hold an annual  meeting  for  2006.  We are named as a
nominal  defendant.  The complaint  seeks  unspecified  monetary  damages on our
behalf and an order  requiring that an annual meeting be scheduled and held. The
defendants have moved to dismiss this lawsuit as well. On February 12, 2007, the
court stayed all future


                                       21


proceedings  in the  matter  until  forty-five  days  after  we  issue  restated
financial  results,  and required us to provide  monthly  reports  regarding the
status of its restatement  process.  On March 13, 2008, we reached an agreement,
in principle, subject to court approval, to settle this action on a consolidated
basis with the Haag action.

On March 7, 2007, a suit styled Zaleon v.  American  Italian Pasta Company (C.A.
No. 2775-N) was filed in the Delaware Chancery Court against us alleging that no
annual  meeting of  shareholders  had been held  since  February  7,  2005,  and
requesting  that we be compelled to convene an annual  meeting.  Proceedings  in
that matter are currently stayed by agreement of the parties. The agreement,  in
principle, to settle the other two derivative actions will resolve this action.

SEC and DOJ Investigations

Since July 2005, we have been in communication with the staff of the Enforcement
Division  of the  SEC  about  the  matters  under  investigation  by  our  Audit
Committee. In late July 2005, the SEC staff issued a voluntary request to us for
a wide range of  documents  relating  to,  among other  things,  our  accounting
practices,  financial reporting and other public disclosures, 2004 restructuring
program,  internal control weaknesses  identified in our prior SEC filings,  and
compensation  and  benefits  information  for  certain  persons  employed  by or
associated  with us during  the time  period  under  investigation  by the Audit
Committee.

On January 31,  2006,  as part of a formal,  non-public  investigation,  the SEC
staff  issued a subpoena to us,  expressly  incorporating  its earlier  document
requests and requesting additional documents and information  concerning,  among
other things, actual or potential errors in our financial statements,  budgeting
process,  communications  with investors,  and  compensation  for and securities
transactions  by certain  persons  employed by or associated  with us during the
time period under investigation by the Audit Committee. Since that time, the SEC
staff has issued  additional  subpoenas  to us,  seeking  additional  documents,
testimony,  and  information  relating to the same or similar  subject  matters.
Representatives  of the DOJ have  been  coordinating  with the SEC staff in this
investigation.

We are cooperating with these  investigations  and have provided  information to
the SEC staff and the DOJ in response to the  subpoenas  and  requests.  We have
had, and are continuing to have,  discussions with the SEC staff, and separately
with the DOJ, regarding the conclusion of their investigation  activities and of
their  respective  views  of  appropriate  bases  on  which  to  reach  mutually
acceptable settlements.  Such settlements could result in a Deferred Prosecution
Agreement,  which could include the assignment of a corporate monitor, continued
cooperation with any ongoing  investigations  and/or a monetary fine. Due to the
status of ongoing  discussions  with the DOJ and SEC staff,  the Company  cannot
estimate a range of possible  loss that could  result from a monetary  fine,  if
any.  There can be no assurance  that any  settlement  would not have a material
adverse effect on our business,  financial  condition,  results of operations or
cash flows. We have been cooperating with these investigations.

Department of Commerce Matter

In 1996, an investigation by the International  Trade  Administration of the DOC
revealed  that  Italian  and Turkish  producers  were  engaging in unfair  trade
practices  by  selling  pasta at less than fair  value in the U.S.  markets  and
benefiting from subsidies from their respective  governments.  The International
Trade Commission ("ITC") subsequently determined that the unfair trade practices
caused or would cause material injury to U.S.  manufacturers.  As a result,  the
ITC imposed anti-dumping duties (the "AD Order") and countervailing  duties (the
"CV Order") on certain imported pasta from Italy and Turkey  (collectively,  the
"AD/CV  Orders").  In 2001,  the AD/CV Orders were  extended  five years through
2006.  In  September  2007,  the ITC  extended the AD/CV Orders for another five
years through 2011. Under the AD/CV Orders, U.S. importers of certain pasta from
Italian and Turkish  producers  are  assessed  anti-dumping  and  countervailing
duties at rates  determined by the DOC for the relevant foreign  producer.  Each
foreign producer may undergo an annual administrative review which may result in
an increase or decrease of the producer's rate.

During its  ongoing  analysis of  financial  matters,  we reviewed  transactions
reported  to the DOC for the period  July 1, 2002  through  June 30, 2003 in the
antidumping  proceeding on pasta imported from Italy. Based on the data reported
by us and our Italian  subsidiary,  Pasta Lensi,  S.r.l., the DOC revoked the AD
Order with respect to Pasta Lensi. During our investigation, information came to
our  attention  that certain  data  reported to the DOC was  incorrect  and as a
result,  Pasta Lensi may not have been eligible for  revocation of the AD Order.
We  disclosed  the  issue  to the  DOC  and  simultaneously,  we  provided  this
information to the DOJ, which requested further information on this


                                       22


matter.  As a result  of our  disclosure  to the DOC,  it  published  notice  on
February 22, 2008 in the Federal  Register of its preliminary  determination  to
reinstate Pasta Lensi in the existing  antidumping  duty order at a cash deposit
rate of 45.6%. The preliminary determination applies, on a prospective basis, to
all imports of subject products from and after February 22, 2008. A cash deposit
rate of 45.6% would have a  significant  adverse  impact to our working  capital
position. We have appealed this determination.  We have substantially  mitigated
the impact of this order by changing our ingredient to organic semolina in March
2008,  thereby  manufacturing  products for import into the U.S. that are exempt
from the  antidumping  duty order.  Based on our review,  we do not believe this
order will have a material adverse effect on our financial condition.

ITEM 1A. RISK FACTORS

There have been no material  changes from the risk factors  disclosed in Part I,
Item 1A, of the  company's  Annual Report on Form 10-K for the fiscal year ended
September 28, 2007.

ITEM  2.  UNREGISTERED  SALES  OF  EQUITY  SECURITIES  AND USE OF  PROCEEDS  
The following table provides the  information  with respect to purchases made by
the Company of shares of its common  stock  during the third  fiscal  quarter of
2008:


                                                                       Total Number of
                              Total Number of                        Shares Purchased
                                   Shares        Average Price          as Part of
Period                         Purchased(1)   Paid per Share Plan   Publicly Announced
------                         ------------   -------------------  -------------------

March 29 - April 25                      -             $    -                    -
April 26 - May 23                        -                  -                    -
May 24 - June 27                       195                9.21                   -
                              ------------      --------------        ------------
Total                                  195              $ 9.21                   -
                              ============      ==============        ============

(1) Shares received as payment for taxes related to vesting of restricted stock.


On October 4, 2002 the Company's Board of Directors authorized up to $20 million
to implement a common stock  repurchase  plan. There were no purchases under the
plan during the second fiscal  quarter of 2008.  There is  $7,881,000  available
under the Common Stock repurchase plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable

ITEM 5. OTHER INFORMATION

        Not applicable

ITEM 6. EXHIBITS
------- --------------------------------------------------------

31.1      Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.

31.2      Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.

32.       Certification  of the CEO  and  CFO  Pursuant  to  Section  906 of the
          Sarbanes-Oxley Act of 2002.


                                       23


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                      American Italian Pasta Company



Date:  August 6, 2008                 /s/ John P. Kelly
                                      ------------------------------------------
                                      John P. Kelly
                                      President and Chief Executive Officer





Date:  August 6, 2008                  /s/ Paul R. Geist
                                       -----------------------------------------
                                       Paul R. Geist
                                       Executive Vice President and
                                       Chief Financial Officer




                         AMERICAN ITALIAN PASTA COMPANY
                                  EXHIBIT INDEX



Exhibit
Number                          Description of Exhibit
-------  -----------------------------------------------------------------------  

31.2      Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.

31.2      Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.

32.       Certification  of the CEO  and  CFO  Pursuant  to  Section  906 of the
          Sarbanes-Oxley Act of 2002.