UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 26, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                to


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
incorporation or organization)

(I.R.S. Employer Identification No.)4100 N. Mulberry Drive, Suite 200
Kansas City, Missouri

64116(Zip Code)(Address of principal executive offices)


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

Securities
registered pursuant to Section 12(b) of the Act:

Title

Name of ExchangeClass A Convertible Common Stock:
$.001 par value per share

The NASDAQ Stock Market, LLC


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

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
definition of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

Smaller reporting company o


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

As of March 28, 2008, the aggregate market value of the Registrant's Class A Convertible Common Stock held by non-affiliates (using the
closing price) was approximately $100,039,000.

The
number of shares outstanding as of December 1, 2008 of the Registrant's Class A Convertible Common Stock was 20,264,000 and there were no shares outstanding of the
Registrant's Class B Convertible Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:Portions of the definitive Proxy Statement to be delivered to Stockholders in connection with the 2009
Annual Meeting of Stockholders are incorporated by reference in Part III.



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AMERICAN ITALIAN PASTA COMPANY    FORM 10-K  FISCAL YEAR ENDED SEPTEMBER 26, 2008  INDEX

PagePART I

1ITEM 1.

BUSINESS

1ITEM 1A.

RISK FACTORS

8ITEM 1B.

UNRESOLVED STAFF COMMENTS

15ITEM 2.

PROPERTIES

16ITEM 3.

LEGAL PROCEEDINGS

16ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

19PART II

20ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

20ITEM 6.

SELECTED FINANCIAL DATA

22ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

35ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

36ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

69ITEM 9A.

CONTROLS AND PROCEDURES

69ITEM 9B.

OTHER INFORMATION

71PART III

72ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

72ITEM 11.

EXECUTIVE COMPENSATION

72ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

72ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

72ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

72PART IV

72ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

72


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Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains statements concerning potential future events. These forward-looking
statements are based upon assumptions by our management, as of the date of this Annual Report on Form 10-K, including assumptions about risks and uncertainties faced by us. Readers
can identify these forward-looking statements by the use of verbs such as expects, anticipates, believes, estimates, intends, projects, may, will, predicts, 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 described below in Item 1ARisk Factors. Readers are
strongly encouraged to consider those factors when evaluating any such forward-looking statements. Except as otherwise required by the federal securities laws, we will not update any forward-looking
statements in this Annual Report on Form 10-K to reflect future events or developments.

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PART I

ITEM 1.    BUSINESS

General

American Italian Pasta Company is a Delaware corporation and was incorporated and commenced operations in 1988. Unless the context
otherwise indicates, all references in this Annual Report on Form 10-K to "the Company", "we", "us", "our", and similar words are to American Italian Pasta Company and its
subsidiaries. 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. During the fiscal year ended September 26, 2008, we had revenues of
$569.2 million.

We
report on a 52/53 week fiscal year end that generally consists of four thirteen week quarters that end on the Friday nearest the end of the quarter. Approximately every sixth year we
report on a 53-week fiscal year end that results in a fourteen week first quarter of that fiscal year. Fiscal years 2008, 2007 and 2006 were 52 weeks and ended on
September 26, 2008, September 28, 2007 and September 29, 2006, respectively. There is no material seasonal impact on our operations.

We
have production, milling, and distribution facilities located in Excelsior Springs, Missouri, Columbia, South Carolina, Tolleson, Arizona, and Verolanuova, Italy. We outsource
distribution at all of our facilities and we outsource milling at the Arizona and Italy plants. Our U.S. plants serve both retail and institutional customers. We believe the construction of the
Missouri plant in 1988 represented the first use in North America of a vertically integrated, high-capacity pasta plant using Italian milling and pasta production technology. Our South
Carolina plant, which is also vertically integrated, commenced operations in 1995, and our Arizona plant commenced operations in 2003. The Italy plant, which was constructed in 2001, serves primarily
retail and institutional customers internationally and also serves retail customers in the United States.

Our
executive offices are located at 4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116, and our telephone number is
(816) 584-5000. Our website is located athttp://www.aipc.com. We make available free of charge through our website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as they are
reasonably available after these materials are electronically filed with or furnished to the Securities and Exchange Commission. Information contained in our website is not a part of this Annual
Report on Form 10-K.

AIPC Way

We have developed the AIPC Way, which embodies our vision, mission, operational model, business approach, core capabilities and values.
The components of the AIPC Way are as follows:



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Products

Our product line is comprised of approximately 3,700 items or stock-keeping units ("SKUs"). In many instances, we produce pasta to our
customers' unique specifications. We produce approximately 300 different shapes and sizes of pasta products in multiple package configurations, including bulk packages for institutional customers and
smaller individually-wrapped packages for retail consumers. The varied shapes and sizes include long goods such as spaghetti, linguine, fettuccine, angel hair and lasagna, and short goods such as
elbow macaroni, mostaccioli, rigatoni, rotini, ziti and egg noodles. These products are manufactured for a variety of customers including those who purchase our products as branded offerings from
retailers and for retailers who sell products we manufacture as store or customer brands, or also commonly known as private label offerings.

Our
products are produced to satisfy the specifications of our customers as well as our own product specifications. We conduct internal laboratory evaluation against competitive products
on physical characteristics and cooking performance. Physical characteristics considered include color, speck count, shape and consistency. Cooking performance considerations include starch release,
protein content, and texture. Our customers also perform competitive product comparisons on a regular basis.

In
fiscal year 2008, we continued our strategy to ensure we are pursuing a profitable health platform through our private label and branded business in grocery retailers, club stores,
mass merchants and discount stores. We have developed a number of gluten free, whole wheat, whole grain, enriched multi-grain, and organic products. In addition, during fiscal year 2008 we expanded
our private label offerings to include pasta and rice sides, which we believe provide opportunities for the retailers we serve and consumers.

The
pasta market is changing and we will transform our Company to remain an industry leader. The dry pasta market remains strong and consumers are buying more pasta. Private label (also
known as and referred to herein as customer or store brands) is growing at the expense of manufacturer-owned brands due to the efforts of retailers and the effects of the economy. As retailers
consolidate, regional manufacturer-owned brands are at a competitive disadvantage. We will continue to capitalize on private label growth while optimizing the potential of our brands.

Our
current plan is to optimize our business around these market changes and put even more emphasis on being a private label leader. Retail private label is the fastest growing part of
our business and is a core strength for us. We intend to invest more resources to category management and to help retailers increase private label sales and profit. We intend to expand our private
label offerings to include more premium and healthy products.

Our
owned brands represent significant volume and profit. We intend to invest even more in our owned brands that are in a preferred position in the marketplace by focusing our resources
on our strongest brands in their strongest markets. This review of our brand portfolio resulted in a non-cash brand impairment charge against two of our smaller brands during the fourth
quarter of fiscal year 2008 of $3.7 million.

We
are continuing to refine our focus on food service and industrial businesses to improve our business performance. We have aligned the food service business more closely with the
supply chain to drive cost improvement which is important to our food service customers.

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Our
U.S. production facilities are inspected each year by the American Institute of Baking ("AIB"), a United States baking, food processing and allied industries evaluation agency, for
sanitation and food safety. Our plants consistently achieve the AIB Excellent/Superior ratings. In addition, our Tolleson, Arizona plant is certified organic by the Organic Crop Improvement
Association International. We also implemented a comprehensive Hazard Analysis Critical Control Point ("HACCP") program to continuously monitor and improve the safety, quality and
cost-effectiveness of our facilities and products.

Our
Italian plant is inspected by AIB and a European representative similar to AIB, the British Retail ConsortiumFood Safety ("BRC"), one of the recognized European Food
Safety Bodies. Our facility received the "Grade A" certification from the BRC. Our Italian plant is an ISO 9002 certified production facility and certified organic by Consorzio Per Il Controllo
Dei Prodotti Biologici (Consortium for the Control of Biological Production). In addition, we have implemented HACCP and Food Safety Programs consistent with the U.S. facilities.

Marketing and Distribution

We actively sell and market our domestic products through our sales employees and with the use of food brokers and distributors
throughout the United States, Canada, Mexico, and the Caribbean. Our senior management is directly involved in the selling process in all customer markets. Our over-arching sales and
marketing strategy is to provide category leadership, quality product, a complete product offering, competitive pricing and superior customer service to attract new customers and to maintain and grow
pasta sales to existing customers. We work with our customers to develop marketing and promotional programs specifically tailored to stimulate pasta consumption in their trading area based upon the
specific strategy and role for pasta.

We
have established a significant market presence in North America by developing strategic customer relationships with food industry leaders that have substantial pasta requirements. We
supply private label and branded pasta to many of the largest grocery retailers in the United States, including serving as a primary supplier of pasta to Walmart Stores, Inc. ("Walmart"). We are the
largest pasta supplier to Sysco Corporation ("Sysco"), the nation's largest marketer and distributor of food service products. We also have developed supply relationships with leading food processors,
which use our pasta as an ingredient in their branded food products.

Our
Italian plant enables us to offer authentic Italian pasta products. This facility serves European, North American, and other international markets with branded, private label,
ingredient and food service products.

As
part of our overall customer development strategy, we use our category management expertise to assist customers in optimizing category growth and profitability. Our category
management expertise allows us to recommend SKU assortment and shelf space allocation to both private label and branded customers. Our representatives also assist food processors in incorporating our
pasta as an ingredient in their customers' food products. We provide dedicated technical support to our institutional customers by making recommendations regarding the processing of pasta in their
facilities. We believe that these value-added activities provide customers with a better appreciation and acceptance of our products.

We
have demonstrated our commitment to customer service through the development of enhanced customer service programs. Examples of these programs include our implementation of an
Efficient Customer Response ("ECR") model which uses Electronic Data Interchange ("EDI") and vendor replenishment programs to assist key customers, and category management services for our private
label and branded customers.

Our
primary distribution centers in North America are strategically located at our production facilities in South Carolina, Missouri and Arizona to serve the national market. Finished
products are

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automatically
conveyed via enclosed case conveying systems from the production facilities to the distribution centers for palletizing and storage until shipping. The combination of integrated
facilities and multiple distribution centers enables us to realize distribution cost savings and provides lead-time, fill rate and inventory management advantages to our customers. The
operation of the Missouri, South Carolina and Arizona distribution centers is outsourced under a long term agreement with Ozburn-Hessey Logistics, LLC ("OHL"), a firm
specializing in warehouse and logistics management services.

Pasta Production

Pasta's primary ingredient is semolina, which is extracted from durum wheat through a milling process. Durum wheat is used primarily
for pasta. Each variety of durum wheat has its own unique set of protein, gluten content, moisture, density, color and other attributes which affect the quality and other characteristics of the
semolina. We select and blend different durum wheat varieties in order to meet customer semolina specifications.

Our
ability to produce high-quality pasta generally begins with purchasing durum wheat directly from elevators, grower-owned cooperatives, and the Canadian Wheat Board among
other sources. This purchasing method ensures that the extracted semolina meets our specifications. We have several sources for durum wheat and are not dependent on any one supplier or sourcing area.
As a
result, we believe that we have adequate sources of supply for durum wheat. We occasionally buy and sell semolina to balance our milling and production requirements.

Durum
wheat is a cash crop whose market price fluctuates. To a certain extent, we manage our durum wheat cost risk through advance purchase contracts for durum wheat that are generally
less than six months in duration and cost pass-through mechanisms and other arrangements with our customers. We seek to manage the balance of such risk through continued improvement in our
efficiencies and pricing of our products. Competitive pressures may limit our ability to pass-through these costs.

Durum
wheat is shipped by rail to our production facilities in Missouri and South Carolina under annually negotiated contracts or market tariff rates. We purchase durum wheat and have it
converted to semolina and semolina/flour blends for our Tolleson, Arizona facility from an adjacent milling facility owned by Bay State Milling Company ("Bay State") under the terms of a
long-term supply agreement. The agreement is for an initial 10-year term with renewal provisions thereafter. In the event of ownership changes or sustained under-performance,
we have contractual rights to purchase the mill at a book value established at the start of the supply agreement less future depreciation. We are obligated to purchase 80% of our annual Tolleson
requirements for semolina from Bay State with an annual minimum of 50 million pounds. Pricing for these purchases is based on the cost of raw materials plus a conversion fee. We have satisfied
our minimum requirements and paid Bay State approximately $21.2 million in fiscal year 2008, $13.8 million in fiscal year 2007 and $9.8 million in fiscal year 2006.

In
Italy, we purchase our semolina requirements from Italian mills to meet our specific quality and customer needs.

We
generate and sell by-products from our milling operations in the form of flour and mill feed. These products compete in the marketplace with alternative products for feed
usage and, therefore, fluctuate in price accordingly. We manage our by-product sales price risk through a variety of pass-through mechanisms and with forward sales contracts.

We
purchase our packaging supplies, including poly-cellophane, paperboard cartons, boxes and totes from third parties. We believe we have adequate sources of packaging
supplies. In addition, we rely on supply chain logistics and operations planning to optimize finished goods inventory, minimize the risk of obsolescence for finished goods and raw materials, maximize
customer service, and achieve efficient factory utilization.

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Trademarks

We hold a number of federally registered and common law trademarks, primarily related to our brands, which we consider to be of value
and importance to our business. We have also registered other trademarks.

Dependence on Major Customers

Historically, a limited number of customers have accounted for a substantial portion of our revenues. During the fiscal years ended
September 26, 2008, September 28, 2007 and September 29, 2006, sales to Walmart accounted for approximately 22%, 23% and 22%, respectively, of our total revenue. During the fiscal
years ended September 26, 2008, September 28, 2007 and September 29, 2006, sales to Sysco accounted for approximately 9%, 9% and 11%, respectively, of our total revenue. We expect
to continue to rely on a limited number of major customers for a substantial portion of our revenue.

We
generally do not have long-term supply contracts with our customers, including Sysco and Walmart. Accordingly, we are dependent upon our customers to sell our products and
to assist us in promoting market acceptance of, and creating demand for, our products. An adverse change in our relationships with or the financial viability of one or more of our major customers
could have a material adverse effect on our business, financial condition and results of operations.

Competition

We operate in a highly competitive environment against numerous well-established national, regional and foreign companies,
and many smaller companies. We compete in the procurement of raw materials, the development of new products and product lines, the improvement and expansion of previously introduced products and
product lines and the production, marketing and distribution of these products. Some of these companies with which we compete have longer operating histories, significantly greater brand recognition,
or more financial or other resources. Our products compete with a broad range of food products, both in the retail and institutional customer markets. Competition in these markets generally is based
on achieving advantages relating to distribution, product quality, pricing, packaging, advertising, promotion, customer service, and logistics capabilities.

Our
direct competitors include Barilla (a large multi-national Italian-owned diversified food company), New World Pasta Company owned by Ebro Puleva (Spain's leading food processor),
Dakota Growers Pasta Company, Philadelphia Macaroni Co. Inc. and A. Zerega's Sons, Inc., and foreign companies such as Italian pasta producer DeCecco. For sales in Europe and
other international markets, our Italian plant competes with Barilla and numerous Italian pasta producers.

Pasta Markets

Although we have international sales, our revenues from sales in North America amounted to 92%, 93% and 95% of our revenues in fiscal
years 2008, 2007 and 2006, respectively.

North
American retail pasta (in all its forms; which includes such categories as refrigerated pasta, frozen meals with pasta, soup with pasta, and stove top meals with pasta) consumption
was estimated to have been approximately $6.4 billion in fiscal year 2008 (as measured by A.C. Nielsen, which data does not include Walmart). The pasta industry consists of two primary customer
markets: (i) Retail, which includes grocery retailers, club stores, mass merchants, drug and discount stores that sell branded and private label pasta to consumers; and
(ii) Institutional, which includes both food service distributors that supply restaurants, hotels, schools and hospitals, as well as food processors that use pasta as a food ingredient.

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Customer MarketsRetail:The U.S. Retail market includes traditional grocery retailers, club stores, mass merchants, drug and discount stores. We are
the leading producer of retail dry pasta in the U.S. consisting of our brands and the private label businesses of our customers. Our primary competitors for retail pasta sales in the United States by
volume are New World Pasta, Barilla and Dakota Growers Pasta Company, respectively. Our strategy is to provide our retail partners with a full portfolio of pasta products including regional brands,
private label store brands, authentic Italian imported products, and specialty products all delivered within the highest quality standards and with exceptional customer service.

Customer MarketsInstitutional: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 that sell products to restaurants, healthcare facilities, schools, hotels,
industrial caterers, and multi-unit restaurant chains that procure directly. The food service market is highly fragmented and is served by numerous regional and local food distributors.

The
Institutional market also includes sales to food processors who use pasta as an ingredient in their food products such as frozen dinner entrees, side dishes, dry side dish mixes,
canned soups, and single-serve meals. The consistency and quality of the color, starch release, texture, cooking consistency, and gluten and protein content of pasta produced for food processors is
crucial to the success of their products. As a result, food processors have stringent specifications for these attributes.

The
size of the Institutional market is affected by the number of food processors that elect to produce pasta internally rather than outsourcing their production. A substantial amount of
the pasta used by food processors has been and continues to be manufactured internally for use by food processors in their own products.

Government Regulation; Environmental Matters

We are subject to various laws and regulations relating to the operation of our production facilities, the production, packaging,
labeling and marketing of our products and pollution control, including air emissions, which are administered by federal, state, and other governmental agencies. Our production facilities are subject
to inspection by the U.S. Food and Drug Administration ("FDA") and the Occupational Safety and Health Administration, as well as various state agencies.

Our
facilities are subject to air permitting by the U.S. Environmental Protection Agency and/or authorized States under federal and/or state regulations implementing the federal Clean
Air Act. Each of our facilities is currently operating under valid permits. Costs to renew these permits are immaterial.

Our
facilities are subject to certain safety regulations including regulations issued pursuant to the U.S. Occupational Safety and Health Act. These regulations require us to comply with
certain manufacturing safety standards to protect our employees from accidents. We believe that we are in material compliance with all employee safety regulations.

Our
facilities are also subject to annual reporting requirements under the Emergency Planning and Community Right-to-Know Act and its implementing regulations. No
permit is required, but we do submit reports to federal and/or state regulators, local emergency planning organizations, and the local fire department with jurisdiction over the facilities quantifying
all hazardous materials stored on our property that meet or exceed threshold quantities. Costs associated with this annual reporting are minimal.

The
Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), as amended, and other similar state laws require the cleanup of hazardous waste disposal
sites. Parties that may be liable under CERCLA for the cleanup of a hazardous waste disposal site include the current property owner, the operator, owners and operators of the property at the time of
a

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release
of hazardous substances, the arranger of the disposal, and the transporter of hazardous substances. To date, we have not been notified by the U.S. Environmental Protection Agency, any state
agency, or any other private party that we are considered responsible or potentially responsible for some aspect of the cleanup of any hazardous waste disposal site under CERCLA or any other similar
state laws.

We
received the Customs Trade Partnership Against Terrorism ("C-TPAT") certification from the United States Customs and Border Protection ("CBP") division of the Department
of Homeland Security. C-TPAT was developed by the CBP after the September 11, 2001 terrorist attacks as a way to identify low risk importers and facilitate the efficient release of
goods, even under heightened security conditions. To become a participant of C-TPAT, our security measures were reviewed and certified by CBP. As part of the C-TPAT
certification and review process, CBP is reviewing the implementation of our security measures. C-TPAT certification includes certain benefits to participants and may help reduce the risk
of significant delays in the importation of our product.

All
imported pasta is subject to U.S. import regulations. Duties are assessed in accordance with the Harmonized Tariff Schedule of the United States.

Employees

As of September 26, 2008, we employed 665 full-time persons worldwide of whom 178 were selling and administrative
employees and 487 were manufacturing employees. Our 609 U.S. employees were not represented by any labor unions. We have 56 Italian employees, 17 of whom were represented by a labor union. We consider
our employee relations to be excellent.

Pasta Industry Environment

During fiscal year 2008, the dry pasta market continued to improve as consumer demand for pasta products increased slightly compared to
fiscal year 2007. We believe this growth was driven by a shift in consumer demand from traditional semolina based pasta to more whole or multi-grain products such as whole wheat and whole grain pasta.
We continue to focus our efforts on building market share in this growing part of the industry.

Restructuring and Rightsizing Program; Subsequent Company Developments

In response to the pasta industry conditions, during the fourth quarter of fiscal year 2004, we idled full operations at our Kenosha,
Wisconsin manufacturing facility, temporarily shut down production at two of our other domestic manufacturing facilities, and exited certain leased domestic distribution centers. As a result of these
actions, during fiscal year 2004 we recorded $2.9 million of restructuring expenses primarily related to employee severance and termination benefits, lease costs, and supply agreement costs. In
2005, we recognized $0.6 million benefit related to the reversal of a previously established restructuring reserve due to the early reactivation of the Kenosha plant which was not contemplated
at the time the restructuring reserve was established. The plant was permanently closed in April 2006 and was sold in August 2006.

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ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below, as well as the other information included or
incorporated by reference in this Annual Report on Form 10-K before investing in our common stock. If any of the following risks occur, our business, financial condition or
operating results could be materially adversely affected. The risks described below are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently
believe to be immaterial may also materially adversely effect our business, financial condition and operating results.

A change in our relationship with our major customers could adversely affect our revenues.

Historically, a limited number of customers have accounted for a substantial portion of our revenues. If our relationship with one or
more of our major customers changes or ends, our sales could suffer, which could have a material adverse effect on our business, financial condition and results of operations. We expect that we will
continue to rely on a limited number of major customers for a substantial portion of our revenues in the future. During the 2008, 2007, and 2006 fiscal years, sales to Walmart accounted for
approximately 22%, 23% and 22%, respectively. During the 2008, 2007, and 2006 fiscal years, sales to Sysco accounted for approximately 9%, 9% and 11%, respectively. Currently, we do not have
long-term supply agreements with a substantial number of our customers, including Walmart and Sysco. Our exclusive arrangement with Sysco expired on December 31, 2006. There is no
guarantee that the Sysco volumes and revenues will continue as they were under the contract.

Fluctuations in the cost of raw materials, energy, packaging materials or other items could adversely affect us.

The principal raw material in our products is durum wheat. We generally procure durum from North Dakota, Montana, and Canada for our
Missouri and South Carolina plants, and we generally procure durum from the southwest section of the U.S for our Arizona plant. The cost of durum wheat represents a substantial portion of our total
cost of goods sold and changes in the supply of durum wheat could have a material adverse effect on our operating profit and margins. As durum wheat is used almost exclusively in pasta production and
is a narrowly traded, cash-only commodity crop, we have limited means to protect ourselves from price fluctuations. Durum prices have been volatile and may continue to be volatile in the
future.

The
supply and price of durum wheat in North America and on a global scale is subject to market conditions and is influenced by several factors beyond our control,
including:



We
rely on the supply of flexible film, folding cartons and other packaging materials, which represent a significant portion of our cost of goods sold, that fluctuate in price due to
market conditions beyond our control.

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We
rely on rail carriers for transportation of durum wheat to our milling facilities, and ocean and truck freight for movement of our finished goods. Fuel costs, which have been and may
continue to be volatile, effect our transportation costs for raw materials and finished goods.

Fluctuations
in the cost of raw materials (including durum wheat ingredients and egg products), energy (including transportation costs), packaging materials, or other items could have a
material adverse effect on our operating profit and margins. Historically, changes in sale prices of our pasta products have lagged changes in our materials costs. Furthermore, if the cost of raw
materials, energy, packaging materials or other items increase, competitive pressures may limit our ability to raise prices or affect the timing or magnitude of such price increases. Conversely, if
the cost of raw materials, energy, packaging materials or other items decrease, competitive pressures may cause us to lower prices before we have fully utilized higher priced inventory or the
magnitude of price decreases may exceed the magnitude of the corresponding decrease in raw materials, energy, packaging materials or other costs. Accordingly, fluctuations in the cost or supply of raw
materials, energy, packaging materials or other items may have a material adverse impact on our results of operations and cash flows.

If our customers curtail their operations, our financial performance may be adversely affected.

Due to the highly competitive environment currently existing in the food retailing and foodservice industries, some of our retail and
foodservice customers have experienced economic difficulty. In addition, the food retailing industry has experienced consolidation. A number of our customers have been forced to close stores and
certain others have sought bankruptcy protection. If a material number of our customers, or any one large customer, closed a significant number of stores, filed for bankruptcy protection, or
consolidated operations with another company, these actions could have a material adverse impact on our business, financial condition, and results of operations.

A decline in demand for dry pasta could adversely affect our financial performance.

We focus primarily on producing and selling dry pasta. We expect to continue this primary focus. Because of our product concentration,
any decline in consumer demand or preference for dry pasta or any other factor that adversely affects the pasta market could have a material adverse effect on our business, financial condition and
results of operations. During the latter half of fiscal year 2004 and continuing in fiscal year 2005, we experienced a significant decline in demand for dry pasta products caused primarily by diet
driven changes to consumer preference, which adversely affected our profitability. If demand were to materially decline again, we could experience a material adverse impact on our business, financial
condition and results of operations.

If aggregate production capacity in the U.S. pasta industry increases or is under-utilized, we may have to adopt a more aggressive pricing strategy, which could adversely
affect our results of operations.

Our competitive environment is affected by the relationship between aggregate industry production capacity and aggregate market demand
for pasta products. Production capacity above market demand can have a material adverse effect on our business, financial condition and results of operations.

If we are not able to compete effectively with established domestic and foreign producers of pasta products, our financial performance may be adversely affected.

The markets in which we operate are highly competitive. We compete against numerous well-established national, regional,
local and foreign companies in every aspect of our business. Some of our competitors may have longer operating histories, greater brand recognition, or more financial or other resources than we do.
Our customers may not continue to buy our products and we may not be able to compete effectively with these competitors.

9

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If we are unable to manage our production and inventory levels, our ability to operate cost-effectively and to maintain high customer service standards may be
adversely affected.

Unanticipated fluctuations in demand make it difficult to manage production schedules, plant operations and inventories. Also, customer
inventory management systems that are intended to reduce a retailer's inventory investment increase pressure on suppliers like us to fill orders promptly and thereby shift a portion of the retailer's
inventory management cost to the supplier. If we overestimate the demand, the result will be the production of excess inventory which could result in markdowns and increased inventory carrying costs.
If we underestimate the demand for our products, our customer service standards may suffer as we may be unable to provide adequate supplies of pasta products to retailers in a timely fashion, which
may result in loss of sales and/or customers.

Our need for substantial capital and our level of indebtedness may restrict our operating and financial flexibility and could adversely affect our business, financial
condition or operating results.

Our business has required and will continue to require substantial capital investment. A portion of this investment has been financed
through third-party lenders. The amount of
debt we carry and the terms of our indebtedness could adversely affect us in several ways, including:



In
the event that we fail to comply with the covenants in our current credit facility, or any future loan agreements, there could be an event of default under the applicable instrument.
As a result, all amounts outstanding under our current or any future debt instruments may become immediately due and payable. We have used, and may in the future use, interest rate protection
agreements covering our variable rate debt to limit our exposure to variable rates. However, we may not be able to enter into such agreements or such agreements may adversely affect our financial
performance. If interest rates were to increase significantly or if we are unable to generate sufficient cash flow from operations in the future, we may not be able to service our debt and may have to
refinance all or a portion of our debt, structure our debt differently, obtain additional financing or sell assets to repay such debt. We may not be able to secure such refinancing, additional
financing or asset sales on favorable terms or at all.

10

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If existing anti-dumping measures imposed against certain foreign imports terminate, we will face increased competition from foreign companies and our profit
margins or market share could be adversely affected.

Anti-dumping and countervailing duties on certain Italian and Turkish imports imposed by the United States Department of
Commerce ("DOC") in 1996 enable us and our domestic competitors to compete more favorably against Italian and Turkish producers in the U.S. pasta market. In September 2007, the U.S. International
Trade Commission ("ITC") extended the anti-dumping and countervailing duty orders for an additional five years, through 2011. If the anti-dumping and countervailing duty orders
are repealed or foreign producers sell competing products in the United States at prices lower than ours or enter the U.S. market by establishing production facilities in the United States, the result
would further increase competition in the U.S. pasta market and could have a material adverse effect on our business, financial condition and results of operations.

A write-off or write down of our intangible and other long lived assets could adversely affect our results of operations.

Our total assets include substantial intangible assets. These intangible assets, resulting primarily from our acquisitions of the
Mueller's, Golden Grain/Mission, and seven other pasta brands acquired from Borden Foods, represent the value of our brands. We review our indefinite-lived intangible assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A determination
that all or a portion of our intangible assets are not recoverable, although a non-cash charge to operations, could have a material adverse effect on our results of operations and total
capitalization. In fiscal year 2005, we recorded brand impairment expenses of $88.6 million. In fiscal year 2006, we recorded additional brand impairment of $1.0 million and sold brands
resulting in a net intangible write-off of approximately $4.7 million. In fiscal year 2008 we recognized additional brand impairments of $3.7 million. The balance of our
brands, excluding amortizable intangible brand assets of $1.2 million, at September 26, 2008 was $78.6 million.

Our
total assets also reflect substantial long lived fixed assets for property, plant and equipment. We review long-lived assets, including amortizable intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the
carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. A
determination requiring write off of a significant portion of fixed assets, although a non-cash charge to operations, would have a material adverse effect on our results of operations and
total capitalization. At September 26, 2008, long lived fixed assets, including amortizable intangible brand assets of $1.2 million, totaled $304.7 million.

Because we produce food products, we may be subject to product liability claims and have costs related to product recalls.

We may need to recall some of our products if they become adulterated, infested, misbranded or mislabeled. We may also be subject to
claims or lawsuits if the consumption of any of our products causes injury. A widespread product recall or a significant product liability judgment against us could cause products to be unavailable
for a period of time and result in a loss of consumer confidence in our food products and could have a material adverse effect on our business. We carry insurance against most of these matters;
however, our insurance coverage may not be adequate. The cost of commercially available insurance has increased significantly and such insurance may not be available in the future at prices that we
can afford. In addition, because we often indemnify our customers for costs related to

11

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product
recalls, we could be subject to additional expenses that may not be covered by insurance and could have a material adverse impact on business, results of operations, and financial condition.

The loss of the services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of
operations.

Our operations and prospects depend in large part on the performance of our senior management team. We may not be able to find
qualified replacements for any of these individuals if their services were no longer available. We do not currently maintain key person life insurance on any member of our senior management team.
Except for Mr. John P. Kelly, our President and Chief Executive Officer, we do not provide employment agreements to our executive officers.

If our competitors develop or acquire advanced technology, our financial performance may be adversely affected.

If other pasta producers acquire equipment similar to our equipment or more advanced equipment that provides greater efficiencies, what
we believe to be our current competitive advantage might be diminished or eliminated, potentially causing pressure on profit margins or reducing our market share. Erosion of this advantage could have
a material adverse effect on our business, financial condition and results of operations.

Disruptions in transportation of raw materials or finished products or increases in transportation costs could adversely affect our financial results.

Durum wheat is shipped by rail to our production facilities in Missouri and South Carolina under annually negotiated contracts or
market tariff rates. We also ship semolina, milled and processed at the Missouri facility, to our South Carolina facility. There is no assurance that the transportation costs will remain the same
under these contracts as rail carriers have experienced recent fuel cost inflation which they are passing on to their customers. An extended interruption in our ability to ship durum wheat by railroad
to the Missouri or South Carolina plants, or semolina to our South Carolina facility, could cause us to incur significantly higher costs and longer lead times associated with the distribution of our
pasta to our customers. If we are unable to provide adequate supplies of pasta products to our customers in a timely fashion due to such delays, we may subsequently lose sales. This could have a
material adverse effect on our business, financial condition and results of operations. In addition, the inflationary pressure of higher fuel costs and continued increases in transportation costs of
our finished products, could have a material adverse effect on our business, financial condition and results of operations.

Our international business may not be successful.

We operate a pasta-producing facility in Italy. We do not have the same competitive scale of operations or historic relationships with
the European trade or European supply base in these overseas markets that we do in the U.S.

There
are several risks inherent in doing business on an international level. These risks include:



12

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Any
of these risks could adversely impact the success of our international operations. If our international revenues are inadequate to offset the expense of maintaining foreign
operations, our business and results of operations could be harmed.

Our competitive position and financial results and condition could be adversely impacted if we are unable to protect our intellectual property.

Our brands are important to our success and our competitive position. Our actions to establish and protect our brands and other
proprietary rights may be inadequate to prevent imitation of our products by others. Moreover, we may face claims by third parties that we violate their intellectual property rights. Any litigation or
claims against us, whether or not successful, could result in substantial cost, divert management's time and attention from our core business, significantly harm our reputation, our business and
results of operations.

A failure to comply with applicable laws and regulations could adversely affect our business.

We are subject to laws and regulations administered by federal, state, and other governmental agencies relating to the operation of our
production facilities, the production, packaging, labeling and marketing of our products and pollution control, including air emissions. Any determination by the FDA or other agencies that our
facilities are not in compliance with applicable regulations could interfere with the continued manufacture and distribution of the affected products and, in some cases, might also require the recall
of previously distributed products. Any such determination could have a material adverse effect on our business, financial condition and results of operations.

As
a result of our voluntary disclosure to the DOC of incorrect data previously reported by us in connection with the DOC anti-dumping proceeding regarding pasta imported
from Italy through our Italian subsidiary, Pasta Lensi, S.r.l., the DOC has initiated a change circumstances review of Pasta Lensi and has reinstated Pasta Lensi in the existing antidumping
order at a 45.6% cash deposit rate, thereby requiring us to deposit this percentage of the value of subject imports with the government. 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. Additional information is provided in this Annual Report on Form 10-K under the heading "Legal ProceedingsDepartment of Commerce Matter."

Under
environmental laws, we are exposed to liability primarily as an owner and operator of real property, and as such, we may be responsible for the clean-up or other
remediation of contaminated property. Environmental laws and regulations can change rapidly and we may become subject to more stringent environmental laws and regulations in the future that may be
retroactively applied to earlier events. In addition, compliance with more stringent environmental laws and regulations could involve significant capital investments. Additional information is
provided in this Annual Report on Form 10-K under the heading "BusinessGovernmental Regulation; Environmental Matters."

13

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Our indemnification obligations and limitations of our director and officer liability insurance could have a material adverse effect on our business, results of operations
and financial condition.

Several of our former officers and a former director were the subject of legal actions related to our past accounting issues. These
legal actions remain unresolved. Under Delaware law, our articles and bylaws, and certain indemnification agreements, we may have an obligation to indemnify our current and former directors and
officers in relation to these matters. Some of these indemnification obligations may be covered by certain insurers under applicable directors' and officers' liability policies. Our applicable
directors' and officers' liability policies for the policy year during which these matters arose has been depleted with the final court approval of the federal securities class action lawsuit and the
pending settlement of the derivative cases, thereby leaving certain additional indemnity obligations as uninsured. If we incur significant uninsured indemnity obligations, these obligations could have
a material adverse effect on our business, results of operations and financial condition.

If we fail to establish and maintain effective disclosure controls and procedures and internal control over financial reporting, we may have material misstatements in our
financial statements and we may not be able to report our financial results in a timely manner.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), management has conducted an assessment
of our internal control over financial reporting. Management has identified a material weakness in our internal control over financial reporting and concluded that our internal control over financial
reporting was not effective as of September 26, 2008. A description of the material weakness is included under the heading "Controls and Procedures" in this Annual Report on
Form 10-K.

We
have developed and are implementing specific measures to remedy the identified material weakness and other deficiencies that existed at the end of fiscal year 2008. There can be no
assurance as to when the remediation plan will be fully implemented. Until our remediation efforts are completed, management will continue to devote significant time and attention to these efforts.
There will also continue to be an increased risk that our future financial statements could contain errors that will be undetected.

Reputational risks and other risks relating to negative publicity.

We may be subject to negative publicity resulting from our past accounting issues and related investigations, settlement of litigation,
and guilty pleas of our former officers in connection with our past accounting issues. While we believe our customers focus primarily on the quality of our products and service levels, this negative
publicity could affect our relationship with our current customers and suppliers if they lose confidence in our ability to fulfill our commitments, and could affect our ability to develop
relationships with potential customers and suppliers, which could have a material adverse effect on our business.

We are subject to a consent injunction and agreement which, if we violate, could require us to pay substantial fines or other penalties or otherwise have a material adverse
effect on us.

We are subject to a consent injunction with the Securities and Exchange Commission ("SEC") and a settlement agreement with the United
States Attorney's Office for the Western District of Missouri on behalf of the Department of Justice ("DOJ"), violation of either of which could have a material adverse effect on us. In the fourth
quarter of fiscal year 2008, the SEC and the DOJ announced the completion of their investigation of us and resolution of outstanding investigative matters. Under the terms of a settlement with the
SEC, we agreed to a consent injunction requiring future compliance with federal securities laws. Under an agreement with the DOJ, we agreed to continue to cooperate with the DOJ. To the extent we fail
to comply with either agreement, we could be subject to additional sanctions

14

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or
fines, which could have a material adverse effect on our business, results of operations and financial condition.

A
more detailed description of this matter is included under the heading "Legal Proceedings" in this Annual Report on Form 10-K.

Pending legal actions claims could have a material adverse effect on us.

We have been subject to a number of legal actions related to our restatement, all of which have been settled. While these matters have
been settled in principle, the settlement remains subject to final court approval. As a result of these actions and the related settlements, our directors' and officers' liability policies for the
applicable policy year have been depleted. Therefore, any additional claims, as well as defense of pending claims against former officers and directors, could have a material adverse effect on our
business, results of operations and cash flows. We are unable at this time to estimate our potential liability in such matters. The defense of these lawsuits may consume substantial time, and they may
divert management's attention and resources from our ordinary business operations. More information regarding these lawsuits is included under the heading "Legal Proceedings" in this Annual Report on
Form 10-K.

We could face adverse consequences as a result of our late SEC filings.

During August 2008, we became current in our SEC reporting obligations. However, we will not be eligible to use a "short form"
registration statement on Form S-3 until we have been current in our periodic reporting obligations for twelve months, which could adversely affect the timing and increase the cost
of raising capital through the issuance and sale of equity.

Our ability to pay dividends to shareholders is restricted by factors including contractual provisions and our financial performance.

We have not paid dividends since June 2005 and do not anticipate we will pay dividends in the foreseeable future. We anticipate that
future free cash flow will be used principally to fund interest expense and repayment of debt. Payment of dividends is restricted by provisions in our credit facility.

A significant percent of our outstanding voting stock is held by a concentrated number of investors.

A majority of our outstanding voting stock is held by a limited number of investors. As a result, the decision of relatively small
number of shareholders could have a substantial impact on the trading price of our stock. Continued concentrated ownership could result in fewer shares being available to be traded in the market,
resulting in reduced liquidity. In addition, a decision by one or more large investor to liquidate its holdings could adversely affect the trading price of our stock. So long as a majority of our
shares are held by a small number of investors, it is easier for any one shareholder to join with other shareholders to attempt to effect control of our company.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.    PROPERTIES

Production Facilities:As of September 26, 2008, we owned pasta production plants located in Excelsior Springs, Missouri, Columbia, South Carolina,
Tolleson, Arizona, and Verolanuova, Italy. Our U.S. facilities are strategically located to support North American distribution of our products and benefit from the rail and interstate highway
infrastructure near each facility. As of September 26, 2008, our facilities had combined annual production capacity of approximately 940 million pounds of pasta. In addition, we
occasionally purchase pasta products from other manufacturers for resale.

Distribution Centers:We own the distribution centers adjoining our Missouri, South Carolina, and Arizona plants. In addition, as of September 26, 2008, we
leased space in public warehouses in New Jersey, Missouri and Arizona.

The
warehousing operations at each of our distribution centers in Missouri, South Carolina and Arizona, including our leased facility in Missouri, are outsourced under a
long-term agreement with OHL. OHL specializes in warehouse and logistics management services. In addition, OHL provides traffic and freight management services to us under a long term
contract, thereby effectively providing for the shipment of our finished products from our domestic facilities.

Our
credit facility, executed on March 13, 2006 and last amended December 27, 2007, grants a collateral interest to our lenders in substantially all of our tangible and
intangible domestic assets.

ITEM 3.    LEGAL PROCEEDINGS

Federal Securities, Shareholder Derivative Litigation

Beginning in August, 2005, a number of substantially similar class action lawsuits were filed and consolidated into a single action in
the United States District Court for the Western District of Missouri styledIn re American Italian Pasta Company Securities Litigation(Case
No. 05-CV-0725-W-ODS). The consolidated amended complaint named 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 alleged that the defendants made public statements concerning our financial results that
were false and misleading. The plaintiffs sought 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 was 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 $25.0 million, comprised of $11.0 million in cash, to be provided by our insurers, and $14.0 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. On
September 12, 2008, the settlement administrator received 903,078 common shares for distribution to the class, thereby satisfying our obligations under the stipulation of settlement.

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In
November 2005, a shareholder derivative action styledHaag 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 LLP
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. On March 13, 2008, a settlement in principle was reached with plaintiff, subject to Court approval. The settlement requires us to adopt certain governance
reforms and pay $1.5 million in attorney's fees and costs to counsel for the plaintiff, which payment will be made under our insurance policies. On December 5, 2008, the Court granted
final approval of the settlement.

On
September 6, 2006, an action styledChaiet 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 fiscal year 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 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 our 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 Haagaction. On August 25, 2008 the Court
granted preliminary approval of the settlement. Based on the final approval of the Haagaction, we anticipate the Court will dismiss this action.

On
March 7, 2007, a suit styledZaleon 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 settlement of the other two derivative actions resolves this action.

SEC and DOJ Investigations

Beginning in 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. Subsequently, the SEC staff issued
additional subpoenas to us, seeking additional documents, testimony, and information concerning, among other things, trade promotions, plant and equipment depreciation, anti-dumping, brand
purchase accounting, plant and asset capitalization, and

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revenue
recognition. Representatives of the U.S. Attorney's Office for the Western District of Missouri on behalf of the Department of Justice ("DOJ") coordinated with the SEC staff on these
investigations.

On
September 15, 2008, the SEC and DOJ announced the resolution of their investigations. Under the terms of settlement with the SEC, we agreed to a consent injunction requiring
future compliance with federal securities laws. Under an agreement with the DOJ, we agreed to acknowledge responsibility for the conduct of certain former officers and former employees, to continue to
cooperate with the DOJ, and to pay a monetary penalty of $7.5 million. The settlement was recorded in the fourth quarter of fiscal year 2008.

Department of Commerce Matter

In 1996, an investigation by the International Trade Administration of the Department of Commerce ("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
our ongoing analysis of financial matters, we reviewed transactions reported to the DOC for the period July 1, 2002 through June 30, 2003 in the
anti-dumping 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 the 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 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 anti-dumping duty order at a cash
deposit rate of 45.6% thereby requiring us to deposit this percentage of the value of the subject imports with the government. 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 anti-dumping duty order. Based on our review, we do not believe this order will have a material adverse effect on our financial condition.

Arbitration

Until the April 2006 shutdown of our Kenosha, Wisconsin facility, we purchased semolina for that plant from Horizon Milling, LLC
("Horizon") under the terms of a long-term supply agreement. In August of 2006, we advised Horizon that the economic and business circumstances had changed since commencement of the supply
agreement, that we were invoking the material adverse effect provisions of the supply agreement and that we had sold the facility. Pursuant to an arbitration ruling, we are obligated to satisfy
minimum purchase requirements for the purchase deficiencies for fiscal years 2006 and 2007 totaling $1.2 million and annual purchase deficiencies for fiscal years 2008 and 2009 totaling

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$1.4 million.
The annual purchase deficiencies are due at the conclusion of each respective fiscal year and payable in the first quarter of the following year. As a result, we recorded a
$2.6 million expense in fiscal year 2006 related to the cancellation of the supply agreement.

From
time to time and in the ordinary course of our business, we are the subject of government investigations or audits and named as a defendant in legal proceedings related to various
other issues, including worker's compensation claims, tort claims and contractual disputes.

Some
of the matters described above are ongoing and their ultimate resolution may impact our financial results for the period in which they are resolved, and may have a material adverse
effect upon our business or consolidated financial statements.

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

We did not submit any matters to the vote of our stockholders during the fourth quarter of fiscal year 2008.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Class A Convertible Common Stock, par value $0.001 per share (the "common stock") was quoted on the Pink Sheets, an
electronic quotation service for securities traded over-the-counter, under the symbol "AITP" or "AITP.PK". Effective on the opening of trading on November 14, 2008, our
common stock was quoted on the NASDAQ Global Market under the symbol "AIPC".

Our
articles of incorporation allowed two classes of common stock, Class A Convertible voting, and Class B Convertible nonvoting, with certain initial investors permitted
to convert back and forth between the classes. The conversion features were not exercised and no shares of Class B stock were issued.

The
range of the high and low prices per share of the common stock for fiscal year 2008 and 2007 was as follows:

Year Ended
September 26, 2008

Year Ended
September 28, 2007High

Low

High

LowFirst Quarter

$
9.10

$
6.55

$
11.25

$
7.06Second Quarter

$
7.00

$
4.39

$
11.02

$
8.95Third Quarter

$
12.35

$
5.45

$
10.85

$
9.60Fourth Quarter

$
15.90

$
11.00

$
10.00

$
7.80


Holders

As of December 1, 2008, there were approximately 2,000 shareholders of record of our common stock.

Dividends

Our current credit facility contains limitations on the payment of dividends. We have not declared or paid dividends since June 2005.

Securities Authorized for Issuance Under Equity Compensation Plans

Additional information on our equity compensation plans is available in Item 12, under "Security Ownership of Certain Beneficial
Owners and Management and Related Stock Holder Matters" in this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

During the fourth quarter of fiscal 2008 we purchased 1,607 shares of our common stock, at an average price paid per share of $11.00
(all purchases were made during the four week period ending August 22, 2008), in connection with the withholding of taxes upon vesting of nonvested shares.

On
October 4, 2002, our Board of Directors authorized up to $20.0 million to implement a common stock repurchase plan. There were no purchases under the plan in fiscal year
2008, and we do not anticipate making any purchases under this plan in the foreseeable future. There is $7.9 million available under the common stock repurchase plan.

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Stockholder Return Performance Graph

The following graph compares the cumulative total stockholders' return on the common stock for the five fiscal years ended
September 26, 2008 (October 3, 2003 to September 26, 2008) against the cumulative total return of the Russell 2000® Index and a peer group. The graph and table assume
that $100 was invested on October 3, 2003 (the last day of fiscal year 2003) in our common stock, the Russell 2000® Index, and the peer group and that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among American Italian Pasta Company. The Russell 2000 Index And A Peer Group

GRAPHIC

*$100 invested on 10/3/03 in stock & index, -including reinvestment of dividends.

Russell 2000®
Index(1)

Peer Group(2)

American
Italian PastaOctober 3, 2003


100.00


100.00


100.00October 1, 2004


115.45


121.89


69.93September 30, 2005


133.35


142.11


29.07September 29, 2006


146.58


151.60


21.21September 28, 2007


164.67


162.29


22.45September 26, 2008


146.03


159.71


43.35


---

21

---





ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected historical financial data for the fiscal years ended September 26, 2008,
September 28, 2007, September 29, 2006, September 30, 2005 and October 1, 2004 (in thousands, except per share data).

YEAR ENDED2008

2007

2006

2005

2004STATEMENT OF OPERATIONS DATA:Revenues(1)

$
569,196

$
398,122

$
367,023

$
364,159

$
392,702Cost of goods sold


446,891


308,819


284,777


300,151


320,851Gross profit


122,305


89,303


82,246


64,008


71,851Selling and marketing expense


27,727


21,503


22,871


20,342


27,155General and administrative expense(2)


46,663


33,548


35,459


23,198


21,277Litigation settlement(3)











14,000


Impairment charges to brands


3,654





998


88,550


132Loss on disposition of brands(4)








4,708





(Gains) losses related to long-lived assets(5)


1,139


(109
)

22,268


9,759


1,099Provision for (recovery from) restructuring program(6)











(554
)

2,868Acquisition and plant start-up expenses(7)














240Operating profit (loss)


43,122


34,361


(4,058
)

(91,287
)

19,080Interest expense, net


26,240


29,421


29,509


16,234


10,990Other (income) expense(8)


92


(245
)

(913
)

(3,544
)

2,518Income (loss) before income taxes(9)


16,790


5,185


(32,654
)

(103,977
)

5,572Income tax provision (benefit)


(2,321
)

(163
)

(2,241
)

(3,730
)

1,513Net income (loss)

$
19,111

$
5,348

$
(30,413
)
$
(100,247
)
$
4,059Net income (loss) per common share (basic)

$
1.00

$
0.29

$
(1.65
)
$
(5.49
)
$
0.22Net income (loss) per common share (assuming dilution)

$
0.99

$
0.28

$
(1.65
)
$
(5.49
)
$
0.22Cash dividend declared per common share

$


$


$


$
0.5625

$
0.3750Weighted-average common shares outstanding


19,118


18,673


18,386


18,247


18,043Weighted-average common shares outstanding (including dilutive securities)


19,384


18,951


18,386


18,247


18,562OTHER FINANCIAL DATA (AT END OF PERIOD):Cash and cash equivalents

$
38,623

$
16,635

$
22,805

$
11,911

$
2,712Working capital

$
72,350

$
55,505

$
54,285

$
58,971

$
56,106Plant, property and equipmentnet

$
303,503

$
316,109

$
324,464

$
360,740

$
384,327Brands

$
79,769

$
83,282

$
82,772

$
88,750

$
178,736Total assets

$
553,024

$
527,963

$
531,969

$
571,926

$
688,311Long term debt, less current maturities

$
217,000

$
240,000

$
260,500

$
276,006

$
286,795Stockholders' equity

$
205,971

$
171,918

$
160,336

$
186,026

$
293,112Total debt/total capitalization


54
%

58
%

62
%

60
%

50
%Depreciation and amortization expense(10)

$
24,092

$
23,409

$
24,895

$
25,132

$
24,956Amortization of deferred debt issuance cost(11)

$
1,836

$
1,265

$
4,216

$
2,051

$
1,026


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22

---





23

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with "Selected
Financial Data," our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of factors, including those set forth under "Cautionary Note Concerning Forward-Looking Information" and "Risk Factors"
elsewhere in this report.

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.

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006Revenues:Retail


74.8
%

76.5
%

73.1
%Institutional


25.2


23.5


26.9Total revenues


100.0


100.0


100.0Cost of goods sold


78.5


77.6


77.6Gross profit


21.5


22.4


22.4Selling and marketing expense


4.9


5.4


6.2General and administrative expense


8.2


8.4


9.7Impairment charges to brands


0.6





0.2Loss on disposition of brands








1.3Loss related to long-lived assets


0.2





6.1Operating profit (loss)


7.6


8.6


(1.1
)Interest expense, net


4.6


7.4


8.0Other (income) expense





(0.1
)

(0.2
)Income (loss) before income taxes


3.0


1.3


(8.9
)Income tax benefit


(0.4
)




(0.6
)Net income (loss)


3.4
%

1.3
%

(8.3
)%


Overview

We began operations in 1988. We believe we are the largest producer and marketer of dry pasta in North America, by volume. 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 the combination of our low cost structure, our 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 merchants, drug and discount
stores) and encompasses sales of our branded, private label, imported and specialty products. These revenues represented 74.8%, 76.5% and 73.1% of our total revenue for the years ended
September 26, 2008, September 28, 2007 and September 29, 2006, respectively. Institutional market revenues include

24

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revenues
from product sales to customers who use our pasta as an ingredient in food products or who resell our pasta in the foodservice (meals away from home) market. It also includes revenues from
sales to government agencies and other customers that we periodically supply. The institutional market represented 25.2%, 23.5% and 26.9% of our total revenue for the years ended September 26,
2008, September 28, 2007 and September 29, 2006, respectively.

Average
selling price for our products is largely determined by competitive market factors and product mix. In addition, average selling price for retail private label products may be
affected by customer specific agreements related to raw materials, packaging, product manufacturing complexity and other service requirements. Generally, the average selling price for retail channels
is higher than for institutional channels. Within the retail market, the average selling price for branded products is generally higher than for private label products. Within the institutional
market, the average selling price for foodservice products is generally higher than for ingredient products.

Revenues
are reported net of cash discounts, product returns, and promotional and slotting allowances. We have arrangements with several institutional customers that provide for the
"pass-through" of direct material cost and certain other cost changes as pricing adjustments. 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, offset by by-product sales. 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. Beginning in 2006, durum prices have increased substantially and durum prices have been volatile. To a certain extent, we manage our durum wheat cost risk through advance
purchase contracts for durum wheat that are generally less than six months in duration and cost pass-through mechanisms and other arrangements with our customers. 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. Such depreciation expense is a component of inventory cost and cost of goods sold.

Fiscal
years 2008, 2007, and 2006 were all 52-week years.

Critical Accounting Policies

Our results of operations and financial condition, as reflected in our consolidated financial statements, have been prepared in
accordance with accounting principles generally accepted in the United States. As discussed in Note 2 to our consolidated financial statements, 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 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. We consider our accounting policies related to indefinite-lived intangible assets, long-lived assets, share-based compensation, allowance for doubtful
accounts, reserves for slow-moving, damaged and discontinued inventory, reserve for obsolete and impairment of spare parts, promotional allowances, and income taxes to be our critical
accounting policies. Our management bases its estimates and judgments on relevant facts and circumstances, 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. Our most critical accounting policies are described below.

Indefinite-lived Intangible Assets:We assess indefinite-lived intangible assets, which are not subject to amortization, each year for impairment. We completed our
annual review of fiscal year 2006

25

---



based
on the 2007 fiscal year business plan and our forecast available in the fourth quarter of fiscal year 2006. We recorded impairment charges of $1.0 million in the fourth quarter of fiscal
year 2006. We completed our annual review of fiscal year 2007 based on the 2008 fiscal year business plan and our forecast available in the fourth quarter of fiscal year 2007. Based on the review, no
impairment charges were recorded in fiscal year 2007. We performed our fiscal year 2008 annual review of our brands based on the fiscal year 2009 business plan and forecasts, which resulted in a brand
impairment of $3.7 million. Future events could cause our management to conclude that the carrying value of one or more of our brands is not recoverable and that the value of intangible assets
is further impaired. The
balance of our brands, excluding amortizable intangible brand assets of $1.2 million, at September 26, 2008 was $78.6 million

Long-Lived Assets:We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. During fiscal year 2006, we closed the Kenosha plant. The Kenosha plant and remaining
assets were sold in fiscal year 2006 and a pre-tax loss of $15.6 million was recorded in fiscal year 2006 related to the impairment and sale. At September 26, 2008,
long-lived assets, including amortizable intangible brand assets of $1.2 million, totaled $304.7 million.

Share-Based Compensation:The fair value of stock options and stock appreciation rights classified as equity is measured based on the grant date fair value of the
award. We recognize the fair value on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. We use the Black-Scholes
option pricing model to determine the grant date fair value of stock options and stock appreciation rights. Key assumptions of the Black-Scholes option pricing model include the expected life of stock
options, the expected volatility, the expected term of the grants, and the expected risk-free interest rate. These assumptions reflect our best estimates, but they involve inherent
uncertainties based on market conditions generally outside our control. While we do not believe share-based compensation would have been materially impacted by the variability in the range of
reasonable assumptions we could have applied to value option awards, it is possible that share-based compensation could be materially impacted by the application of alternate assumptions in future
periods. Also, we record share-based compensation expense for nonvested stock awards, stock options, and stock appreciation rights net of estimated forfeitures. Our forfeiture rate assumption used in
determining share-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from those estimates, which could have a material impact on compensation
expense.

Allowance for Doubtful Accounts:We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware
of a specific customer's inability to meet its financial obligations to us (e.g. bankruptcy filings, substantial down-grading of credit scores), we record a specific reserve for bad
debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the
length of time the receivables are past due and our historical experience. Our allowance balance was $2.3 million as of September 26, 2008.

Reserve for Slow-Moving, Damaged and Discontinued Inventory:We carry our finished goods inventory at standard costs, adjusted for capitalized
variances, determined on a first-in, first-out (FIFO) basis. At the end of each period, we review our inventory to ensure that the items are carried at lower of cost or market
value. We periodically review our inventory for slow-moving, damaged and

26

---



discontinued
items and provide reserves to reduce such items identified to the recoverable amount. Our reserve balance was $0.7 million as of September 26, 2008.

Reserve for Obsolete and Impaired Spare Parts:We carry our spare parts inventory as a component of property, plant and equipment. Spare parts are valued at the
lower of average cost or net realizable value and are not depreciated, but are expensed when placed in service. We periodically review our spare parts for excess and obsolete items and establish
reserves to reduce such items to their recoverable amounts. Our reserve balance was $1.0 million as of September 26, 2008.

Promotional Allowance:Promotional allowances related to our sales are recorded at the time revenue is recognized. Such allowances, where applicable, are estimated
based on anticipated volume and promotional spending with specific customers. We periodically review our estimate for promotional allowances and adjust accruals to reflect our estimate of the future
liability.

Income Taxes:We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to
examinations by taxing authorities. 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. Although we believe that our accruals for tax liabilities, including uncertain tax positions, are reasonable and adequate, tax
regulations are subject to interpretation and the tax review and resolution process is inherently uncertain; therefore, our assessment can involve both a series of complex judgments about future
events and rely heavily on estimates and assumptions. To the extent the probable tax outcome of these matters changes, such changes in estimates may have a material impact on the income tax provision
and on our consolidated statements of operations in the period in which such determination is made.

We
must also make judgments regarding the realizability of deferred tax assets and tax liabilities. Our judgments regarding future taxable income may change due to changes in market
conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be
increased or decreased, resulting in a respective increase or decrease in income tax expense which may have a material impact on our consolidated statements of operations in the period of the change
in assumptions of estimates.

In
accordance with criteria established by SFAS No. 109, "Accounting for Income Taxes", the valuation allowance against deferred tax assets as of September 26, 2008 and
September 28, 2007 was $37.1 million and $49.8 million, respectively. The net change in total valuation allowance for the years ended September 26, 2008,
September 28, 2007 and September 29, 2006 was a decrease of $12.7 million, a decrease of $2.5 million and an increase of $10.2 million, respectively. The valuation
allowance at September 26, 2008 and September 28, 2007 was related to federal, state, and foreign net operating loss carryforwards, deferred tax assets, and tax credit carryforwards
that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those
temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods) and tax planning
strategies in making this assessment. In order to fully realize the deferred tax asset, we will need to generate future taxable income before the expiration of the deferred tax assets as governed by
the tax code. As we had a three-year cumulative loss as of September 26, 2008, management considered income from the reversal of net temporary differences in existence as of
September 26, 2008 and did not considered future years' forecasted

27

---



income
in determining the measurement and recognition of our valuation allowance. If we generate income in the future, we may reverse a portion of our valuation reserve, which may have a material
impact on our consolidated statements of operations.

FISCAL YEAR ENDED SEPTEMBER 26, 2008 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 28, 2007

Revenues:Revenues increased $171.1 million, or 43.0%, to $569.2 million for the fiscal year ended September 26, 2008, from
$398.1 million for the fiscal year ended September 28, 2007. Revenues increased $171.6 million, or 43.1%, due to higher average selling prices, partly offset by a
$2.2 million decrease related to slightly lower volume. 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.

Retail
revenues increased $121.1 million, or 39.7%, to $425.5 million for the fiscal year ended September 26, 2008, from $304.4 million for the fiscal year
ended September 28, 2007. The revenue increase is primarily the result of a $117.0 million, or 38.4%, increase related to higher average selling prices, a $2.4 million, or 0.8%,
increase in volume, and a $1.7 million, or 0.1% increase in payments received from the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000. During the first quarter of
fiscal year 2009, we received notice that the calculated share of our fiscal year 2009 payment related to duties assessed prior to October 1, 2007 will be approximately $0.8 million,
which would be an approximate $3.9 million decrease from the amount we received in fiscal year 2008.

Institutional
revenues increased $50.0 million, or 53.4%, to $143.7 million for fiscal year ended September 26, 2008, from $93.7 million for fiscal year ended
September 28, 2007. The revenue increase is primarily the result of a $53.5 million, or 57.1%, increase due to higher average selling prices partly offset by a $3.5 million, or
3.7%, decrease due to lower volume. The decrease in volume is primarily due to eligibility changes in certain government contracts that focus on small companies as defined by the relevant governmental
agency.

Cost of goods sold:Cost of goods sold increased $138.1 million, or 44.7%, to $446.9 million for the fiscal year ended September 26, 2008 from
$308.8 million for the fiscal year ended September 28, 2007. As a percentage of revenues, cost of goods increased to 78.5% for the fiscal year ended September 26, 2008 from 77.6%
for fiscal year ended September 28, 2007. Our raw materials, transportation, and other input costs were unfavorable compared to the prior year but the effect of the increase was substantially
offset by higher selling prices. Cost of goods sold includes provision for obsolete finished goods inventory of $1.2 million for fiscal year 2008 and $0.8 million for fiscal year 2007.
In addition, the fiscal year 2008 costs include the provision of $0.5 million related to the allowance for excess or obsolete spare parts.

Gross profit:Gross profit increased $33.0 million, or 37.0%, to $122.3 million for the fiscal year ended September 26, 2008, from
$89.3 million for the fiscal year ended September 28, 2007. Gross profit as a percentage of revenues decreased to 21.5% during fiscal year 2008 compared to 22.4% during fiscal year 2007
due to increases in raw material, transportation, and other input costs that were not fully offset by higher prices. The increase in raw material costs was primarily the result of an increase in durum
wheat prices and the increase in transportation costs was primarily the result of an increase in energy costs.

Selling and marketing expense:Selling and marketing expense increased $6.2 million, or 28.9%, to $27.7 million for the fiscal year ended
September 26, 2008, from $21.5 million for fiscal year ended September 28, 2007. This increase is primarily the result of an increase in brokerage commission costs of
$2.2 million, consulting expenses of $1.6 million, compensation expenses of $1.2 million, and other

28

---



business
development costs of $0.5 million. The increase in broker costs are due to higher commissions as a result of increased selling prices. The increase in consulting expenses relate
primarily to an independent third party analysis of the pasta category and our market placement. The increase in compensation expense is principally the result of stock based compensation, increased
incentive compensation, and compensation accrued for certain employees terminated in the ordinary course of business. Selling and marketing expense, as a percentage of revenue, decreased to 4.9% for
the fiscal year ended September 26, 2008 from 5.4% for the fiscal year ended September 28, 2007.

General and administrative expense:General and administrative expense increased 39.1% to $46.7 million for the fiscal year ended September 26, 2008,
from $33.5 million for the fiscal year ended September 28, 2007. General and administrative expenses as a percentage of revenues decreased to 8.2% for the fiscal year ended
September 26, 2008 from 8.4% for the fiscal year ended September 28, 2007. As previously disclosed, during fiscal year 2008 we concluded an investigation and restatement of our
historical financial statements. As a result of this process, we incurred certain professional fees including legal, forensic accounting, independent registered public accounting firm fees, public
relations, and Alvarez & Marsal fees during fiscal years 2005 through 2008. During the fiscal year ended September 26, 2008, $17.5 million of professional fees related to the
restatement of historical financial statements and pending legal matters were recorded compared to $13.3 million during the comparable period of fiscal year 2007. Included in the fiscal year
2008 amount is the monetary penalty of $7.5 million to the U.S. Department of Justice. The remaining change in general and administrative expense was due primarily to an increase of
non-restatement related professional fees and consulting services of $4.2 million, an increase in compensation and benefits of $1.7 million, and an increase in stock-based
compensation costs of $1.1 million. The non-restatement related professional fees primarily relate to $1.8 million of audit and legal fees associated with the filing of our
fiscal years 2006 and 2007 Form 10-Ks filed in June 2008 and $1.0 million of fees related to our fiscal year 2008 filings. The consulting services are related to the review
of our supply chain and operations of $0.8 million and other consulting fees of $0.6 million. Compensation costs increased as a result of hiring additional personnel, including our new
CEO, and increased incentive compensation.

Impairment of brands:We completed our annual review of fiscal year 2008 brand intangible values based on the 2009 fiscal year business plan and our forecast
available in the fourth quarter of fiscal year 2008. We intend to invest more in our brands that are in a preferred position in the marketplace by focusing our resources on our strongest brands in
their strongest markets. Based on our review in the fourth quarter of fiscal year 2008, we have recorded a $3.7 million non-cash impairment charge on two of our brands.

(Gain) Loss related to long-lived assets:The $1.1 million loss during fiscal year 2008 is due primarily to the write-off of fixed
assets due to routine plant changes and asset upgrades. During fiscal year 2007 we recognized a $0.1 million net gain on the sale of certain excess equipment.

Operating profit:Operating profit for the fiscal year ended September 26, 2008, was $43.1 million, an increase of $8.7 million as compared to
$34.4 million reported for the fiscal year ended September 28, 2007. Operating profit decreased as a percentage of revenues to 7.6% for the fiscal year ended September 26, 2008,
from 8.6% for the fiscal year ended September 28, 2007, as a result of the factors discussed above.

Interest expense:Interest expense for the fiscal year ended September 26, 2008, was $26.2 million, a decrease of 10.8% from the $29.4 million
reported for the fiscal year ended September 28, 2007. The decrease is attributable to lower interest rates, partially offset by an increase in the amortization of deferred debt issuance costs.
The average interest rate in effect during fiscal year 2008 and fiscal year 2007 was 10.2% and 11.4%, respectively. We recorded amortization of deferred debt issuance costs of $1.8 million in
fiscal year 2008 and $1.3 million in fiscal year 2007. The $0.5 million increase is due to financing costs related to the amendment of our credit facility in December 2007.

29

---



Other (income) expense:During fiscal year 2008, we recognized net other expense of $0.1 million compared to the recognition of net other income of $(0.2)
million during fiscal year 2007. These amounts primarily reflect our foreign currency transaction gains and losses.

Income tax benefit:Income tax benefit for the fiscal years ended September 26, 2008 and September 28, 2007 was $2.3 million and
$0.2 million, respectively, and reflects effective income tax rates of (13.8%) and (3.1%), respectively. The effective rates in fiscal years 2008 and 2007 are substantially below statutory
rates primarily due to decreases in our valuation allowances ($12.7 million in fiscal year 2008 and $2.5 million in fiscal year 2007). As we had a three-year cumulative loss
as of September 26, 2008, management considered income from the reversal of net temporary differences in existence as of September 26, 2008 and did not considered future years'
forecasted income in determining the measurement and recognition of our valuation allowance. If we generate income in the future, we may reverse a portion of our valuation reserve, which may have a
material impact on our consolidated statements of operations.

Net income:Net income for the fiscal year ended September 26, 2008, was $19.1 million, an increase of $13.8 million from the
$5.3 million for the fiscal year ended September 28, 2007, as a result of the factors discussed above. Net income as a percentage of net revenues was 3.4% versus 1.3% in the prior year.

FISCAL YEAR ENDED SEPTEMBER 28, 2007 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29, 2006

Revenues:Revenues increased $31.1 million, or 8.5%, to $398.1 million for the fiscal year ended September 28, 2007, from
$367.0 million for the fiscal year ended September 29, 2006. Revenues increased $7.1 million, or 1.9%, due to volume increase, and increased $23.7 million, or 6.5%, due to
higher average selling prices. Revenues increased by $0.3 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 $35.9 million, or 13.4%, to $304.4 million for the fiscal year ended September 28, 2007, from $268.5 million for the
fiscal year ended September 29, 2006. Revenues increased $15.4 million, or 5.7%, due to volume increase, and increased $20.2 million or 7.5% due to higher average selling prices.
Revenues increased by $0.3 million, or 0.1% 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 Institutional market decreased $4.8 million or 4.9% to $93.7 million for fiscal year ended September 28, 2007, from $98.5 million for fiscal
year ended September 29, 2006. Revenues decreased $5.9 million, or 6.0% due to volume losses and increased $1.1 million, or 1.1% due to higher average selling prices and changes
in sales mix.

Cost of goods sold:As a percentage of revenues, cost of goods sold remained at 77.6% for fiscal years 2007 and 2006. Our raw materials and other input costs were
unfavorable to prior year but the effect of the increase was offset by higher selling prices. Cost of goods sold in fiscal year 2007 also includes $0.8 million provision for inventory
obsolescence which was a reduction of $0.6 million, from $1.4 million in fiscal year 2006.

Gross profit:Gross profit increased $7.1 million, or 8.6%, to $89.3 million for the fiscal year ended September 28, 2007, from
$82.2 million for the fiscal year ended September 29, 2006. Gross profit as a percentage of revenues remained at 22.4% for both years. The increase in gross profit is directly related to
the volume growth described above and our ability to increase sales prices at a level approximately equal to the increased raw material and other production costs.

30

---



Selling and marketing expense:Selling and marketing expense decreased $1.4 million, or 6.1%, to $21.5 million for the fiscal year ended
September 28, 2007, from $22.9 million for fiscal year ended September 29, 2006. This decrease is primarily related to decreased payroll of $0.4 million and a decrease of
share-based compensation expense of $0.5 million as compared to fiscal year 2006. Selling and marketing expense, as a percentage of revenue, decreased to 5.4% for the fiscal year ended
September 28, 2007, from 6.2% for the comparable prior year period.

General and administrative expense:General and administrative expense decreased $2.0 million, or 5.6%, to $33.5 million for the fiscal year ended
September 28, 2007, from $35.5 million for the comparable period last year. This decrease is attributable primarily to decreased costs of professional fees. General and administrative
expenses as a percentage of revenues decreased to 8.4% for the fiscal year ended September 28, 2007, from 9.7% for the fiscal year ended September 29, 2006 due to the effect of these
relatively fixed costs being incurred on increased sales. During the fiscal year ended September 28, 2007, $13.3 million of professional fees related to the restatement and pending legal
matters were recorded compared to $16.1 million in fiscal year 2006. These professional fees, net of insurance, include legal, forensic accounting, independent registered public accounting firm
fees, public relations and Alvarez & Marsal fees.

Impairment of brands and trademarks:We completed our annual review of fiscal year 2007 brand intangible values based on the 2008 fiscal year business plan and our
forecast available in the fourth quarter of fiscal year 2007. The review resulted in no brand impairment. During the year ended September 29, 2006, we recorded $1.0 million of impairment
charges.

Loss on disposition of brands:During the second quarter of fiscal year 2006, we sold our Mrs. Leeper's and Eddie's Spaghetti brands and recorded a loss on
disposition of brands of $4.7 million. There were no such dispositions in fiscal year 2007.

Loss related to long-lived assets:During the fiscal year ended September 28, 2007, a
$0.1 million gain relating to the sale of long-lived assets was recorded as compared to $22.3 million of losses related to long-lived assets in fiscal year 2006.
In the second quarter of fiscal year 2006, we decided to close the Kenosha facility and recognized an impairment loss based on the estimated fair value. In April 2006, this facility was permanently
closed and certain equipment was moved to our other manufacturing facilities. The Kenosha plant and remaining assets were sold in fiscal year 2006 and a pre-tax loss of
$15.6 million was recorded in fiscal year 2006 related to the impairment and sale. We received net cash proceeds from the sale of $5.0 million. In addition, certain pasta lines and
packaging equipment considered unnecessary for our production plans were taken out of service. These assets were disposed or the excess equipment was written down to fair market value.

Operating profit / (loss):Operating profit for the fiscal year ended September 28, 2007, was $34.4 million, an increase of $38.5 million as
compared to an operating loss of $4.1 million reported for the fiscal year ended September 29, 2006. Operating profit (loss) increased as a percentage of revenues to 8.6% for the fiscal
year ended September 28, 2007, from (1.1)% for the fiscal year ended September 29, 2006, as a result of the factors discussed above.

Interest expense:Interest expense for the fiscal year ended September 28, 2007, was $29.4 million, decreasing 0.3% from the $29.5 million
reported for the fiscal year ended September 29, 2006. The decrease is attributable to lower average borrowings outstanding offset by higher interest rates. The average interest rate in effect
during fiscal year 2007 and fiscal year 2006 was 11.4% and 9.1%, respectively. In addition, we recorded amortization of deferred debt issuance costs of $1.3 million in fiscal year 2007 and
$4.2 million in fiscal year 2006. The decrease in the amortization of deferred debt issuance is primarily due to the $1.3 million write-off of the unamortized balance, as
well as $1.3 million of amendment fees that were incurred, prior to our refinancing our credit facility in March 2006.

31

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Other (income) expense:Other (income) for fiscal year 2007 was $(0.2) million, representing (0.1)% of revenues. Other (income) for fiscal year 2006 was $(0.9)
million, representing (0.2)% of revenues. These amounts primarily reflect the foreign currency transaction gains/losses.

Income tax benefit:Income tax benefit for each of the fiscal years ended September 28, 2007 and September 29, 2006 was $0.2 million and
$2.2 million, respectively, and reflects effective income tax rates of (3.1%) and 6.9%, respectively. The effective rates in fiscal years 2007 and 2006 are substantially below statutory rates
primarily due to the changes in our valuation allowances ($2.5 million decrease in fiscal year 2007 and $10.2 million increase in fiscal year 2006) related to the net operating loss and
tax credit carryforwards and other deferred tax assets.

Net income / loss:Net income for the fiscal year ended September 28, 2007, was $5.3 million, an increase of $35.7 million from the
$30.4 million loss for the fiscal year ended September 29, 2006, as a result of the factors discussed above. Net income (loss) as a percentage of net revenues was 1.3% versus (8.3)% in
the prior year.

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 $38.6 million and net working capital totaled $72.4 million at September 26, 2008. Cash and cash equivalents totaled $16.6 million and net working capital totaled
$55.5 million at September 28, 2007.

As
of September 26, 2008 and September 28, 2007 we had $2.4 million and $9.2 million, respectively, invested in the Columbia Strategic Cash Portfolio Fund
(Columbia Fund). The Columbia Fund is administered by a subsidiary of Bank of America, and 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. At that time our investment was reclassified from cash and cash equivalents to short term investments. The underlying assets are valued at fair value and as of
September 26, 2008 we had recorded valuation losses on this investment of $0.2 million. Through September 26, 2008, we had recovered approximately $4.8 million of the
pre-liquidation investment balance. We anticipate the remaining investment of $2.4 million will be recovered as the liquidation progresses. During the fiscal year ended
September 26, 2008, we have received $0.3 million of interest income from the Columbia Fund.

Our
net cash provided by operating activities totaled $35.7 million for the fiscal year ended September 26, 2008 compared to $23.9 million for the fiscal year ended
September 28, 2007 and $41.2 million for the fiscal year ended September 29, 2006. Our net cash provided by operating activities for the fiscal year ended September 26,
2008 is comprised primarily of net income of $19.1 million, adjusted for $34.1 million of non-cash charges and credits, primarily depreciation and amortization of
$25.9 million, brand impairment charge of $3.7 million, and stock based compensation expense of $3.2 million, partly offset by the $17.5 million use of cash related to
changes in operating assets and liabilities. The most significant changes in operating assets and liabilities are the $22.8 million use of cash to support the increase of inventory, the
$9.0 million use of cash to support the increase in trade and other accounts receivable, and the $14.8 million source of cash generated by the increase in accounts payable and accrued
expenses. The source or use of cash related to inventory will fluctuate from period to period based on the timing of inventory purchases and sales as well as changes in commodity costs. For the fiscal
year ended September 26, 2008, the use of cash related to inventory is primarily attributable to higher increased commodity costs combined with an increase in finished goods inventory pounds.
The source or use of cash related to trade and other receivables will fluctuate from period to period based on the timing of sales and selling price. For the fiscal year ended September 26,
2008, the use of cash related to accounts receivable is due primarily to the impact of

32

---



increased
selling prices. The source or use of cash related to accounts payable and accrued expenses will fluctuate from period to period based on the timing of payments and changes in the cost of
products and services used. For the fiscal year ended September 26, 2008, the source of cash related to accounts payable and accrued expense is due primarily to the increase in commodity and
transportation costs.

Our
net cash used in investing activities principally relates to investments in production and distribution, milling, and management information system assets. Cash provided by investing
activities principally relates to proceeds from disposal of property, plant and equipment. Capital expenditures were $12.4 million, $9.8 million and $12.6 million for the fiscal
years 2008, 2007 and 2006, respectively. Proceeds on the sale of property plant and equipment were $2.0 million, $0.4 million and $8.1 million in fiscal years 2008, 2007 and 2006,
respectively. Cash used in fiscal year 2008 was partially offset by $4.8 million received from the liquidation of short term investments. During fiscal year 2006, we sold our Kenosha facility
for $5.0 million and sold two of our brands for $1.8 million.

During
the fiscal year ended September 26, 2008, our net cash used by financing activities amounted to $0.7 million, which included the payment of $0.5 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 credit facility. In addition, we drew
$15.0 million on our revolving credit facility to finance inventory purchases and advance payments, which was repaid during period. Our Italian subsidiary drew $1.1 million under
revolving credit facilities during fiscal year 2008, which was repaid during the period. During the fiscal year ended September 28, 2007, our net cash used in financing activities amounted to
$21.0 million, which is primarily a result of voluntary term loan principal payments totaling $20.5 million.

As
of September 26, 2008, our U.S. credit facility, as amended, is comprised of a $239.9 million term loan and a $30 million revolving credit facility. The U.S.
credit facility is secured by substantially all of
our domestic assets and provides for interest at either LIBOR rate plus 550 basis points or at an alternate base rate calculated as prime rate plus 450 basis points. The term loan matures 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. As of September 26, 2008, the excess cash flow liability under this agreement was approximately
$22.9 million, which is expected to be paid in December 2008 from cash reserves or borrowed from our revolving credit facility. The term loan interest rate in effect at September 26,
2008 and September 28, 2007 was 8.3% and 11.4%, respectively. As of September 26, 2008, we had no borrowings outstanding under the revolving credit facility. The outstanding letters of
credit under our revolving credit facility totaled approximately $2.4 million as of September 26, 2008. Accordingly, under the credit facility we had additional borrowing capacity of
$27.6 million as of September 26, 2008.

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. We were in compliance with these financial covenants as of September 26, 2008.

We
anticipate cash generated from operations and available on our revolving credit facility to be sufficient to meet our expected capital and liquidity needs, including the funding of
capital expenditures, debt repayments, and working capital requirements, for the foreseeable future.

Contractual Obligations

The following table shows our contractual payment obligations for our long term debt and future purchase obligations as of
September 26, 2008. Approximately $2.5 million of unrecognized tax benefits, including interest and penalties, are not included in this contractual obligations table due to the

33

---



uncertainty
related to the timing of any payments. Interest on our long term debt is calculated based on the contractual loan maturity at the interest rate (8.3%) in effect at September 26,
2008 (in thousands):

Payments Due by Period

Certain Contractual Obligations

Total

Less than
1 year

1-3
years

4-5
years

After 5
yearsLong term debt

$
239,900

$
22,900

$
217,000

$


$
Short term debt


2,013


2,013








Interest payments


44,703


18,487


26,216





Operating leases


2,593


1,299


1,287


7


Supply agreement


1,400


700


700





Unconditional purchase obligations


102,003


98,003


3,000


1,000


Total contractual cash obligations

$
392,612

$
143,402

$
248,203

$
1,007

$



Impact of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about a company's financial assets and liabilities that are
measured at fair value. SFAS 157 does not change existing guidance on whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position ("FSP")
No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") which excludes SFAS No. 13, "Accounting for Leases" and certain other accounting
pronouncements that address fair value measurements, from the scope of SFAS 157. In February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement
No. 157" ("FSP 157-2") which provides a one-year delayed application of SFAS 157 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 did not have a material impact on our consolidated financial
statements. In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active" ("FSP 157-3"), which
clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management's internal assumptions
should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use
of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The guidance in FSP 157-3 is
effective immediately.

In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). This statement establishes a framework to disclose and account for business
combinations. The adoption of the requirements of SFAS 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 our 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 161").
SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities, including how an entity uses derivative

34

---



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 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 161 to have a material impact on our consolidated
financial statements.

In
May 2008, the FASB issued SFAS 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 Conformity with Generally Accepted Accounting Principles." We do not expect the adoption of this statement to have a material impact on our
financial statements.

In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). This
FSP 142-3 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" ("SFAS 142"). The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for our interim and annual financial statements beginning in fiscal year 2010. We do not expect the adoption of this statement to have a material
impact on our financial statements.

Off-Balance Sheet Arrangements

At September 26, 2008, we had no off-balance sheet arrangements that have or are likely to have a material current
or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Effect of Inflation

In fiscal years 2008, 2007, and 2006 we experienced inflationary cost increases in certain operating costs, including raw materials,
utilities, freight, insurance and benefit costs.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Average interest rates on borrowings under our U.S. credit facility were 10.2% in fiscal year 2008. If interest rates had been 100
basis points higher, our annual interest expense would have increased $2.4 million, assuming comparable borrowing levels during the year.

The
functional currency for our Italy operations is the Euro. At September 26, 2008, we had a net investment in our Italy operations of €22.0 million
($30.9 million).

We
have forward contracts for a certain portion of our future durum wheat requirements. These contracts are set price contracts to deliver grain to our mill, and are not derivative
instruments as they have no net settlement provision and are not transferable.

35

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERICAN ITALIAN PASTA COMPANY  Index to Consolidated Financial Statements

PageReport of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting

37Reports of Independent Registered Public Accounting Firms on the Consolidated Financial Statements

39Consolidated Balance Sheets at September 26, 2008 and September 28, 2007

41Consolidated Statements of Operations for the years ended September 26, 2008, September 28, 2007 and
September 29, 2006

42Consolidated Statements of Stockholders' Equity for the years ended September 26, 2008, September 28, 2007 and
September 29, 2006

43Consolidated Statements of Cash Flows for the years ended September 26, 2008, September 28, 2007 and
September 29, 2006

44Notes to Consolidated Financial Statements

46Schedule II Valuation and Qualifying Accounts

76


36

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
American Italian Pasta Company

We
have audited American Italian Pasta Company and subsidiaries' (the "Company") internal control over financial reporting as of September 26, 2008, based on criteria established
inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified and included in management's assessment a material
weakness in internal controls related to the Company's financial statement closing process.

In
our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, American Italian Pasta Company and
subsidiaries has not maintained effective internal control over financial reporting as of September 26, 2008, based on criteria established inInternal
ControlIntegrated Frameworkissued by COSO.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement
schedule of American Italian Pasta Company and subsidiaries as of and for the year ended September 26, 2008. The material weakness identified above was considered in determining the nature,
timing, and extent of

37

---



audit
tests applied in our audit of the 2008 financial statements, and this report does not affect our report dated December 10, 2008, which expressed an unqualified opinion on those financial
statements and financial statement schedule and included an explanatory paragraph regarding the Company's adoption of Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, Accounting for Income Taxes."

/s/ GRANT
THORNTON LLP

Kansas
City, Missouri
December 10, 2008

38

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
American Italian Pasta Company

We
have audited the accompanying consolidated balance sheet of American Italian Pasta Company and subsidiaries (the "Company") as of September 26, 2008 and the related
consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit of the basic financial statements included the financial statement schedule listed in the
Index under Item 15(a) as of and for the year ended September 26, 2008. These financial statements and financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Italian Pasta Company and
subsidiaries as of September 26, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

As
discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, Accounting for Income Taxes" on
September 29, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Italian Pasta Company and subsidiaries' internal control
over financial reporting as of September 26, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 10, 2008 expressed an adverse opinion thereon.

/s/ GRANT
THORNTON LLP
Kansas City, Missouri
December 10, 2008

39

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors
American Italian Pasta Company

We
have audited the accompanying consolidated balance sheet of American Italian Pasta Company (the Company) as of September 28, 2007, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in the period ended September 28, 2007. Our audits also included the financial statement schedule listed in the Index
at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Italian Pasta Company at
September 28, 2007, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 28, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule for each of the two years in the period ended September 28, 2007, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST &
YOUNG LLP 
Kansas City, Missouri
June 27, 2008

40

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

September 26, 2008

September 28, 2007ASSETSCurrent assets:Cash and cash equivalents

$
38,623

$
16,635Short term investments


2,370


Trade and other receivables, net


49,197


38,279Inventories


66,026


44,443Other current assets


5,819


7,629Deferred income taxes


2,126


2,381Total current assets


164,161


109,367Property, plant and equipment, net


303,503


316,109Brands


79,769


83,282Other assets


5,591


19,205Total assets

$
553,024

$
527,963LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
29,541

$
19,195Accrued expenses


37,258


31,523Other


99


1,181Short term debt and current maturities of long term debt


24,913


1,963Total current liabilities


91,811


53,862Long term debt, less current maturities


217,000


240,000Income tax payable


1,783


Deferred income taxes


34,054


35,286Litigation settlement





26,500Other long term liabilities


2,405


397Total liabilities


347,053


356,045Commitments and contingenciesStockholders' equity:Preferred stock, $.001 par value:Authorized shares10,000,000





Issued and outstanding sharesnoneClass A common stock, $.001 par value:Authorized shares75,000,000


22


21Issued and outstanding shares22,454,145 and 20,259,060, respectively, at September 26, 2008 and 20,832,627 and 18,674,628, respectively, at
September 28, 2007Class B common stock, par value $.001Authorized shares25,000,000; Issued and outstandingnone





Additional paid-in capital


261,772


247,492Treasury stock, 2,195,085 shares in 2008 and 2,157,999 shares in 2007, at cost


(52,076
)

(52,029
)Accumulated other comprehensive income


16,728


15,352Accumulated deficit


(20,475
)

(38,918
)Total stockholders' equity


205,971


171,918Total liabilities and stockholders' equity

$
553,024

$
527,963


See accompanying notes to consolidated financial statements.

41

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

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006Revenues

$
569,196

$
398,122

$
367,023Cost of goods sold


446,891


308,819


284,777Gross profit


122,305


89,303


82,246Selling and marketing expense


27,727


21,503


22,871General and administrative expense


46,663


33,548


35,459Impairment charges to brands


3,654





998Loss on disposition of brands








4,708(Gain) loss related to long-lived assets


1,139


(109
)

22,268Operating profit (loss)


43,122


34,361


(4,058
)Interest expense, net


26,240


29,421


29,509Other (income) expense, net


92


(245
)

(913
)Income (loss) before income taxes


16,790


5,185


(32,654
)Income tax benefit


(2,321
)

(163
)

(2,241
)Net income (loss)

$
19,111

$
5,348

$
(30,413
)Net income (loss) per common share (basic)

$
1.00

$
0.29

$
(1.65
)Weighted-average common shares outstanding


19,118


18,673


18,386Net income (loss) per common share (assuming dilution)

$
0.99

$
0.28

$
(1.65
)Weighted-average common shares outstanding (including dilutive securities)


19,384


18,951


18,386


See
accompanying notes to consolidated financial statements.

42

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

Class A Common StockTreasury Stock



Accumulated
Other
Comprehensive
IncomeAdditional
Paid-in
Capital

Unearned
Compensation

Accumulated
Deficit

Total
Stockholders'
EquityShares

Amount

Shares

At CostBalance at September 30, 2005


20,567

$
21

$
243,708


(2,134
)
$
(51,817
)
$
(738
)
$
8,705

$
(13,853
)
$
186,026Net loss























(30,413
)

(30,413
)Foreign currency translation adjustment




















2,110





2,110Comprehensive income


























(28,303
)Reclassification of unearned compensation upon adoption of SFAS 123R








(738
)







738








Stock-based compensation


212





2,653

















2,653Purchase treasury shares











(5
)

(40
)










(40
)Balance at September 29, 2006


20,779


21


245,623


(2,139
)

(51,857
)




10,815


(44,266
)

160,336Net income























5,348


5,348Foreign currency translation adjustment




















4,537





4,537Comprehensive income


























9,885Stock-based compensation


54





1,869

















1,869Purchase treasury shares











(19
)

(172
)










(172
)Balance at September 28, 2007


20,833


21


247,492


(2,158
)

(52,029
)




15,352


(38,918
)

171,918Net income























19,111


19,111Foreign currency translation adjustment




















1,376





1,376Comprehensive income


























20,487Cumulative effect of adoption of FIN 48,Accounting for Uncertainty in Income Taxes(Note 12)























(668
)

(668
)Stock issued on settlement of shareholder suit


1,431


1


13,999

















14,000Stock-based compensation


190





1,376


(30
)













1,376Purchase treasury shares











(7
)

(47
)










(47
)Tax impact of expired stock options








(1,095
)
















(1,095
)Balance at September 26, 2008


22,454

$
22

$
261,772


(2,195
)
$
(52,076
)



$
16,728

$
(20,475
)
$
205,971


See accompanying notes to consolidated financial statements.

43

---





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

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006OPERATING ACTIVITIES:Net income (loss)

$
19,111

$
5,348

$
(30,413
)Adjustments to reconcile net income (loss) to net cash provided by operations:Depreciation and amortization


24,092


23,409


24,895Amortization of deferred financing fees


1,836


1,265


4,216Impairment charges to brands


3,654





998Loss on disposition of brands








4,708(Gain) loss related to long-lived assets


1,139


(109
)

22,268Provision for inventory obsolescence


1,233


788


1,420Provision for spare parts obsolescence


488





Stock-based compensation expense


3,165


1,869


2,653Deferred income tax benefit


(2,017
)

(667
)

(2,410
)Other


574


163


750Changes in operating assets and liabilities:Trade and other receivables


(9,011
)

(5,372
)

1,742Inventories


(22,800
)

(4,182
)

4,282Other current assets


1,806


(1,203
)

2,079Accounts payable and accrued expenses


14,768


2,839


5,244Other


(2,296
)

(239
)

(1,240
)Net cash provided by operating activities


35,742


23,909


41,192INVESTING ACTIVITIES:Short term investments under orderly liquidation


(7,379
)




Redemption of short term investments


4,803





Additions to property, plant and equipment


(12,430
)

(9,836
)

(12,577
)Proceeds from disposal of pasta brands








1,775Proceeds from disposal of property, plant and equipment


1,961


356


8,122Net cash used in investing activities


(13,045
)

(9,480
)

(2,680
)FINANCING ACTIVITIES:Proceeds from issuance of debt


16,151





265,000Principal payments on debt


(16,251
)

(20,500
)

(285,351
)Purchase of treasury stock


(47
)

(172
)

(40
)Deferred financing costs


(539
)

(308
)

(7,369
)Net cash used in financing activities


(686
)

(20,980
)

(27,760
)Effect of exchange rate changes on cash


(23
)

381


142Net increase (decrease) in cash and cash equivalents


21,988


(6,170
)

10,894Cash and cash equivalents, beginning of year


16,635


22,805


11,911Cash and cash equivalents, end of year

$
38,623

$
16,635

$
22,805


See
accompanying notes to consolidated financial statements.

44

---



AMERICAN ITALIAN PASTA COMPANY        SUPPLEMENTAL CASH FLOW INFORMATION        (in thousands)

Year EndedSeptember 26, 2008

September 28, 2007

September 29, 2006Cash paid for interest

$
23,851

$
28,151

$
22,551Cash paid for income taxes, net

$
352

$
74

$
694Non-cash investing and financing activitiesProperty, plant and equipment accrued in accounts payable

$
173

$
161

$
51Cash received by escrow agent on litigation-related insurance proceeds

$
11,000

$


$
Cash distributed to shareholders by escrow agent under litigation settlement

$
11,000

$


$
Stock issued in relation to settlement liability

$
14,000

$


$



45

---





AMERICAN ITALIAN PASTA COMPANY        Notes to Consolidated Financial Statements

1. DESCRIPTION OF THE BUSINESS

American Italian Pasta Company is a Delaware corporation which began operations in 1988. Our management believes we are the largest producer and marketer of dry pasta in North America,
by volume. We have manufacturing and distribution facilities located in Excelsior Springs, Missouri, Columbia, South Carolina, Tolleson, Arizona, and Verolanuova, Italy.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of ConsolidationThe consolidated financial statements include the accounts of our majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year EndOur fiscal year ends on the last Friday of September or the first Friday of October, resulting in a
52- or 53-week year depending on the calendar. Our first three quarters end on the Friday last preceding December 31, March 31 and June 30 or the first
Friday of the following month of each quarter. Fiscal years 2008, 2007 and 2006 were 52 weeks and ended September 26, 2008, September 28, 2007, and September 29, 2006.

Revenue RecognitionThe provisions of Staff Accounting Bulletin No. 104 and all other related interpretations have been
applied. Sales are recognized when delivery of product has occurred or services have been rendered, there is persuasive evidence of a sales arrangement, selling prices are fixed or determinable, and
collection from the customer is reasonably assured. Transfer of title typically occurs upon delivery at the customers' place of business. Promotional allowances related to our sales are recorded at
the time revenue is recognized and reflected as a reduction of revenues on the accompanying consolidated statements of operations. Such allowances, where applicable, are estimated based on anticipated
volume and promotional spending with specific customers. We recognize revenue for subsidy offset payments from the Department of Commerce (see Note 11) when the amount and the right to receive
payment can be reasonably determined.

Foreign CurrencyOur foreign operations utilize the Euro as their functional currency. Accordingly, for purposes of
translating foreign subsidiary financial statements to the U.S. dollar reporting currency, assets and liabilities of our foreign operations are translated at the period-end exchange rate
and revenues and expenses are translated at the weighted-average exchange rates for the period and related gains or losses are recognized as other comprehensive income. Foreign currency gains and
losses resulting from foreign currency transactions are included in consolidated operations in the period incurred. Realized net foreign currency transaction (gains) losses of $0.2 million,
($0.1) million, and ($0.9) million for fiscal years 2008, 2007, and 2006, respectively, are reflected in the statement of operations under the caption other (income) expense, net.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our accounting policies with significant estimates
include indefinite-lived intangible assets, long-lived assets, share-based compensation, allowance for doubtful accounts, reserves for slow-moving, damaged and discontinued
inventory, reserve for obsolete and impaired spare parts, promotional allowances, and income taxes. Actual results could differ from those estimates.

Risks and UncertaintiesPasta is made from semolina milled from durum wheat. We mill the wheat into semolina at certain of our
plants. Durum wheat is a narrowly traded commodity crop. We

46

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

attempt
to mitigate some of the effect of durum wheat cost fluctuations through forward purchase contracts that require physical delivery and through raw material cost-based pricing
agreements with certain of our customers. These contracts represent normal purchases and are recorded as performance occurs under the contract. Our commodity procurement and pricing practices
are intended to reduce the risk of durum wheat cost increases on profitability, but also may temporarily affect our ability to benefit from durum wheat cost decreases.

Financial InstrumentsThe carrying values of our financial instruments, including cash and cash equivalents, short term
investments, trade and other receivables, accounts payable, short term debt, and long term debt, as reported in the accompanying consolidated balance sheets at September 26, 2008 and
September 28, 2007, approximate fair value.

Cash and Cash EquivalentsCash and cash equivalents include cash on hand, amounts due from banks and highly liquid marketable
securities with maturities of three months or less at the date of purchase. At times, we have cash in excess of FDIC limits and place our cash and cash equivalents with high credit quality financial
institutions.

Trade Accounts ReceivableWe grant credit to certain customers who meet our pre-established credit requirements.
Generally, we do not require collateral when trade credit is granted to customers. Credit losses are provided for in the financial statements and have generally been within management's expectations.
The allowance for doubtful accounts at September 26, 2008 and September 28, 2007 was $2.3 million and $2.2 million, respectively and is netted against accounts receivable
in the consolidated balance sheet. Uncollectible accounts are written-off against the allowance for doubtful accounts after collection efforts have been exhausted. For the fiscal years
2008, 2007 and 2006, bad debt expense (recovery) was $0.4 million, $0.2 million and $(0.1) million, respectively.

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. We periodically review our inventory for slow-moving, damaged or discontinued items and provide
reserves to reduce such items identified to their recoverable amount. Inbound freight costs are capitalized as a component of inventory. Warehousing costs, including storage costs, are expensed as
incurred as a component of cost of goods sold.

Property, Plant and EquipmentCapital additions and improvements are classified as property, plant and equipment and are
recorded at cost. Depreciation is calculated for financial statement purposes using the straight-line method over the estimated useful life of the related asset as follows:

Number of YearsLand improvements

28 - 40Buildings

30 - 40Plant and mill equipment

10 - 30Furniture, fixtures and equipment

3 - 10


Plant
and mill equipment also includes spare parts, recorded at lower of average cost or realizable value. Spare parts are valued at the lower of average cost or net realizable value and
are not
depreciated, but are expensed when placed in service. We periodically review our spare parts for excess and obsolete items and provide reserves to reduce such items to their recoverable amounts. At
September 26, 2008 and September 28, 2007, the reserve was $1.0 million and $1.1 million, respectively.

47

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

BrandsIn accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," we do not amortize the cost of intangible assets with indefinite lives. Our indefinite lived intangible assets consist entirely of brand names. We perform impairment tests of the carrying
value of indefinite lived intangible assets at least annually and more frequently should events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
These impairment tests are impacted by judgments as to future cash flows and other considerations. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See
Note 7Brands for a discussion of charges to income for brand impairments.

Other Long Lived AssetsIn accordance with SFAS No. 144, "Accounting for Impairment or Disposal
of Long-lived Assets," we review long-lived assets, including amortizable intangible assets for impairment, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income TaxesA deferred tax asset or liability recognized for the anticipated future tax consequences of temporary differences
between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in
the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on our ability to
generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that sufficient future taxable income, taking into consideration tax
planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax
expense in the period such a determination is made. This charge may have a material impact on recognized income tax expense on our consolidated statement of operations. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recognition of a change in enacted tax rates may have a material impact
on recognized income tax expense and on our consolidated statements of operations.

Effective
September 29, 2007, we adopted 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

48

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

factors
when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional
information, we may need to periodically adjust our recognized tax positions and tax benefits. These periodic adjustments may have a material impact on our consolidated statements of operations. The
cumulative effect of applying the provisions of FIN 48 was reported as an adjustment to the opening balance of retained earnings as of September 29, 2007. 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 12 of the notes to the consolidated financial statements.

Share-Based CompensationIn accordance with SFAS No. 123R, "Share-Based Payment (revised)," ("SFAS 123R") we
recognize all share-based payments to employees in the income statement under the fair value method. Under SFAS 123R, share-based compensation recognized in our results is based on awards
ultimately expected to vest, and accordingly has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised appropriately in
subsequent periods if actual forfeitures differ from those estimates. Nonvested share awards classified as equity are measured at fair value as if the share were vested and issued on the grant date.
Nonvested share awards classified as liabilities are remeasured at each reporting date until the date of settlement. Compensation cost for each period is based on the percentage of the requisite
service that has been rendered through the end of the period and the change in fair value of the award during the period. We utilize the Black-Scholes option valuation model to calculate the fair
value of each stock option and stock appreciation right award. Expected volatility was based on the combination of the historical volatility of our common stock and the implied volatility of our
options. The expected term of the options and stock appreciation rights represent the period of time until exercise or termination and is based on historical experience of similar awards, including
vesting schedules and expectations of future behavior. The risk free interest rate is based on the U.S. Treasury rate at the time of the grant for instruments of a comparable life. We do not currently
anticipate a dividend payout in the foreseeable future.

Advertising CostsAdvertising costs are expensed as incurred. Advertising costs were $2.2 million in the fiscal year
2008, $2.3 million in fiscal year 2007, and $3.7 million in fiscal year 2006.

Other Comprehensive IncomeComprehensive income refers to revenue, expense, gains, and losses that are recorded as an element
of stockholders' equity rather than as a component of net income. Our other comprehensive income consists of foreign currency translation adjustments from foreign subsidiaries using the local currency
as their functional currency.

Impact of Recent Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about a company's
financial assets and liabilities that are measured at fair value. SFAS 157 does not change existing guidance on whether or not an instrument is carried at fair value. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff
Position ("FSP") No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") which excludes SFAS No. 13, "Accounting for

49

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leases"
and certain other accounting pronouncements that address fair value measurements, from the scope of SFAS 157. In February 2008, the FASB issued FSP 157-2, "Effective Date of
FASB Statement No. 157" ("FSP 157-2") which provides a one-year delayed application of SFAS 157 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 did not have a material impact on our consolidated financial
statements. In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active" ("FSP 157-3"), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management's internal assumptions should be considered in
measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or
pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The guidance in FSP 157-3 is effective immediately

In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). This statement establishes a framework to disclose and account for business
combinations. The adoption of the requirements of SFAS 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 our 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 161").
SFAS 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 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 161 to have a material impact on our consolidated financial statements.

In
May 2008, the FASB issued SFAS 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 Conformity with Generally Accepted Accounting Principles." We do not expect the adoption of this statement to have a material impact on our
financial statements.

In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP 142-3 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" ("SFAS 142"). The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other U.S. generally accepted accounting principles. FSP 142-3 is effective for our
interim and annual financial statements beginning in fiscal year 2010. We do not expect the adoption of this statement to have a material impact on our financial statements.

50

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

3. SHORT TERM INVESTMENTS

As of September 26, 2008 and September 28, 2007 we had $2.4 million and $9.2 million, respectively, invested in the Columbia Strategic Cash Portfolio Fund
(Columbia Fund). The Columbia Fund is administered by a subsidiary of Bank of America, and is an enhanced money fund that allowed immediate withdrawal of funds. On December 10, 2007, when the
investment balance was $7.4 million, the Columbia Fund 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. At that time our investment was reclassified from cash and cash equivalents to short term investments. The underlying assets are valued at fair value and as of
September 26, 2008 we had recorded valuation losses on this investment of $0.2 million. Through September 26, 2008, we had recovered approximately $4.8 million of the
pre-liquidation investment balance. We anticipate the remaining investment of $2.4 million will be recovered as the liquidation progresses. During the fiscal year ended
September 26, 2008, we have received $0.3 million of interest income from the Columbia Fund.

4. INVENTORIES

Inventories consist of the following (in thousands):

September 26, 2008

September 28, 2007Finished goods

$
44,861

$
30,713Raw materials, additives, packaging materials and work-in-process


21,856


14,373Reserves for slow-moving, damaged and discontinued inventory


(691
)

(643
)$
66,026

$
44,443


5. PROPERTY, PLANT AND EQUIPMENT

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

September 26, 2008

September 28, 2007Land and improvements

$
11,812

$
11,867Buildings


112,861


112,434Plant and mill equipment


352,235


348,617Furniture, fixtures and equipment


32,028


30,848508,936


503,766Accumulated depreciation


(219,336
)

(199,369
)289,600


304,397Spare parts, net of reserve


7,910


8,154Construction in progress


5,993


3,558$
303,503

$
316,109


We
capitalize interest costs associated with the construction and installation of property, plant and equipment. During the fiscal years ended September 26, 2008,
September 28, 2007, and September 29, 2006, $0.5 million, $0.8 million and $0.5 million, respectively, of interest cost was capitalized.

51

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

5. PROPERTY, PLANT AND EQUIPMENT (Continued)

Depreciation
expense for the fiscal years ended September 26, 2008, September 28, 2007 and September 29, 2006, was $22.4 million, $21.8 million and
$22.5 million, respectively.

Plant
and mill equipment is carried at cost less accumulated depreciation and impairment charges. As of September 26, 2008 and September 28, 2007 we had idle assets with a
net book value of $0.6 million and $3.9 million, respectively.

We
maintain property, plant and equipment in Italy with a net book value totaling $40.8 million and $43.8 million at September 26, 2008 and September 28,
2007, respectively.

6. OTHER ASSETS

Other assets consist of the following (in thousands):

September 26, 2008

September 28, 2007Package design costs

$
13,660

$
12,713Deferred debt issuance costs


6,945


6,406Insurance settlement





12,500Other


189


1,173Other assets, gross


20,794


32,792Accumulated amortization


(15,203
)

(13,587
)Other assets, net

$
5,591

$
19,205


Package
design costs relate to certain third party costs to design artwork and produce die plates and negatives necessary to manufacture and print packaging materials according to our
and our customer's specifications. These costs are amortized on a straight-line basis over a three-year period and recorded as a component of cost of goods sold. In the event
that product packaging is discontinued prior to the end of the amortization period, the respective package design costs are written off. Package design costs, net of accumulated amortization, were
approximately $2.3 million and $2.1 million at September 26, 2008 and September 28, 2007.

Deferred
debt issuance costs relate to our long term debt and credit facilities and are amortized over the term of our five-year credit facility which matures in March 2011.
This amortization is recorded as a component of interest expense. Deferred debt issuance costs, net of accumulated amortization, at September 26, 2008 and September 28, 2007, were
approximately $3.2 million and $4.5 million, respectively.

The
insurance settlement balance reported as of September 28, 2007 is comprised of insurance proceeds receivable for the settlement of two lawsuits. The first insurance settlement
is the $11.0 million cash component of a $25.0 million settlement on all claims alleged in the federal securities class action lawsuit. This settlement also includes the distribution of
1,430,981 of our common shares valued at $14.0 million. As discussed in Note 13, during September 2008 the insurance proceeds were paid to an escrow agent for the benefit of the
plaintiff shareholders. The second insurance settlement receivable relates to a fiscal year 2006 shareholder derivative action that settled for $1.5 million. We expect the court to order
distribution during fiscal year 2009 and, accordingly, this balance is reported as a component of accounts receivable as of the fiscal year ending September 26, 2008. The $1.5 million
liability related to this settlement is reported as an accrued expense as of September 26, 2008. See Note 13 for additional information.

52

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

7. BRANDS

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", through fiscal 2008 we assigned an indefinite life to brand names acquired, and accordingly, recorded no
amortization expense. The brand names are our only intangible assets.

We
sold the Mrs. Leeper's brand and Eddie's Spaghetti brand and related inventory in fiscal year 2006 for $1.8 million in net proceeds and recorded a write-down
of approximately $4.7 million related to brands and $0.3 million related to the write-off of the unamortized non-compete agreement obtained in connection with
this brand acquisition.

We
perform an annual impairment review of our brands. As a part of the annual impairment review, we recognized an additional non-cash brand impairment of $1.0 million
for fiscal year 2006. We performed our fiscal year 2007 annual review of our brands based on the fiscal year 2008 business plan and forecasts, which indicated no brand impairment in fiscal year 2007.
We performed our fiscal year 2008 annual review of our brands based on the fiscal year 2009 business plan and forecasts, which resulted in a non-cash brand impairment of
$3.7 million. As a part of the 2008 annual impairment review we determined that one of the impaired brands has a definite life and, accordingly, we will amortize the $1.2 million fair
value of this brand over its estimated economic life beginning in fiscal year 2009.

8. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

September 26, 2008

September 28, 2007Accrued promotional costs

$
9,411

$
10,389Accrued interest expense


2,801


3,969Accrued bonus expense


4,417


5,290Other accrued expenses


11,629


11,875Lawsuit settlement


1,500


Investigation settlement (Note 13)


7,500


$
37,258

$
31,523


9. SHORT TERM DEBT

Our Italian subsidiary has credit facilities that allow 30-60 day advances that are based on accounts receivable balances pledged and are secured by our Italian
accounts receivables and other assets. At both September 26, 2008 and September 28, 2007, we had balances outstanding under these credit facilities totaling $2.0 million. These
credit facilities bear interest at an average rate of 5.5% as of September 26, 2008. The maximum that may be borrowed by our Italian subsidiary is limited to $5.0 million by our U.S.
Credit Facility. We are in compliance with this limitation as of September 26, 2008.

As
of September 26, 2008, our Italian subsidiary has an additional $0.3 million available under a general line of credit; we did not have any borrowings outstanding under
this general line of credit.

53

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

10. LONG TERM DEBT

Long term debt consists of the following (in thousands):

September 26,
2008

September 28,
2007Borrowings under U.S. credit facility

$
239,900

$
240,000Less current portion


22,900


$
217,000

$
240,000


As
of September 26, 2008, the U.S. credit facility, as amended, is comprised of a $239.9 million term loan and a $30.0 million revolving credit facility. The U.S.
credit facility is secured by substantially all of our domestic assets and provides for interest at either LIBOR rate plus 550 basis points or at an alternate base rate calculated as prime rate plus
450 basis points. The term loan matures in March 2011 and does not have scheduled principal payments. Principal pre-payments are required if certain contingent events occur, including the
sale of certain assets, issuance of equity, and the generation of excess cash flow as defined in the credit agreement. As of September 26, 2008, the excess cash flow liability under this
agreement was approximately $22.9 million, which is expected to be paid in December 2008 from cash reserves or from borrowings under the revolving credit facility. The term loan interest rate
in effect at September 26, 2008 and September 28, 2007 was 8.3% and 11.4%, respectively. As of September 26, 2008, we had no borrowings outstanding under the revolving credit
facility. The outstanding letters of credit under our revolving credit facility totaled approximately $2.4 million as of September 26, 2008. Accordingly, under the U.S. credit facility
we had additional borrowing capacity of $27.6 million as of September 26, 2008.

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. We were in compliance with these financial covenants as of September 26, 2008.

Annual
maturities of long term debt obligations for each of the next five fiscal years reflecting the terms of the credit facility discussed above, are as follows (in thousands):

2009

$
22,9002010


2011


217,0002012


2013


$
239,900


11. 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 provides that
assessed anti-dumping and subsidy duties liquidated by the Department of Commerce on Italian and Turkish imported pasta after October 1, 2000 will be distributed to affected
domestic producers. The legislation creating the dumping and subsidy offset payment provides for annual payments from the U.S. government. We record the Byrd Amendment payment as revenue in the
quarter in which the amount, and the right to receive payment, can reasonably be determined. We recognized revenue under the Act

54

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

11. CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000 (Continued)

of
$4.7 million, $3.0 million and $2.6 million in fiscal years 2008, 2007 and 2006, respectively. Effective October 1, 2007, the Act was repealed, resulting in the
discontinuation of future distributions to affected domestic producers for duties assessed after such date. During the first quarter of fiscal year 2009, we received notice that the calculated share
of our fiscal year 2009 payment related to duties assessed prior to October 1, 2007 will be approximately $0.8 million. It is not possible to reasonably estimate amounts, if any, to be
received in fiscal years subsequent to 2009 on duties assessed prior to October 1, 2007.

12. INCOME TAXES

Significant components of the income tax provision are as follows (in thousands):

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006Current income tax expense (benefit):U.S.

$
(162
)
$
452

$
89Foreign


(142
)

52


80(304
)

504


169Deferred income tax benefit:U.S.


(2,435
)

(722
)

(2,719
)Foreign


418


55


309(2,017
)

(667
)

(2,410
)Net income tax benefit

$
(2,321
)
$
(163
)
$
(2,241
)


55

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

12. INCOME TAXES (Continued)

Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):

September 26,
2008

September 28,
2007Deferred tax assets:Net operating loss carryforwards

$
39,452

$
42,018Tax credit carryforwards


14,878


15,226Inventory valuation


1,920


1,088Stock-based compensation


2,958


2,934Intangible assets


5,767


8,277Accounts receivable valuation


237


2,330Prepaid expenses and other current assets


2,559


2,357Other





5,18467,771


79,414Valuation allowance


(37,079
)

(49,759
)Total deferred tax assets


30,692


29,655Deferred tax liabilities:Property, plant and equipment


62,115


62,560Other


505


Total deferred tax liabilities


62,620


62,560Net deferred tax liabilities

$
31,928

$
32,905


The
following is the component of income (loss) before income tax benefit for domestic and foreign operations (in thousands):

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006Domestic

$
18,315

$
5,666

$
(31,565
)Foreign


(1,525
)

(481
)

(1,089
)$
16,790

$
5,185

$
(32,654
)


56

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

12. INCOME TAXES (Continued)

The
reconciliation of income tax computed at the U.S. statutory tax rate to income tax expense is as follows (in thousands):

Year EndedSeptember 26,
2008

September 28,
2007

September 29,
2006Income / (loss) before income taxes

$
16,790

$
5,185

$
(32,654
)U.S. statutory tax rate


X 35
%

X 35
%

X 35
%Federal income tax expense / (benefit) at U.S. statutory rate


5,877


1,815


(11,429
)State income tax expense / (benefit), net of federal tax effect


592


(5
)

(969
)Foreign tax rate differential


297


365


(173
)Change in valuation allowance


(12,680
)

(2,574
)

10,237Non-Deductible fine


2,625





Tax credits








(62
)Other, net


968


236


155Total income tax benefit

$
(2,321
)
$
(163
)
$
(2,241
)


During
the fiscal year ended September 26, 2008, we reduced the deferred tax assets and current taxes payable recorded for equity based compensation programs by approximately
$1.1 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 our total income tax expense or its
effective tax rate. There were no such adjustments for stock options in fiscal years 2007 or 2006.

We
had federal net operating loss carryforwards of $94.7 million at September 26, 2008 and $103.6 million at September 28, 2007, that have various expiration
dates from 2024 to 2027. A partial valuation allowance has been established against the federal net operating loss carryforward at September 26, 2008 and September 28, 2007 as we do not
believe it is more likely than not that the carryforward will be utilized prior to expiration. In making this determination, we did not consider future taxable income due to the existence of a
three-year cumulative loss as of both September 26, 2008 and September 28, 2007. We only considered taxable income to the extent of reversals of net temporary differences in
existence as of both September 26, 2008 and September 28, 2007. At the end of each period, we will evaluate whether a valuation reserve is appropriate. If we continue to generate income,
we may reverse a portion of our valuation reserve, which may have a material effect on our financial statements.

We
had various state net operating loss carryforwards of $151.8 million at September 26, 2008 and $160.9 million at September 28, 2007, that have various
expiration dates from 2008 to 2028. The ultimate realization of these losses depends on our ability to generate taxable income in future years as well as on our continued business activity in each
state and our corresponding apportioned taxable income in each state. A full valuation allowance has been established against these net operating loss carryforwards at September 26, 2006 and
September 28, 2007, as we do not believe it is more likely than not that they will be utilized prior to expiration.

We
had AMT credit carryforwards of $10.5 million and $10.4 million at September 26, 2008 and September 28, 2007, respectively, with no expiration date. A
partial valuation allowance has been

57

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

12. INCOME TAXES (Continued)

established
against these credits at September 26, 2008 and September 28, 2007 as we do not believe it is more likely than not that these credits will be fully utilized. In making this
determination, we did not consider future taxable income due to the existence of a three-year cumulative loss as of September 26, 2008 and September 28, 2007. We only
considered taxable income to the extent of reversals of net temporary differences in existence as of September 26, 2008 and September 28, 2007.

We
had general business credit carryforwards of $0.3 million and $0.7 million as of September 26, 2008 and September 28, 2007 respectively, with various
expiration dates from 2013 to 2023. A partial valuation allowance was established against these credits as of September 26, 2008 and a full valuation allowance was established against these
credits as of September 28, 2007 as we do not believe it is more likely than not that the full amount of these credits will be utilized prior to expiration due to existence of net operating
loss carryovers. For the fiscal year ended September 26, 2008, we elected to forgo bonus depreciation in order to utilize a portion of the general business credit carryforward under the
provisions of the Federal Housing Assistance Tax Act of 2008. At September 26, 2008 and September 28, 2007, we had state tax credit carryforwards of $4.1 million that have varying
expiration dates from 2011 to 2020. A full valuation allowance has been established against these credits for both years as we do not believe it is more likely than not that these credits will be
utilized prior to expiration.

No
U.S. income taxes have been provided on the undistributed earnings of foreign subsidiaries that have been retained for reinvestment. Any taxes paid to foreign governments on those
earnings may be used, in whole or in part, as credits against the U.S. tax on any dividends distributed from earnings.

We
adopted FIN 48 effective September 29, 2007. As a result of the adoption, we recognized additional tax related liabilities of approximately $0.7 million resulting
in a reduction to beginning retained earnings. In addition, we 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. We 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 26, 2008, the gross amount of
unrecognized tax benefits, including penalty and interest, was approximately $2.5 million. If recognized, approximately $2.0 million would affect our effective tax rate.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, penalties, and the associated state deferred tax assets, is as follows (in
thousands):

Balance as of September 28, 2007

$
1,717Change attributable to tax positions taken during a prior period


(241
)Change attributable to tax positions taken during the current period


Decreases attributable to settlements with tax authorities


Decreases attributable to lapse of statute of limitations


Balance as of September 26, 2008

$
1,476


We
file income tax returns in the U.S. federal jurisdiction, the United Kingdom, the Netherlands, Italy and various state jurisdictions. We have also made an evaluation of the potential
impact of assessments by state jurisdictions in which we have not filed tax returns. During fiscal year 2008, the Internal Revenue Service completed the examination of our tax returns for the fiscal
years 2002 through 2004, with no material change in taxes due for those periods. As of September 26, 2008, the

58

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

12. INCOME TAXES (Continued)

federal
tax returns for fiscal years 2004 through 2008 will remain open until the statute closes for the years in which the net operating losses are utilized in the future. In addition, state and
foreign tax returns for the fiscal years 2003 through 2008 are open to audit under the statute of limitations. As of September 26, 2008, it is not anticipated that any of the net unrecognized
tax benefits will be recognized in the next twelve months.

We
have classified interest and penalties as a component of income tax expense. As of September 26, 2008, we had accrued interest and penalties of $0.8 million
($0.5 million after tax). As of September 28, 2007, we had accrued interest and penalties of $0.6 million ($0.4 million after tax).

13. COMMITMENTS AND CONTINGENCIES

Purchase and Supply Agreements:

We had durum wheat, semolina, and other supply purchase commitments totaling approximately $102.0 million and
$72.6 million at September 26, 2008 and September 28, 2007, respectively.

We
purchase our raw material requirements (including semolina and semolina/flour blends) for our Tolleson, Arizona facility from Bay State Milling Company ("Bay State") under a
ten-year supply agreement that expires September 30, 2012. The agreement will automatically renew for a five-year term unless notice is given by either party on or
before September 30, 2010, and may be renewed for additional periods under similar terms. We are obligated to purchase 80% of our annual Tolleson requirements for semolina from Bay State with
an annual minimum of 50 million pounds. Pricing for these purchases are based on the cost of raw materials plus a conversion fee. We have satisfied our minimum requirements for fiscal years
2008, 2007 and 2006. In the event Bay State's ownership changes or under performs, we have the contractual right to purchase the mill at an established book value less accumulated depreciation.

Operating Leases:

We lease office space, computer equipment and other equipment, under lease agreements accounted for as operating leases. The office
lease agreement contains renewal options and rental escalation clauses, as well as provisions for the payment of utilities, maintenance and taxes. As of September 26, 2008, our future minimum
rental payments due under the non-cancelable operating lease agreements consist of the following (in thousands):

2009

$
1,2992010


9572011


2962012


342013


7Thereafter


$
2,593


Rent
expense was approximately $1.3 million for fiscal 2008, $1.2 million for fiscal year 2007 and $1.1 million for fiscal year 2006.

59

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Governmental Investigations and Other Matters:



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:



60

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)



61

---



AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)



From
time to time and in the ordinary course of business, we are 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 our financial results for the period in which they are resolved, we believe 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:

We have incurred significant expenses on our behalf and on behalf of the several individuals to whom we have indemnification
obligations related to certain claims and investigations involving us and these individuals. The expenses incurred through the fiscal year ended September 26, 2008, in connection with all of
these matters, including those associated with our restatement and pending legal matters, net of insurance proceeds, were $2.5 million in fiscal year 2005, $16.1 million in fiscal year
2006, $13.3 million in fiscal year 2007, and $17.5 million in fiscal year 2008. Included in fiscal year 2008 amount is the monetary penalty of $7.5 million payable to the U.S.
Department of Justice.

Employment and Consulting Agreements:

We have employment or severance agreements with certain officers providing for payments to be made in the event the employee is
terminated related to a change in control as well as severance provisions not related to change in control.

On
September 28, 2005 we entered into a consulting agreement with Alvarez & Marsal LLC, to provide management services and a co-chief executive officer.
The agreement provided for fees and incentive cash bonuses, as well as warrants for our stock, which warrants are described more fully in Note 19, Nonvested Stock and Warrants. All
compensation, fees, and expenses under the agreement have been fully paid, with certain confidentially and indemnity obligations to Alvarez & Marsal LLC continuing under the agreement.

14. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) 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
net income (loss) per share is computed by dividing net income (loss) 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 and stock
appreciation rights, 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.

62

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

14. NET INCOME (LOSS) PER COMMON SHARE (Continued)

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

September 26, 2008

September 28, 2007

September 29, 2006Net
Income

Weighted
Average
Shares
Outstanding

Per Share
Amount

Net
Income

Weighted
Average
Shares
Outstanding

Per Share
Amount

Net
Income
(Loss)

Weighted
Average
Shares
Outstanding

Per Share
AmountBasic net income (loss) per share

$
19,111


19,118

$
1.00

$
5,348


18,673

$
0.29

$
(30,413
)

18,386

$
(1.65
)Effect of dilutive securities:Stock options and stock appreciation rights





266








278








Diluted income (loss) per share

$
19,111


19,384

$
0.99

$
5,348


18,951

$
0.28

$
(30,413
)

18,386

$
(1.65
)


For the years ended September 26, 2008 and September 28, 2007, weighted average outstanding shares totaling approximately
2.0 million and 1.5 million shares of common stock, respectively, were anti-dilutive and, therefore, not included in the computation of diluted income per share. For the
fiscal year ended September 29, 2006, all potentially dilutive securities were excluded as we had a net loss per share.

15. EQUITY INCENTIVE PLANS

In October 1992, a stock option plan was established that authorizes the granting of options to purchase up to 1,201,880 shares of our common stock by certain officers and key employees.
In October 1993, an additional plan was established that authorizes the granting of options to purchase up to 82,783 shares of our common stock. In October 1997, a third stock option plan was
established that authorizes the granting of nonvested shares and/or options to purchase up to 2,000,000 shares of our common stock by certain officers, key employees and contract employees. In
December 2000, a fourth stock option plan was established that authorizes the granting of nonvested shares, options and stock appreciation rights to purchase up to 1,000,000 shares of our common stock
by certain officers, key employees and contract employees. In February 2004, shareholders approved an additional 800,000 shares under the 2000 plan. We do not anticipate that we will repurchase shares
on the open market during fiscal year 2009 for the purpose of satisfying share option or share appreciation right exercises.

We
utilize the Black-Scholes option valuation model to calculate the fair value of each option and stock appreciation right award. Expected volatility was based on the combination of the
historical volatility of our common stock and the implied volatility of our options. The expected term of the options and stock appreciation rights represents the period of time until exercise or
termination and is based on historical experience of similar awards, including vesting schedules and expectations of future behavior.
The risk free interest rate is based on the U.S. Treasury rate at the time of the grant for instruments of a comparable life. We do not currently anticipate a dividend payout in the foreseeable
future.

63

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

15. EQUITY INCENTIVE PLANS (Continued)

We
did not issue stock options during the fiscal years 2008, 2007, and 2006. The assumptions used to record share-based compensation expense for stock appreciation rights under SFAS
No. 123R for fiscal years 2008, 2007 and 2006 are as follows:

2008

2007

2006Expected volatility


40.1% - 46.7
%

38.6% - 42.3
%

38.0% - 46.4
%Weighted-average volatility


41.6
%

39.2
%

45.9
%Expected dividends


0.0
%

0.0
%

0.0
%Expected term (in years)


3.8 - 5.9


3.8 - 5.2


4.5 - 5.5Risk-free rate


3.44
%

4.65
%

4.70
%Weighted-average Black Scholes value

$
3.01

$
3.56

$
1.69


Stock Options

The stock options vest over one to five years in varying amounts, depending on the terms of the individual option agreements, and
expire 10 years from the date of grant.

A
summary of our stock option activity, and related information, is as follows:

Number of
Shares

Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value

Weighted
Average
Remaining
Contractual
Term
(in years)Outstanding at September 28, 2007


940,164

$
30.19Forfeited


(2,860
)
$
28.77Expired


(244,863
)
$
28.88Outstanding at September 26, 2008


692,441

$
30.66Vested or expected to vest at September 26, 2008


687,573

$
30.67

*


3.8Exercisable at September 26, 2008


654,409

$
30.80

*


3.7






There
were no stock options issued or exercised during fiscal years 2008, 2007, or 2006.

We
recognized compensation expense related to stock options of $0.3 million, $0.3 million and $1.6 million in fiscal years 2008, 2007 and 2006, respectively. There
is no income tax effect related to the stock option compensation expense as deferred income tax benefits otherwise provided are offset by valuation allowances as discussed in Note 12.

As
of September 26, 2008, we had $0.2 million of future unrecognized compensation costs that are expected to be recognized over a weighted average period of less than one
year.

64

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

15. EQUITY INCENTIVE PLANS (Continued)

Stock Appreciation Rights

The stock appreciation rights vest over three to four years in varying amounts depending on the terms of the individual agreements, and
expire seven years from the date of grant.

A
summary of our stock appreciation rights activity, and related information, is as follows:

Number of
Shares

Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value

Weighted
Average
Remaining
Contractual
Term
(in years)Outstanding at September 28,2007


1,230,783

$
7.00Granted


957,201

$
7.43Cancelled


(170,181
)
$
7.00Outstanding at September 26,2008


2,017,803

$
7.21Vested or expected to vest at September 26, 2008


1,797,993

$
7.21

$
12,952,000


5.4Exercisable at September 26, 2008


300,541

$
6.98

$
2,681,000


4.8


The
weighted average fair value for stock appreciation rights granted was $3.01 and $3.56 for the fiscal years ended September 26, 2008 and September 28, 2007.

As
of September 26, 2008, we had $3.4 million of future unrecognized compensation costs that are expected to be recognized over a weighted average period of
1.5 years related to stock appreciation rights. No stock appreciation rights were exercised during fiscal years 2008, 2007, or 2006.

We
recognized compensation expense related to stock appreciation rights of $1.3 million, $0.6 million, and $0.2 million in fiscal years 2008, 2007, and 2006,
respectively. There is no income tax effect related to the stock appreciation rights compensation expense as deferred income tax benefits otherwise provided are offset by valuation allowances as
discussed in Note 12.

16. EMPLOYEE BENEFIT PLANS

We have a defined contribution plan organized under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows all qualifying employees to
contribute up to the tax deferred contribution limit allowable by the Internal Revenue Service. We currently match 50% of the employee contributions, which is not to exceed 6% - 12% of
the employee's salary, depending on the length of the employee's service. We may contribute additional amounts to the plan as determined annually by the Board of Directors. Employer contributions
related to the plan totaled $0.9 million, $0.8 million and $0.7 million for the years ended September 26, 2008, September 28, 2007 and September 29, 2006,
respectively.

We
sponsor an Employee Stock Purchase Plan ("ESPP") which offered all employees the election to purchase our common stock at a price equal to 90% of the market value on the last day of
the calendar quarter. Authorized shares under this plan were 100,000. During fiscal year 2005, we suspended the ESPP and have not determined when or under what terms this program may be reactivated.

65

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

17. STOCK REPURCHASE PLAN

In October 2002, our Board of Directors authorized up to $20.0 million to implement a common stock repurchase plan. We did not purchase any shares in fiscal years 2008, 2007 and
2006 under this program.

18. STOCKHOLDER RIGHTS PLAN

On December 3, 1998, our Board of Directors adopted a Stockholder Rights Plan. Under the Plan, each common stockholder at the close of business on December 16, 1998
received a dividend of one right for each share of Class A common stock held. Each right entitles the holder to purchase one one-hundredth of a share of a new series of
participating preferred stock at an initial purchase price of $110.00. The rights will become exercisable and will detach from the common stock a specified period of time after any person has become
the beneficial owner of 15% (20% if an institutional investor) or more of our common stock or commenced a tender or exchange offer which, if consummated, would result in any person becoming the
beneficial owner of 15% (20% if an institutional investor) or more of the common stock. When exercisable, each right will entitle the holder, other than the acquiring person, to purchase for the
purchase price our common stock having a value of twice the purchase price.

If,
following an acquisition of 15% (20% if an institutional investor) or more of our common stock, we are involved in certain mergers or other business combinations or we sell or
transfer more than 50% of our assets or earning power, each right will entitle the holder to purchase for the purchase price common stock of the other party to such transaction having a value of twice
the purchase price.

At
any time after a person has acquired 15% (20% if an institutional investor) or more (but before any person has acquired more than 50%) of our common stock, we may exchange all or part
of the rights for shares of common stock at an exchange ratio of one share of common stock per right.

We
may redeem the rights at a price of $.01 per right at any time prior to a specified period of time after a person has become the beneficial owner of 15% (20% if an institutional
investor) or more of its common stock. The rights will expire on December 16, 2008, unless earlier exchanged or redeemed.

19. NONVESTED SHARE AWARDS AND WARRANTS

During the fiscal years ended September 26, 2008, September 28, 2007 and September 29, 2006, we awarded 154,897, 76,994, and 239,682 shares of nonvested shares to
employees with a weighted-average grant date values of $7.75, $8.80 and $4.25, respectively. The shares vest over either 3 or 4 years.

Liability Awards

Prior to fiscal year 2008, we permitted employees to net-settle shares for taxes at amounts greater than minimum statutory
withholding obligation, which resulted in the awards being classified as liabilities. In accordance with the provisions of SFAS 123R, we record expense on nonvested share awards equal to the
change in fair value at the end of each reporting period. As of September 26, 2008, a $1.8 million liability related to these nonvested share awards is reported as a component of other
long term liabilities.

66

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

19. NONVESTED SHARE AWARDS AND WARRANTS (Continued)

We
received 6,606 shares at a weighted average price of $7.17, 19,455 shares at a weighted average price of $8.82 and 4,946 shares at a weighted average price of $7.99 in connection with
the withholding of taxes upon vesting of nonvested shares in fiscal years 2008, 2007 and 2006, respectively, which is reflected as a financing activity within the consolidated statements of cash
flows.

Our
nonvested share activity for awards subject to liability accounting is as follows:

Number of
Shares

Weighted Average
Grant Date
Fair Value

Aggregate
Intrinsic
ValueNonvested at September 28, 2007


226,326

$
7.77Vested


(39,984
)
$
10.23Forfeited


(23,052
)
$
6.54Nonvested at September 26, 2008


163,290

$
7.34

$
2,596,000


Expense
recognized related to nonvested shares subject to liability accounting amounted to $1.1 million, $0.7 million and $0.3 million in fiscal years 2008, 2007 and
2006, respectively. The weighted average remaining life of liability awards is 1.6 years.

The
total fair value of nonvested shares under liability accounting that vested during the fiscal years 2008, 2007 and 2006 was $0.3 million, $0.4 million and
$0.1 million, respectively.

Equity Awards

Nonvested shares issued during 2008 are classified as equity and compensation expense is recognized over the vesting period based on
the fair value of the nonvested shares at grant date.

Our
nonvested share activity for awards subject to equity accounting is as follows:

Number of
Shares

Weighted Average
Grant Date
Fair Value

Aggregate
Intrinsic
ValueNonvested at September 28, 2007




$
Granted


154,897

$
7.75Forfeited


(7,518
)
$
7.15Nonvested at September 26, 2008


147,379

$
7.78

$
2,343,000


As
of September 26, 2008, none of these nonvested share awards had vested. Expense recognized related to these nonvested share awards totaled $0.3 million in fiscal year
2008. At September 26, 2008, unrecognized compensation expense related to these awards totaled approximately $0.9 million which will be recognized over a weighted average period of
2.7 years.

Other Stock Awards

We have recognized expense related to stock awards issued to directors that vest immediately upon grant of $0.2 million,
$0.2 million, and $0.1 million in fiscal years 2008, 2007 and 2006, respectively.

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AMERICAN ITALIAN PASTA COMPANY

Notes to Consolidated Financial Statements (Continued)

19. NONVESTED SHARE AWARDS AND WARRANTS (Continued)

Warrants

Pursuant to a 2005 agreement with Alvarez & Marsal, LLC, we issued 472,671 warrants to acquire our common stock as a
component of compensation for their evaluation of our business and recommendations for improving our operating and financial performance. These warrants fully vested in January 2006 and compensation
expense of $0.4 million was recognized during fiscal year 2006. The warrants may be exercised at a market price of $5.67 per share and expire in September 2010. As of September 26, 2008,
none of these warrants had been exercised.

20. SIGNIFICANT CUSTOMERS

Sales to Walmart, Inc. during the years ended September 26, 2008, September 28, 2007 and September 29,
2006, represented 22%, 23% and 22% of revenues, respectively. Sales to Sysco during the fiscal years ended September 26, 2008, September 28, 2007 and September 29, 2006,
represented 9%, 9%, and 11% of revenues, respectively.

Accounts
receivable from Walmart and Sysco, as a percent of total trade and other receivables, amounted to 13% and 9%, respectively, as of September 26, 2008 and 19% and 2% as of
September 28, 2007.

21. QUARTERLY FINANCIAL DATAUNAUDITED

The following quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods
presented have been included.

Quarterly
financial data is as follows (in thousands, except per share data):

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal Year ended September 26, 2008Revenues

$
111,723

$
139,568

$
155,844

$
162,061Gross profit


24,335


32,240


24,997


40,733Net income

$
1,394

$
9,444

$
978

$
7,295Net income per common share (basic)

$
0.07

$
0.50

$
0.05

$
0.37Net income per common share (assuming dilution)

$
0.07

$
0.50

$
0.05

$
0.36Fiscal Year ended September 28, 2007Revenues

$
94,105

$
96,793

$
97,158

$
110,066Gross profit


24,287


21,695


19,717


23,604Net income (loss)

$
3,551

$
176

$
(232
)
$
1,853Net income (loss) per common share (basic)

$
0.19

$
0.01

$
(0.01
)
$
0.10Net income (loss) per common share (assuming dilution)

$
0.19

$
0.01

$
(0.01
)
$
0.10


Due
to changes in stock prices during the year and timing of issuance of shares, the cumulative total of quarterly net income (loss) per share amounts may not equal income per share for
the year.

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of September 26, 2008, the end of the period covered by this Annual Report on Form 10-K, management
performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 240.13a-15(e) and 240.15d-15(e) of the Exchange Act. The
assessment was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based on such evaluation we have concluded that, as of the end of
such period, that our disclosure
controls and procedures were not effective as a result of the material weakness in internal control over financial reporting as discussed below.

Notwithstanding
the assessment of our internal control over financial reporting as not effective, our management has concluded that the consolidated financial statements included in this
Annual Report on Form 10-K fairly present, in all material respects, our consolidated financial position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles ("GAAP").

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP; that provide reasonable assurance that receipts and expenditures are being made only in accordance with proper authorization; and that provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. This assessment used the criteria in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

Internal
control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper override of controls. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting.

Management
assessed the effectiveness of the Company's internal control over financial reports as of September 26, 2008 using the COSO framework. Based on its assessment,
management has identified a material weakness, described below, and has concluded that the Company's internal control over financial reporting was not effective as of September 26, 2008. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there

69

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is
a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

Our
independent registered public accounting firm, Grant Thornton LLP, issued a report on our internal control over financial reporting as of September 26, 2008. That
report appears in Item 8 of this Annual Report on Form 10-K.

Material Weakness

As a result of our continuing efforts to complete the restatement of prior fiscal periods, management was unable to take necessary
corrective actions to remediate the following previously reported material weaknesses as of September 26, 2008:





Changes in Internal Control over Financial Reporting

In fiscal 2008, we continued our substantial efforts, which began in fiscal 2005, to address our previously reported material
weaknesses. To remediate the material weaknesses necessitates designing new business process controls, and testing them to ensure that they address the previously reported material weaknesses. We
continue to review and make necessary changes to the design of our system of internal control, through critical assessments of the roles and responsibilities of each functional group within the
organization, enhancing and documenting policies and procedures and providing relevant training, supervision and review where appropriate.

The
following material weaknesses were identified by management as of September 28, 2007, and have had the following remediation during our fiscal year ended September 26,
2008:





70

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Continued Internal Control and Financial Reporting Matters

Our ability to improve our internal control process, implement our remediation initiatives, and test the effectiveness of enhancements
to internal controls has been limited given the time required in fiscal year 2008 to become current on prior filing requirements.

Our
testing and evaluation of the operating effectiveness and sustainability of the changes to our internal control over financial reporting with respect to the material weakness will
continue as the above referenced remediation actions are still in the implementation process. As a result, we may identify additional changes that are required to remediate the material weakness or to
otherwise improve internal controls.

ITEM 9B.    OTHER INFORMATION

None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information appearing under the captions "Information About the Board of Directors and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for our 2009 Annual Meeting of Shareholders (the "2009 Proxy Statement") is hereby incorporated by reference.

ITEM 11.    EXECUTIVE COMPENSATION

Information appearing under the captions "Information About the Board of Directors and Executive OfficersDirector
Compensation and Compensation Committee Interlocks and Insider Participation" and "Executive Compensation" (other than the "Compensation Committee Report," which is deemed furnished herein by
reference) in the 2009 Proxy Statement is hereby incorporated by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information appearing under the captions "Stock Ownership of Major Stockholders", "Stock Ownership of Officers and Directors" and
"Executive CompensationEquity Compensation Plan Information" in the 2009 Proxy Statement is hereby incorporated by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information appearing under the captions "Related Party Transactions" and "Information About the Board of Directors and Executive
OfficersCorporate Governance" in the 2009 Proxy Statement is hereby incorporated by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Information appearing under the caption "Accounting Fees and Services" in the 2009 Proxy Statement is hereby incorporated by reference.

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1.

The Company's consolidated financial statements prepared in accordance with Regulation S-X, including the consolidated statements of operations, cash flows, stockholders' equity, and comprehensive income for the
three fiscal years ended September 26, 2008 September 28, 2007 and September 29, 2006 and the consolidated balance sheets as of September 26, 2008 and September 28, 2007, and related notes and the Report of Independent
Registered Public Accounting Firm are included under Item 8 of this Annual Report on Form 10-K.2.

Schedule IIValuation and Qualifying Accounts3.

The list of exhibits following the signature page of this Annual Report on Form 10-K is incorporated by reference herein in partial response to this Item 15.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 COMPANYBy:

/s/ JOHN P. KELLY John P. Kelly President and Chief Executive Officer


Date:
December 10, 2008

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

POWER OF ATTORNEY AND SIGNATURES

Each of the undersigned hereby severally constitute and appoint Robert Schuller with power of substitution and resubstitution, as his
true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicted below, all amendments to this Annual Report on
Form 10-K and generally to do all things in our names and on our behalf in such capacities to enable American Italian Pasta Company to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and Exchange Commission with respect to this Annual Report on Form 10-K.

Name

Title

Date/s/ WILLIAM R. PATTERSON William R. Patterson

Chairman of the Board of Directors

December 10, 2008/s/ JOHN P. KELLY John P. Kelly

President, Chief Executive Officer and Director
(principal executive officer)

December 10, 2008/s/ PAUL R. GEIST Paul R. Geist

Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

December 10, 2008/s/ JONATHAN E. BAUM Jonathan E. Baum

Director

December 10, 2008/s/ TIM M. POLLAK Tim M. Pollak

Director

December 10, 2008


73

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Name

Title

Date/s/ MARK C. DEMETREE Mark C. Demetree

Director

December 10, 2008/s/ JAMES A. HEETER James A. Heeter

Director

December 10, 2008/s/ TERENCE C. O'BRIEN Terence C. O'Brien

Director

December 10, 2008/s/ DAVID W. ALLEN David W. Allen

Director

December 10, 2008/s/ RONALD C. KESSELMAN Ronald C. Kesselman

Director

December 10, 2008/s/ ROBERT J. DRUTEN Robert J. Druten

Director

December 10, 2008


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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Not applicable.

75

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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        AMERICAN ITALIAN PASTA COMPANY

Description

Balance at
Beginning
of Period

Charged to
Costs and
Expense

Deductions(1)

Balance at
End of
PeriodYear Ended September 26, 2008:Deducted from asset accounts:Allowance for doubtful accounts

$
2,205,000

$
368,000

$
239,000

$
2,334,000Allowance for excess or obsolete spare parts inventory


1,107,000


488,000


633,000


962,000Allowance for slow-moving, damaged and discontinued inventory


643,000


1,233,000


1,185,000


691,000Total

$
3,955,000

$
2,089,000

$
2,057,000

$
3,987,000Year Ended September 28, 2007:Deducted from asset accounts:Allowance for doubtful accounts

$
2,276,000

$
220,000

$
291,000

$
2,205,000Allowance for excess or obsolete spare parts inventory


1,278,000


(91,000
)

80,000


1,107,000Allowance for slow-moving, damaged and discontinued inventory


1,499,000


788,000


1,644,000


643,000Total

$
5,053,000

$
917,000

$
2,015,000

$
3,955,000Year ended September 29, 2006:Deducted from asset accounts:Allowance for doubtful accounts

$
2,376,000

$
(100,000
)
$


$
2,276,000Allowance for excess or obsolete spare parts inventory


1,273,000


5,000





1,278,000Allowance for slow-moving, damaged and discontinued inventory


10,470,000


1,420,000


10,391,000


1,499,000Total

$
14,119,000

$
1,325,000

$
10,391,000

$
5,053,000


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EXHIBIT INDEX

Exhibit
Number

Description(3)


Articles and By-Laws.3.1

The Company's amended and restated Certificate of Incorporation dated October 7, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for fiscal 2005, filed
June 16, 2008).3.2

The Company's amended and restated Bylaws dated October 7, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed December 4, 2008).(4)


Instruments Defining the Rights of Security Holders, Including Indentures.4.1

The specimen certificate representing the Company's Class A Convertible Common Stock, par value $0.001 per share (incorporated by reference to Exhibit 4.1 to the IPO Registration Statement).4.2

The specimen certificate representing the Company's Class B Convertible Common Stock, par value $0.001 per share (incorporated by reference to Exhibit 4.2 to the IPO Registration Statement).4.3

Section 7.1 of the Company's amended and restated Certificate of Incorporation (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for fiscal 2007 filed June 27,
2008).4.4

Article II of the Company's amended and restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed December 4, 2008).4.5

Sections 1, 2, 3, 4 of Article III of the Company's amended and restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed December 4, 2008).4.6

Article VII of the Company's amended and restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed December 4, 2008).4.7

Article IX of the Company's amended and restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed December 4, 2008).4.8.1

Amended and Restated Credit Agreement, dated as of March 13, 2006, by and between the Company and Bank of America, N.A., as Lender, letter of credit issuer and Administrative Agent (incorporated by reference to
Exhibit 4.1 to the Company's Form 8-K filed March 15, 2006).4.8.2

First Amendment to Amended and Restated Credit Agreement, dated as of March 13, 2007 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed March 16, 2007).4.8.3

Second Amendment to Amended and Restated Credit Agreement, dated as of December 27, 2007 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed December 31, 2007).4.9

Shareholders Rights Agreement, dated December 3, 1998, between American Italian Pasta Company and UMB Bank, N.A. as Rights Agent (incorporated by reference to Exhibit 1 to the Company's Registration
Statement dated December 14, 1998 on Form 8-A12B (Commission File No. 001-13403)).4.10

Certificate and First Amendment to Rights Agreement (incorporated by reference to Exhibit 4 to the Company's Form 8-K filed January 6, 2003).


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Exhibit
Number

Description4.11

Warrant to Purchase Class A Convertible Common Stock dated March 10, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed March 16, 2006).(10)


Material Contracts.10.1
*
Board of Directors Compensation Program.10.2
*
Form of Indemnification Agreement with Officers and Directors (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed August 16, 2005), and schedule of parties (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for fiscal 2005, filed June 16, 2008).10.3.1
*
Severance Agreement between the Company and Walt George dated October 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 6, 2005).10.3.2
*
Separation Agreement between the Company and Timothy S. Webster dated December 5, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed December 8, 2005).10.3.3
*
Separation Agreement between the Company and Horst W. Schroeder dated January 25, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 31, 2006).10.3.4
*
Cash Incentive Plan for fiscal 2007 and 2008 (incorporated by reference to Exhibit 10.5.10 to the Company's Annual Report on Form 10-K for fiscal 2005, filed June 16, 2008).10.3.5
*
Employment agreement dated November 6, 2007 between the Company and John P. Kelly (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 8, 2007).10.4.1
*
1997 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to the IPO Registration Statement).10.4.2
*
First amendment to 1997 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the period ending July 31, 1998).10.4.3
*
American Italian Pasta Company 2000 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the period ending June 29, 2001).10.4.4
*
Amendment to the 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the period ending January 2, 2004).10.4.5
*
Form of Restricted Stock Agreement for Restricted Stock Awards granted pursuant to the Company's 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the
period ending September 30, 2002).10.4.6
*
Form of Stock Option Award Agreement for Stock Option Awards Pursuant to the Company's 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the period ending
March 31, 2003).10.4.7
*
New Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed March 8, 2006).


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Exhibit
Number

Description10.4.8
*
Form of Stock Appreciation Rights Award Agreement (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed March 8, 2006).10.5

Product Supply and Pasta Production Cooperation Agreement dated May 7, 1998 between the Registrant and Harvest States Cooperatives (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q
for the period ending July 31, 1998).10.6

Flour Purchase Agreement by and between American Italian Pasta Company and Bay State Milling Company dated August 7, 2002 (incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the
period ending September 30, 2002). (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have
identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission," as indicated throughout the document with an asterisk
in brackets([*])).10.7

Letter Agreement between the Company and Alvarez & Marsal, LLC, dated September 28, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 4,
2005).10.8

Letter Agreement between the Company and Alvarez & Marsal, LLC, dated March 10, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed March 16,
2006).10.9

Letter Agreement between the Company and Alvarez & Marsal, LLC, dated March 21, 2007 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed March 27,
2007).10.10

Letter Agreement between the Company and Alvarez & Marsal, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for fiscal
2005, filed June 16, 2008).10.11

Real Estate Contract between the Company and ST Specialty Foods, Inc. dated June 12, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 16, 2006).10.12
*
American Italian Pasta Company Severance Plan for Senior Vice Presidents and Above. (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for fiscal 2007, filed June 27,
 2008).21

Subsidiaries of the registrant.23.1

Consent of Grant Thornton LLP.23.2

Consent of Ernst & Young LLP.24

Power of Attorney.The power of attorney is set forth on the signature page of this Annual Report on Form 10-K.31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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