**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 
| **x**      | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
|       | **for  the fiscal year ended July 31, 2007**                                                  |
|       |                                                                                          |
| ** ** | **or**                                                                                        |
|       |                                                                                          |
| **o**      | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**Commission File No. 000-50111**

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

(Exact name of registrant as specified in itscharter)

 

| **North  Dakota**        | ** ** | **45-0423511**                    |
|--------------------------|------------|-----------------------------------|
| (State of incorporation) |       | (IRS Employer Identification No.) |

 

**One Pasta Avenue, Carrington, ND 58421**

(Address of principal executive officesincluding zip code)

 

**(701) 652-2855**

(Registrant’s telephone number, includingarea code)

 

Securities Registered Pursuant To Section12(b) Of The Act:

**None**

 

Securities Registered Pursuant To Section12(g) Of The Act:

**Common Stock, $.01par value per share**

**Series D DeliveryPreferred Stock, $.01 par value per share**

 

----

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. 

Yes o  No x

 

Indicate by check mark if the Registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.

Yes o  No x

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer’ in Rule 12b-2 of the Exchange Act. (Checkone): 

Large Accelerated Filer    o              AcceleratedFiler   o              Non-AcceleratedFiler    x

 

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

 

There is no established public market for the Registrant’s common stock.Although there is a limited, private market for shares of the Registrant’scommon stock, the Registrant does not obtain information regarding the transferprice in transactions between its shareholders and therefore is unable toestimate the aggregate market value of the Registrant’s common shares held bynon-affiliates. As of October 29, 2007, the Registrant had 10,192,413 shares ofcommon stock, par value $0.01 per share, outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

None. 

 

 

----

 

**PART I.**

** **

**Forward-Looking Statements**

 

This report contains forward-lookingstatements based upon assumptions by the management of Dakota Growers PastaCompany, Inc. (the “Company”, “Dakota Growers” or “we”), a North Dakota corporation,as of the date of this Annual Report, including assumptions about risks anduncertainties faced by the Company. When used in this report, the words “believe,”“expect,” “anticipate,” “will,” “estimate” and similar verbs or expressions areintended to identify such forward-looking statements. If management’sassumptions prove incorrect or should unanticipated circumstances arise, theCompany’s actual results could differ materially from those anticipated. Thesedifferences could be caused by a number of factors or combination of factorsincluding, but not limited to, those factors described in the “Risk Factors”section of this report. Readers are strongly urged to consider such factorswhen evaluating any forward-looking statement. The Company undertakes noobligation to update any forward-looking statements in this report to reflectfuture events or developments.

 

**ITEM 1.  BUSINESS**

 

**Introduction**

 

The Company is a North Dakota corporationthat was organized on January 30, 2002. It is the successor to and itsoperations are a continuance of Dakota Growers Pasta Company, a North Dakotacooperative (the “Cooperative”), upon the conversion to a corporation effectiveJuly 1, 2002. 

 

The Company owns and operates a verticallyintegrated, state-of-the-art durum wheat milling and pasta production facilityin Carrington, North Dakota. Primo Piatto, Inc. (“Primo Piatto”), awholly-owned subsidiary of the Company being operated as the Minnesota Divisionof the Company, currently operates a pasta production plant in New Hope,Minnesota. The Company currently has annual capacity to grind in excess of 12million bushels of grain and to produce approximately 500 million pounds ofpasta. 

 

**Pasta Industry and Markets**

 

The Company estimates North American annualdry pasta demand to be roughly 4.0 billion pounds, including pasta used indinners, side dishes and meal solutions. Based on the Company’s analysis of themarketplace and trade and industry information, the Company believes dry pastaconsumption has increased slightly over the last three years.  In addition to the domestic market for drypasta, much smaller domestic markets exist for refrigerated and frozen pasta.

 

The Pasta industry identifies domestic drypasta into two basic markets: retail and institutional. The Company recognizesthe institutional market as being comprised of ingredient and foodservicesales.

 

*Retail Market*

 

The Retail market includes salesof branded and private label pasta to grocery stores, club stores, massmerchants and other consumer retail operations. A significant portion of theRetail market is represented by established national or regional pasta brands.The Company estimates that Barilla, New World Pasta Company and AmericanItalian Pasta Company account for over 70% of the branded retail market. TheCompany focuses almost all of its Retail marketing efforts on private labelsales. The market leaders in private label sales are American Italian PastaCompany and Dakota Growers, together representing over 80% of private labelsales. A small portion of the Retail market consists of sales to federal andstate government entities.  

 

DNA Dreamfields Company, LLC (“DNA Dreamfields”), of which the Company held a 47% economicownership as of July 31, 2007, launched a low digestible carbohydrate pastaunder the DreamfieldsTMbrand name in 2004.  DreamfieldsTM pasta has maintained slightly over a 1% dollarshare of the traditional grocery channel pasta market during the last threeyears based on data from A.C. Nielsen, making it the leading pasta in the low

 

2

----

 

carbohydratepasta category.  DreamfieldsTM pasta also has 65% lower glycemic index thanregular pasta.  The Company completed thepurchase of 100% of DNA Dreamfields in September 2007.

 

In 2005, a new trend toward highfiber products developed. While still small relative to the total pastacategory, the consumption of these whole wheat/whole grain products continuesto grow.  DreamfieldsTM pasta offers fiber benefits similar to thelevels of other whole wheat/whole grain pastas while maintaining the integrityof the taste and low carbohydrate traits. Dakota Growers also manufactures and sells traditional whole wheat/wholegrain pastas.  

 

*Institutional Market*

 

Ingredient sales consist of pastaused by food processors as an ingredient or component in a further-processed orcombination food product. Such food products include dry pasta dinners,including macaroni and cheese, frozen entrees, refrigerated salads, cannedentrees, baby food, and canned and dry soups. The size of the Ingredient marketis influenced by the number of food processors that choose to produce pastainternally rather than outsource.

 

Foodservice sales are tocommercial and non-commercial eating establishments such as restaurants,business and industry cafeterias, managed services, hotels and motels, retailvending, recreation, mobile and other away-from-home eating outlets. Marketingdry pasta to this market generally consists of selling to a network ofcompetitive distribution organizations and buying groups, and selling dry pastato individual restaurant chains and other operator organizations. A smallportion of the Foodservice market consists of sales to federal and stategovernment entities.

 

**Co-PackArrangements**

 

A portion of each end-user marketis supplied under “co-pack” arrangements between pasta manufacturers. Theseagreements involve the sale of dry pasta products between pasta manufacturersin order to supply short-term volume deficiencies such manufacturers sufferfrom time to time in meeting customer requirements, and to allow a manufacturerto draw upon particular areas of expertise of other manufacturers, which may bemore cost beneficial than self-manufacturing. Co-pack sales comprised approximately 6%, 3% and 1% of the Company’s netrevenues for the years ended July 31, 2007, 2006 and 2005, respectively.

 

**Production and Products**

 

The Company purchases durum wheat which isprocessed through its milling facility into semolina and durum wheat floursthat are then used by the Company to produce dry pasta products.

 

Pasta production is basically a mixing,extrusion and drying process. The primary ingredients are semolina and water,although egg, tomato, spinach or other ingredients may be added to producecertain products. The finished dry pasta is packed to meet different marketsand customer requirements.

 

The pasta products manufactured by theCompany consist of over 80 different shapes and are sold to customers in allmarkets. In addition to the dry pasta produced by the Company, it purchasesadditional dry pasta shapes from other manufacturers and resells them. Thispractice is widely followed by many pasta manufacturers for efficiency andproduction capacity reasons, and allows distribution of wider product lines tothe Company’s customers. Outside purchases of pasta, excluding imports,comprised approximately 2% of net sales for each of the years ended July 31,2007, 2006 and 2005.    

 

The Company has an agreement with GruppoEuricom, an Italian pasta manufacturer, to distribute Gruppo Euricom’s Italianpasta and rice products in the United States and Canada.  These products are primarily private labelretail and foodservice products. Sales of imported products comprisedapproximately 1% to 2% of the Company’s net revenues in each of the last threefiscal years.

 

3

----

 

The Company’s identity preservation programprovides our customers with food safety, traceability and quality from thefield to the plate.  The Company’sproximity to the durum growing regions, its milling and production facilities,and its information technology systems allow the Company to produce productsunder an identity preservation program.

 

The Company’s Carrington, North Dakotafacilities are certified by the Organic Crop Improvement Association, whichallows the Company to offer 100% organic pasta and semolina. The Company’sfacilities allow for the isolation of the durum, semolina and pasta to enablethis certification.

 

The Company’s products are manufactured usinga comprehensive Hazard Analysis Critical Control Point (HACCP) program, whichrequires strict monitoring in all aspects of the manufacturing process, toensure food quality and safety. We believe that meeting HACCP standards strengthenscustomer confidence in the quality of our products. The Company undergoes foodsafety and product quality audits at various times throughout the year and hasconsistently received high scores.

 

In addition to its pasta products, theCompany markets semolina, durum wheat flour and other flour blends to otherfood product manufacturers as market conditions allow. Lower grade second clearflours and millfeed by-products of the durum milling process are sold primarilyfor animal feed.  Non-pasta sales representedapproximately 8%, 7% and 7% of the Company’s net revenues for the years endedJuly 31, 2007, 2006 and 2005, respectively. 

 

**Sales, Marketing and Customers**

 

The Company markets its products throughdirect sales, supplemented by the efforts of third party brokers retained bythe Company. These brokers receive commissions based upon sales of the Company’sproducts. The Company’s pasta products are distributed on a broad basisthroughout the United States. The Company does not export significant quantitiesof its pasta products. One customer, U.S. Foodservice, accounted forapproximately 12%, 12% and 13% of net revenues for the years ended July 31,2007, 2006 and 2005, respectively. The Company’s top 10 customers accounted for50% of revenues in fiscal year 2007, 50% of revenues in fiscal year 2006 and52% of revenues in fiscal year 2005. Pasta revenues consisted of 49% Retail and 51% Institutional for fiscalyear 2007, 51% Retail and 49% Institutional for fiscal year 2006, and 53%Retail and 47% Institutional for fiscal year 2005.  

 

The Company sells most of its pasta under “purchaseorders”, whereby the customer and the Company are not obligated for anypre-determined length of time, or under pricing commitments agreed to withterms of one year or less.  Pastaproducts imported from Italy under the Company’s agreement with Gruppo Euricomare primarily sold in the private label retail and foodservice markets.

 

**Series D Delivery Preferred Stock Delivery Rights**

 

Each share of Series D Delivery Preferred Stock of the Company givesits holder the privilege, but not the obligation, to deliver one bushel ofdurum wheat to the Company each fiscal year on a “first-come, first-served”basis.  From time to time the Companywill post notices to the market on its Web site (holders may also telephone theCompany for information on market notices) for the purchase of durum wheat.During the 24-hour period following the posting of any market notice and to theextent that the Company’s durum wheat requirements as set forth in the marketnotice have not been fulfilled by other holders of Series D Delivery PreferredStock, holders of Series D Delivery Preferred Stock have the right to (i)accept the Company’s offer to purchase durum wheat and (ii) deliver durumwheat to the Company on such terms and conditions as are set forth in themarket notice.  However, in any givenfiscal year of the Company, the first-come, first-served privilege to deliverdurum wheat shall be exercisable to deliver one bushel of durum wheat****only once with respect to each share of Series D DeliveryPreferred Stock. During the 24-hour period following the posting of any marketnotice, the Company will not purchase durum wheat from non-holders of Series DDelivery Preferred Stock to fulfill the Company’s durum wheat requirements asset forth in the market notice.  If,after the lapse of a certain amount of time (not less than one day), holders ofSeries D Delivery Preferred Stock have not sold to the Company all of the durumwheat

 

4

----

 

requested in the notice, theCompany will fulfill its remaining requirements outside of the Series DDelivery Preferred Stock delivery privilege.

 

Because the privilege of a holder of Series DDelivery Preferred Stock to deliver durum wheat to the Company only arises ifthe Company actually requires durum, the privilege is not absolute.  Any and all durum wheat delivered by a holderof Series D Delivery Preferred Stock to the Company must conform to qualityspecifications established by the Company.

 

The Company purchases durum wheat primarilyon the open market. Durum wheat purchases from holders of the Company’s SeriesD Delivery Preferred Stock have been negligible.

 

**Competition**

 

*Overview*

 

The markets for pasta andsemolina/durum wheat flour are highly competitive in most markets andgeographic regions. The intensity of competition varies from time to time as aresult of a number of factors, including: (1) the degree of industry capacityutilization, (2) comparative product distribution costs, (3) ability to renderdistinctive service to customers, (4) the price of raw materials, primarilydurum wheat, and (5) a distinguishing or unique ability to provide consistentproduct quality in line with customer specifications.  The Company believes that, in a broad sense,the most influential factor on the intensity of competitive conditions isindustry capacity utilization.  It shouldbe noted that detailed information regarding pasta production is somewhatdifficult to obtain, as many pasta producers are closely-held enterprises.

 

*Competition in the Pasta Market*

 

The pasta market is highlycompetitive and includes several well-established enterprises. Thosecompetitors are primarily independent companies and, to a lesser extent,divisions or subsidiaries of other, larger, food products companies. Inaddition, the Company competes against foreign suppliers, including Italian andTurkish enterprises, that sell pasta in the United States.

 

The Company markets its productsin the Retail market primarily as a private label supplier. The Company’sDakota Growers Pasta Co.® label to date has slight penetration in local areamarkets in the Dakotas and Minnesota and its Pasta Sanita® label is sold insmall niches ranging from the upper Midwest to select markets in the NortheastUnited States.  DreamfieldsTM pasta has maintained slightly over a 1% dollarshare of the traditional grocery channel pasta market during the last yearbased on data from A.C. Nielsen, making it the leading pasta in the low carbohydratepasta category. 

 

The Company’s competition in theprivate label retail market is primarily American Italian Pasta Company and, toa lesser extent, New World Pasta Company. These private label retail salescompete with retail branded products distributed primarily by Barilla, NewWorld Pasta Company *(Ronzoni, San Giorgio,Skinner, American Beauty, Creamette, Prince* brands et al), AmericanItalian Pasta Company (*Muellers, R&F, Anthony’s,Golden Grain/Mission* brands et al) and a variety of smaller domesticand imported brands. 

 

In the Foodservice market, the Company alsomarkets its pasta primarily as a private label supplier, including sales tothree of the largest foodservice distributors in the country under theirlabels. The Company’s main competitors in the Foodservice market are AmericanItalian Pasta Company, A. Zerega’s Sons, Inc., and Barilla, aswell as foreign competitors that sell product in the United States. The Company’s Dakota Growers Pasta Co.®, PastaSanita® and Pasta Growers® foodservice brands are sold throughout the UnitedStates to independent distributors and national chain accounts. The Company hasan exclusive distribution agreement with New World Pasta under which theCompany is licensed to use the *Ronzoni, Prince, SanGiorgio and Mrs. Weiss* brands in the Foodservice market.

 

5

----

 

The Company’s ingredient sales have significantly increased asingredient purchasers of dry pasta have sought out more reliable low costsuppliers.  The Company’s top competitorsin the Ingredient market include American Italian Pasta Company, PhiladelphiaMacaroni Co. Inc., and A. Zerega’s Sons, Inc. A large portion of the Ingredientmarket production capacity is represented by self-suppliers, which includeKraft Foods, Campbell Soup Company, ConAgra, Inc., Luigino’s and StouffersCorporation. 

 

The competitive environment inthe pasta industry depends largely on aggregate industry capacity relative toaggregate demand for pasta products. The pasta manufacturing industryexperienced restructuring over the past few years which reduced the excesspasta production capacity to what the Company believes is roughly 15% -20%.  Barilla completed the constructionof a plant in Avon, NY, which became operational in mid–2007.

 

*Competition in the Semolina and Durum Wheat Flour Market*

 

Given thecommodity nature of the market for semolina and durum flour, sales volume islargely dependent on delivered price when adequate supply conditions exist.Italgrani USA, Inc., Horizon Milling, LLC and Miller Milling collectively arebelieved to represent approximately 40% of total domestic durum millingcapacity, while the Company’s current milling operation represents about15%.  Most of the durum milling capacityin the United States is either part of an integrated pasta production facilityor in an alliance with pasta manufacturers. The Company believes that theintegration of its milling and pasta production facilities enables it tocompete more effectively with those competitors who also have integratedfacilities.

 

**Government Regulation**

 

*Trade Policies*

 

Governmentalpolicies and regulations, including those impacting the amount of durum wheatimported from Canada, may affect the operations of the Company and the volumeof pasta imports. United States government farm policies also affect durumplantings and thus can have a significant impact on the market price of durum.

 

Domestic pasta prices are also influenced bycompetition from foreign pasta producers, and as such, by the trade policies ofboth the U.S. government and foreign governments. U.S. Customs and BorderProtection (Customs) distributes antidumping and countervailing duties assessedon certain pasta imported from Italy and Turkey to affected domestic producerspursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “ OffsetAct”). The Company received net payments of $1.3 million, $1.1 million and $0.4million in fiscal years 2007, 2006 and 2005, respectively, under the OffsetAct. These amounts have been classified as other income.  The company cannot reasonably estimate thepotential amount, if any, that it may receive under the Offset Act in futureperiods as any such amount will be based upon futures events over which theCompany has little or no control, including, but not limited to, the amount ofexpenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs.

 

*Food and Drug Administration Regulation*

 

As a producer of products intended for humanconsumption, the Company’s operations are subject to certain federal and stateregulations, including regulations promulgated by the United States Food andDrug Administration. The Company believes that it is in material compliancewith the applicable regulatory requirements. 

 

*Environmental Regulation*

 

Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid waste disposal and odor and noise control. The Companyconducts an on-going control program designed to meet these environmental lawsand regulations. There are no pending regulatory

 

6

----

 

enforcement actions and theCompany believes that it is in substantial compliance with applicableenvironmental laws and regulations.

 

The Company cannot predict whether futurechanges in environmental laws or regulations might increase the cost ofoperating its facilities and conducting its business. Any such changes couldhave adverse financial consequences for the Company.

 

**Intellectual Property Rights**

 

The Company relies on a combination of tradesecret, trademark law, nondisclosure agreements and technical measures toestablish and protect its proprietary rights to its products and processes. TheCompany owns the following trademarks that have been registered with the UnitedStates Patent and Trademark Office for the sale of dry pasta: Pasta Growers®,Pasta Sanita®, Zia Briosa®, Primo Piatto® and Dakota Growers Pasta Co.®.

 

**Research and Development**

 

The Company supports research and developmentprograms in North Dakota that focus on improved varieties of durum wheat.Dakota Growers has an on-staff agronomist and is in the midst of a long-termproject of small plot, replicated variety trial research, as well asfield-scale fungicide research. In connection with plant breeders andresearchers, the Company is working to develop scab-resistant, high-glutendurum varieties.

 

As a result of the creation of DNADreamfields Company, LLC and the introduction of the DreamfieldsTM pasta products, the Company isinvesting and participating in product and manufacturing technique researchbeyond the scope of traditional dry pasta.

 

The Company, as part of its operations,maintains a modern, well-equipped laboratory facility designed primarily toevaluate and maintain high quality standards for incoming raw materials,ongoing product manufacturing, and development of new pasta shapes. 

 

**Employees**

 

As of October 17, 2007, the Company had 435employees, 140 of which are covered by collective bargaining agreements at itsPrimo Piatto, Inc. subsidiary. These collective bargaining agreements expire onDecember 1, 2007 and September 30, 2008. The Company considers its employeerelations to be very good.

 

**Available Information**

 

*SEC Filings*

* *

The Company’s Internet website address is *www.dakotagrowers.com*. We make available, free of chargethrough the “Investors” portion of our website, the Company’s annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 (the “1934 Act”) as soon asreasonably practicable after we electronically file such materials with, orfurnish such materials to, the Securities and Exchange Commission. Reports ofbeneficial ownership filed pursuant to Section 16(a) of the 1934 Act are alsoavailable through our website.  

 

The Securities and Exchange Commissionmaintains an Internet site that contains reports, proxy, and informationstatements and other information regarding issuers that file electronicallywith the Securities and Exchange Commission. The address of that site is *www.sec.gov*.

 

7

----

 

*Corporate Governance*

 

The Company’s Code of Conduct, which isapplicable to all of our employees, and the Charters of the Committees of ourBoard of Directors are available under the “Investors” portion of the Company’swebsite at *www.dakotagrowers.com. *Any of these items or any of theCompany’s filings with the Securities and Exchange Commission will be provided,without charge, upon written request to:

 

Investors Relations

Dakota Growers Pasta Company, Inc.

One Pasta Ave

Carrington, ND 58421

 

**ITEM 1A. RISK FACTORS**

 

The following are important factors thatcould cause actual results to differ materially from those expressed in anyforward-looking statements made by or on behalf of the Company. Additionalrisks that we do not yet know of, or currently believe are immaterial, may alsoimpair the business operations of the Company.

 

***Consumer Trends***

 

As the Company competesexclusively in the dry pasta industry, changes in consumer trends that resultin lowered demand for dry pasta may have a material adverse effect on theCompany’s financial condition and results of operations.

 

***CompetitiveEnvironment***

 

Both the U.S. pasta industry and global pastaindustry are extremely competitive. The Company competes in all dry pastamarkets – retail store brand, foodservice and ingredient, with larger, nationaland international food companies. Competition within the pasta industry islargely dependent upon the relationship of overall industry production capacityto overall market demand for pasta. Developments over the last few years havereduced the level of excess capacity in the domestic pasta industry, althoughfuture fluctuations in available capacity are sure to occur.  Some competitors may have long-term, highvolume contracts, which guarantee a specified amount of volume over the term ofthe contract. Other competitors have retail brand equity and larger amounts ofmarketing dollars to compete against imported and store brand products. Thecompetitive environment has in the past, and may in the future, put pressure onthe Company’s profitability and its ability to maintain market share. While theCompany has and will continue to apply, where possible, cost saving measures inan effort to remain competitive, there is no guarantee that the Company canoperate profitably in the future. 

 

***No Public Market forShares of the Company’s Common Stock and Preferred Stock***

 

Currently no established publictrading market exists for the shares of Common Stock and Preferred Stock of theCompany, and an active trading market may never develop. TheCompany maintains no obligation to seek or to obtain a listing on a nationalmarket. As a result, you may not be able toreadily resell your shares in the Company.******

 

***Technology***

 

The Company believes that its overallcommitment to maintaining and upgrading pasta manufacturing, milling andpackaging equipment is necessary to keep a competitive edge in the pastaindustry. In addition, it also acknowledges that ongoing computer systemupgrades to better service the demands of its customers are important tolong-term success and profitability. The Company may be negatively impacted ifit is unable to consistently keep pace with the industry in these areas. 

 

8

----

 

***Pasta, Semolina, Mill By-Product Prices;Durum Wheat and Other Input Costs***

 

The Company’s profitability is directlyrelated to the market price of dry pasta, semolina, durum wheat and mill feedby-products. The supply and price of durum wheat are subject to marketconditions and are influenced by many factors beyond the Company’s controlincluding weather patterns affecting durum wheat production, governmentalprograms and regulations, insects, and plant diseases. Such volatility withrespect to the price of the basic raw material for the Company’s productsleaves the Company subject to wide variation in its costs from year to year.Durum market prices have increased over the last year with a dramatic increaseover the last two months. Future increases in durum costs could have a materialadverse effect on operating profits unless we are able to pass cost increaseson to our customers. By-products of the milling process compete with other feedproducts, and fluctuate significantly in price with the availability of thesecompeting feed products. 

 

Increases inother input costs, such as packaging materials, ingredients and fuel costs,could adversely affect us. The costs of packaging materials,ingredients and fuel have varied widely in recent years, and future changes insuch costs may cause our results of operations and our operating margins tofluctuate significantly.

 

Changes in sales prices of our products oftenlag behind changes in input costs. Competitive pressures may also limit our ability to increase salesprices timely in response to higher input costs.  If the Company is unable to increase salesprices to offset increases in raw materials, packaging, fuel costs or otherinput costs, operating margins and profits could be materially adverselyaffected.

 

***ProductConcentration***

 

The Company competes almost exclusively inthe dry pasta industry and related flours and by-product markets. Any declinein pricing or demand for dry pasta could have a material adverse effect on theCompany’s financial condition and results of operations. 

 

***Product Liability***

 

The sale of food products for human consumption involves the risk of injury to consumers. These injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. The Company has never been involved in a product liability lawsuit. The Company is subject to U.S. Food and Drug Administration inspection and regulations and we believe the Company’s facilities comply in all material respects with all applicable laws and regulations, but we cannot be certain that we will not be subject to claims or lawsuits in the future for injuries relating to the consumption of the Company’s products. The Company carries insurance for product liability claims related to its products and for the costs related to product recalls. However, we cannot be certain that the Company will not incur claims or liabilities for which it is not insured or that exceed the amount of its insurance coverage.

 

***GovernmentRegulation and Trade Policies***

 

Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid-waste disposal and odor and noise control. The Companyconducts an on-going program designed to comply with these laws andregulations. There are no pending regulatory enforcement actions against theCompany, and the Company believes that it currently is and will continue to bein substantial compliance with all applicable environmental laws andregulations.

 

As a producer of products intended for humanconsumption, the Company’s operations are subject to certain federal and stateregulations, including regulations promulgated by the U.S. Food and DrugAdministration. The Company believes that it is in material compliance with allapplicable regulatory requirements relating to food quality and safety.

 

9

----

 

The operations of the Company may be affectedby governmental trade policies and regulations, including those impacting theamount of durum wheat imported from Canada. Domestic pasta prices are alsoinfluenced by competition from foreign pasta producers, and as such, by thetrade policies of both the U.S. government and foreign governments. 

 

***Restrictive LoanCovenants***

 

The Company’s loan agreements with CoBank andinstitutional investors obligate the Company to maintain or achieve certainamounts of equity and working capital and achieve certain financialratios.  The failure to comply with thevarious loan covenants may result in interest rate penalties, restrict theCompany’s corporate activities or result in a default by the Company which mayhave a material adverse effect on the Company’s liquidity.

 

***Board of DirectorsDiscretion Regarding Dividends***

 

The Board of Directors of the Company hasabsolute discretion to determine the manner and amount of payment of dividendson shares of Common Stock and, subject to certain exceptions, Preferred Stock.

 

**ITEM 2.  PROPERTIES ANDPROCESSING FACILITIES**

 

Dakota Growers owns and operates a millingfacility in North Dakota, and pasta plants in North Dakota and Minnesota. TheCompany owns the warehouse facilities at the pasta plants. These facilities aresupplemented by public warehouses in California, Kansas, Minnesota, New York,North Dakota, Oregon, Ohio and Washington where inventory is maintained andredistributed for the needs of specific customers. 

 

Dakota Growers continues to invest in technologies to improveoperational efficiencies, and information technology to provide enterprisevisibility to all facilities and activities within the supply chain. Theseinformation systems encompass communications, data collection, data storage,process management and record management to ensure the Company is providing asuperior level of service to our customers while attempting to reduce operatingand administrative expenses.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

From time to time and in the ordinary courseof its business, the Company is named as a defendant in legal proceedingsrelated to various issues, including worker’s compensation claims, tort claimsand contractual disputes. Other than such routine litigation, the Company isnot currently involved in any material legal proceedings. In addition, theCompany is not aware of other potential claims that could result in thecommencement of legal proceedings. The Company carries insurance that providesprotection against certain types of claims, up to the policy limits of theCompany’s insurance.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of oursecurity holders during the fourth quarter of fiscal year 2007.

 

10

----

 

**PART II.**

 

**ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

There is no established public trading marketfor the Company’s Common Stock or Preferred Stock. As of October 11, 2007 therewere 1,242 holders of the Company’s Common Stock.

 

Ownership of shares of Common Stock may betransferred subject only to the requirements of the applicable securitieslaws.  Holders of Series D DeliveryPreferred Stock have a delivery right, but not a delivery obligation, to selldurum to the Company.  The Company mustapprove all transfers of shares of Series D Delivery Preferred Stock.

 

Variable Investment Advisers, Inc. (VIA) has established an AlternativeTrading System (ATS) to facilitate trading of the Company’s Common Stock. We donot implicitly or explicitly endorse VIA or their web site, and we are notresponsible for products and services that VIA provides. We do not stand behindVIA or receive any fees from them in connection with the services offered ontheir web site. A link to the web site of VIA is available through the “Investors”portion of the Company’s website at *www.dakotagrowers.com*.VIA has been instructed by the Company to suspend trading on the ATS untilfurther notice as the Company considers strategic alternatives.

 

Trading volumes of the Company’s Common Stock have been minimal todate.

 

On February 9, 2007 the Company entered intoa Stock Purchase Agreement (“Agreement”) with MVC Capital, Inc. (“MVC”) and LaBella Holdings, LLC (“LBH”).  On May 10,2007, the Company completed the transactions pursuant to the Agreement, inwhich MVC acquired 1,000,000 shares of Series F Convertible Preferred Stock andLBH acquired 1,000,000 shares of common stock for a price of $10 pershare. The proceeds from the sale of shares to MVC and LBH were used tofund, in part, a repurchase of common stock from the Company’s stockholders(other than MVC and LBH) pursuant to a tender offer made to stockholders.  Based on the manner of sale andrepresentations of MVC and LBH in the Stock Purchase Agreement,  includinga representation by each as to its status as an accredited investor within themeaning of Rule 501 of Regulation D, the Company believes that the issuance of securitiesto MVC Capital, Inc. and La Bella Holdings, LLC were private placementsnot involving any public offering within the meaning of Section 4(2) of theSecurities Act of 1933, as amended (the “Securities Act”), pursuant toRegulation D thereof.  The Companytherefore believes the offer and sale of the shares to MVC and LBH were exemptfrom the registration requirements of the Securities Act.

 

The following table provides informationabout the shares purchased by the Company in connection with the tender offer:

 
| **Period** | ** ** | **Total Number of  Shares Purchased (1)** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Number of Shares  Purchased As Part of  Publicly Announced Program** | ** ** | **Maximum Number of Shares  That May Yet Be Purchased  Under the Program** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                                                    | ** ** | ** **                                       | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                              | ** ** |
| May 2007   |       | 3,917,519                                                     |       | $                                                | 10.00      |                                                                                                                 | 3,917,519  |                                                                                                                    | None       |   |
|            |            |                                                               |            |                                                  |            |                                                                                                                      |            |                                                                                                                         |            |  |

 

----

(1)                                  OnMarch 26, 2007, the Company commenced a tender offer to purchase up to3,920,000 shares of the Company’s common stock at $10.00 per share incash.   The tender offer expired on April27, 2007. The Company completed the purchase of shares pursuant to the tenderoffer in early May 2007.

 

During April 2007, two of the Company’semployees exercised options for the purchase of 5,550 shares of the Company’scommon stock.  The aggregateconsideration received by the Company for the issuance of those shares was$22,200.  The shares were issued inprivate placement transactions exempt from the registration requirements of theSecurities Act, pursuant to Section 4(2) of the Securities Act.

 

11

----

 

On December 14, 2006, the Company’s Board ofDirectors authorized the payment of $0.01 per share dividend on its Series DDelivery Preferred Stock and a non-periodic dividend payment of $0.14 per shareon its common stock, payable on January 3, 2007 to shareholders of record as ofDecember 20, 2006.

 

On December 15, 2005, the Company’s Board ofDirectors authorized the payment of $0.04 per share dividend on its Series DDelivery Preferred Stock and a non-periodic dividend payment of $0.04 per shareon its common stock, payable on January 10, 2006 to shareholders of record asof December 19, 2005.

 

12

----

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The selected financial data presented belowfor the fiscal years ended July 31, 2003 through 2007 has been derived from theaudited consolidated financial statements of the Company.

 

Effective May 1, 2005, the Company beganto include DNA Dreamfields Company, LLC in its consolidated financialstatements.  The financial statements for prior fiscal years have not beenrestated and therefore do not include consolidated data pertaining to DNADreamfields. The Company has included consolidated amounts for DNA Dreamfieldsin the income statement for the years ending July 31, 2007, 2006 and 2005. SeeNote 2 of the consolidated financial statements for additional information.

 

The selected financial data set forth in thissection should be read in conjunction with the Company’s consolidated financialstatements and related notes and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included elsewhere in thisreport.

 

**SELECTEDFINANCIAL DATA**

**(In thousands,except per share data and ratios)**

 
| ** **                                          | ** ** | **Fiscal year ended July 31** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **INCOME STATEMENT DATA**                           |       |                                              |       |   |   |   |   |   |   |   |   |
| Net revenues                                        |       | $                                                 | 191,062    |   | $ | 171,509 |   | $ | 155,619 |   | $ | 144,679 |   | $ | 136,806 |   |
| Cost of goods sold                                  |       | 165,575                                           |       | 148,904 |   | 136,179 |   | 132,245 |   | 125,160 |   |
| Gross profit                                        |       | 25,487                                            |       | 22,605 |   | 19,440 |   | 12,434 |   | 11,646 |   |
| Marketing, general and administrative  expenses     |       | 12,973                                            |       | 14,190 |   | 16,507 |   | 8,345 |   | 9,816 |   |
| Loss on asset impairment                            |       | —                                            |       | — |   | — |   | 704 |   | — |   |
| Operating income                                    |       | 12,514                                            |       | 8,415 |   | 2,933 |   | 3,385 |   | 1,830 |   |
| Other expense - net                                 |       | (2,199                                            | )          | (2,143 | ) | (1,817 | ) | (2,835 | ) | (2,364 | ) |
| Noncontrolling interests                            |       | 52                                                |       | 894 |   | 3,003 |   | — |   | — |   |
| Income (loss) before income taxes                   |       | 10,367                                            |       | 7,166 |   | 4,119 |   | 550 |   | (534 | ) |
| Income tax expense (benefit)                        |       | 3,759                                             |       | 2,793 |   | 1,606 |   | 214 |   | (105 | ) |
| Net income (loss)                                   |       | 6,608                                             |       | 4,373 |   | 2,513 |   | 336 |   | (429 | ) |
| Dividends on preferred stock                        |       | 113                                               |       | 451 |   | — |   | — |   | 3 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net earnings (loss) on common stock                 |       | $                                                 | 6,495      |   | $ | 3,922 |   | $ | 2,513 |   | $ | 336 |   | $ | (432 | ) |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net earnings (loss) per common share -  Basic       |       | $                                                 | 0.52       |   | $ | 0.30 |   | $ | 0.19 |   | $ | 0.03 |   | $ | (0.03 | ) |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding  - Basic |       | 12,501                                            |       | 13,169 |   | 13,169 |   | 12,265 |   | 12,355 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash dividends declared per common share            |       | $                                                 | 0.14       |   | $ | 0.04 |   | $ | — |   | $ | — |   | $ | — |   |

 

13

----

 
| ** **                                            | ** ** | **As of July 31** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **BALANCE SHEET DATA**                                |       |                             |       |   |   |   |   |   |   |   |   |
| Cash                                                  |       | $                                | 89         |   | $ | 343 |   | $ | 229 |   | $ | 589 |   | $ | 5 |   |
| Working capital                                       |       | 20,800                           |       | 23,273 |   | 20,156 |   | 16,586 |   | 13,429 |   |
| Total assets                                          |       | 143,166                          |       | 134,249 |   | 135,130 |   | 119,415 |   | 122,390 |   |
| Long-term debt (excluding current  maturities)        |       | 40,681                           |       | 28,545 |   | 25,385 |   | 21,087 |   | 28,263 |   |
| Redeemable preferred stock                            |       | —                           |       | — |   | 7 |   | 20 |   | 33 |   |
| Stockholders’ equity                             |       | 49,150                           |       | 64,592 |   | 61,132 |   | 58,619 |   | 53,818 |   |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |
| **OPERATING DATA**                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Ratio of long-term debt to stockholders’  equity |       | .83                              | x          | .44 | x | .42 | x | .36 | x | .53 | x |
|                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

----

 

**ITEM 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

The following discussion containsforward-looking statements. Such statements are based on assumptions by theCompany’s management, as of the date of this report, and are subject to risksand uncertainties, including those discussed under “Risk Factors” in thisreport, that could cause actual results to differ materially from thoseanticipated. The Company cautions readers not to place undue reliance on suchforward-looking statements.

 

**Summary**

 

Dakota Growers is the third largest pastamanufacturer in North America. The Company has two production plants, locatedin Carrington, North Dakota and New Hope, Minnesota and generates a majority ofits revenues from manufacturing pasta for the retail store brand andinstitutional markets, although we serve and continually look for opportunitiesin the entire dry pasta industry. Our identity preservation program providesour customers food safety, traceability and quality from the field to theplate. The Company also has a certified organic program and markets organicpasta through its Dakota Growers Pasta Co.® label, as well as intothe private label retail, foodservice, and ingredient markets. The Companycompetes through low cost production, high product quality, flexibility andcustomer service.

 

Net income for the yearended July 31, 2007 totaled $6.6 million compared to net income of $4.4 millionfor the year ended July 31, 2006. Net earnings per basic common share, afterthe effect of dividends paid on the Company’s Series D Delivery PreferredStock, were $0.52 per share for the year ended July 31, 2007 compared to $0.30for the year ended July 31, 2006. The company paid dividends of $113,000 ($0.01per share) and $451,000 ($0.04 per share) on its Series D Delivery PreferredStock and $1,844,000 ($0.14 per share) and $527,000 ($0.04 per share) on itscommon stock during the second quarters of fiscal years 2007 and 2006,respectively.

 

The Company’s net revenues increased 11.4% for the year ended July 31,2007 when compared to the year ended July 31, 2006. Higher per unit sellingprices and higher pasta sales volumes contributed to the increase. Benefitsderived from increased per unit selling prices and higher pasta sales volumeswere partially offset by higher durum costs. Freight cost increases duringfiscal year 2006 were driven by a combination of higher diesel fuel prices andreduced rail and truck availability. The Company’s freight costs stabilized infiscal year 2007.

 

During fiscal year 2006, the Company initiated a $15 million capitalproject at its New Hope, Minnesota facility to better balance its pastaproduction capabilities and improve operating costs. A main component of thisproject was the installation of a new, state-of-the-art short goods productionline. The new short goods line, which became operational during the Company’ssecond quarter of fiscal 2006, increased the New Hope plant’s capacity by 35%to approximately 230 million pounds annually. The remainder of the project wascompleted in fiscal year 2007. Higher conversion costs per unit at the New Hopefacility during the installation and start-up of the new production equipmentnegatively impacted the Company’s results for fiscal year 2006 and the firsthalf of fiscal year 2007. The Company also recorded a $683,000 and $598,000loss on disposal during the year ended July 31, 2007 and 2006, respectively,related to the retirement of certain equipment in conjunction with the capitalproject at the New Hope facility.

 

The Company increased itseconomic ownership in DNA Dreamfields to 47% effective May 2005. DNADreamfields was originally formed by the Company and other food technology,manufacturing and consumer products marketing enterprises to develop,manufacture and sell low digestible carbohydrate pasta, rice and potatoes underthe DreamfieldsTM brand name. In conjunction with the Company’sincrease in ownership in DNA Dreamfields, the DNA Dreamfields operatingagreement was amended whereby Dakota Growers was named the managing member ofDNA Dreamfields. The Company is the exclusive manufacturer of DreamfieldsTM pasta, and providesadministrative, accounting, information technology, sales, customer service anddistribution services to DNA Dreamfields.

 

15

----

 

Effective September 21, 2007, the Company acquired the remaining unitsof DNA Dreamfields, increasing its ownership to 100%. Pursuant to the terms ofthe purchase agreement, the Company acquired the remaining units for an aggregatepurchase price of $2,231,614. In conjunction with this purchase, the Companyeliminated the noncontrolling interests and reduced recorded goodwillassociated with DNA Dreamfields in the Company’s first quarter of fiscal year2008. The Company will continue to include DNA Dreamfields in its consolidatedfinancial statements.

 

TheCompany believes that the DreamfieldsTM line ofproducts is well suited for consumers seeking healthy eating alternatives. DreamfieldsTM pasta has a65% lower glycemic index than regular pasta as well as 5 grams of digestiblecarbs and 5 grams of fiber per serving. The DreamfieldsTM pasta products carry a higherselling price and higher profit margins than traditional pasta.

 

In 2005, a new trend towardhigh fiber products developed, displacing some of the low carbohydrateconsumption. While still small relative to the total pasta category, theconsumption of these whole wheat/whole grain products continues to grow. DreamfieldsTM pasta offers fiber benefits similar to thelevels of other whole wheat/whole grain pastas while maintaining the integrityof the taste and low carbohydrate traits. Dakota Growers also manufactures andsells traditional whole wheat/whole grain pastas.

 

The cost of production ofdry pasta is significantly impacted by changes in durum wheat market prices,which have varied widely in recent years. The Company attempts to manage therisk associated with durum wheat cost fluctuations through cost pass-throughmechanisms with our customers and forward purchase contracts for durum wheat.Volatility with respect to the price of the basic raw material for the Company’sproducts leaves it subject to wide variation in its costs from year to year. Asa result, factors which impact the size and quality of the durum wheat crop andthe availability of such wheat in the United States and Canada can have amaterial adverse impact on the Company. Those factors include such variables asproducer strategies, the weather in durum wheat production areas in the UnitedStates, Canada and other parts of the world, and import and export policies andregulations. Durum market prices escalated during fiscal year 2007 and arecontinuing to increase sharply in the first quarter of fiscal year 2008. TheCompany has generally been successful in obtaining price increases to offsetthe higher cost of durum. However, any inability by the Company to obtain salesprice increases to offset increases in durum costs may negatively impact theCompany’s future financial results.

 

**Critical Accounting Policies**

 

The accompanying discussion and analysis of the Company’s results ofoperations and financial condition are based upon its consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. These estimates form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. We base our estimates andjudgments on historical experience and on various other assumptions that webelieve are reasonable under the circumstances. However, future events aresubject to change and the best estimates and judgments may require adjustment.For a complete description of the Company’s significant accounting policies,please see Note 1 to the consolidated financial statements. Our criticalaccounting policies are those that have meaningful impact on the reporting ofour financial condition and results, and that require significant managementjudgment and estimates. These policies include our accounting for (a) allowancefor doubtful accounts, (b) inventory valuation, (c) asset impairment, and (d)income taxes.

 

16

----

 

*Allowance for Doubtful Accounts*

 

We evaluate the collectibility of our accountsreceivable based on a combination of factors. In cases where we are aware ofcircumstances that may impair a specific customer’s ability to meet itsfinancial obligations to us, we record a specific allowance against amounts dueto us, and thereby reduce the net recognized receivable to the amount wereasonably believe will be collected. For all other customers, we recognizeallowances for doubtful accounts based on the length of time the receivablesare past due and our historical experience. If the financial condition of ourcustomers would deteriorate, additional allowances may be required in thefuture which could have an adverse impact on our future operating results.

 

*Inventory Valuation*

 

Inventories are stated at the lower of cost or market, determined on afirst-in, first-out (FIFO) basis, using product specific standard costs. TheCompany analyzes variances between actual manufacturing costs incurred andamounts absorbed at inventory standard costs. Inventory valuations are adjustedfor these variances as applicable. The Company regularly evaluates itsinventories and recognizes inventory allowances for discontinued andslow-moving inventories based upon these evaluations.

 

*Asset Impairment*

 

We are required to evaluate our long-livedassets, including goodwill, for impairment and write down the value of anyassets if they are determined to be impaired. Evaluating the impairment oflong-lived assets involves management judgment in estimating the fair valuesand future cash flows related to these assets. The Company used a discountedcash flow analysis in evaluating goodwill for impairment in fiscal years 2007and 2006 and determined that no impairment charges were necessary.  Future events could cause management toconclude that impairment indicators exist and that the value of certainlong-lived assets is impaired.

 

*Income Taxes*

 

In determining income (loss) for financial statement purposes,management must make certain estimates and judgments in calculating taxliabilities and in determining the recoverability of certain deferred taxassets. Deferred tax assets must be reduced by a valuation allowance, if basedon the weight of available evidence, it is more likely than not that someportion or all of the recorded deferred tax assets will not be realized infuture periods. Management believes it is likely that the deferred tax assetsas of July 31, 2007 will be realized through the generation of future taxableincome and tax planning strategies.

 

**Basis of Presentation**

 

Effective May 1, 2005, the Company beganto include DNA Dreamfields in its consolidated financial statements.  Thefinancial statements for prior fiscal years have not been restated andtherefore do not include consolidated data pertaining to DNA Dreamfields. TheCompany has included consolidated amounts for DNA Dreamfields in the incomestatement for the years ending July 31, 2007, 2006 and 2005. See Note 2 of theconsolidated financial statements for additional information.

 

**Results of Operations**

 

*Comparison of Fiscal Years ended July 31, 2007 and 2006*

 

***Net Revenues.*** Net revenues increased $19.6million, or 11.4%, to $191.1 million for the year ended July 31, 2007, from$171.5 million for the year ended July 31, 2006. The increase resulted fromhigher per unit selling prices and higher pasta sales volumes, particularly inthe ingredient market.

 

Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $4.6 million, or 5.6%, for the year ended July 31, 2007 due to a 7.8% increase in average selling prices offset by a

 

17

----

 

2.1% decrease in volume. Foodservice revenues increased $4.3 million, or 8.6%, for the year ended July 31, 2007 due to a 6.2% increase in average selling prices and a 2.3% increase in volume. Ingredient revenues increased $7.1 million, or 25.1%, due to a 7.7% increase in average selling prices and a 16.2% increase in volume.

 

The Company markets semolina production inexcess of its own requirements as well as durum wheat flour, other flour blendsand by-products of the durum milling process. Revenues from millproduct sales for the year ended July 31, 2007 totaled $15.3 million, anincrease of $3.6 million from the prior year. The increase was primarily due tohigher per unit selling prices of millfeed and semolina and to a lesser degreean increase in semolina and millfeed sales volumes.

 

***Cost of Goods Sold.***Costof goods sold totaled $165.6 million for the year ended July 31, 2007, anincrease of  11.2% compared to the $148.9million reported for the year ended July 31, 2006. The increase was primarilydue to higher durum costs and higher sales volumes. Gross profit as apercentage of net revenues increased to 13.3% in fiscal year 2007 compared to13.2% in fiscal year 2006 as benefits realized from sales price increases werepartially offset by higher durum costs.

 

***Marketing, General and Administrative (“MG&A”)Expenses.***MG&A expenses decreased $1.2million, or 8.5%, to $13.0 million for the year ended July 31, 2007, from $14.2million for the year ended July 31, 2006. The decrease is primarily due to thereduction in consumer advertising for DreamfieldsTM pastaproducts. MG&A expenses as a percentage of net revenues decreased from 8.3%to 6.8%.

 

***Interest Expense.***Interestexpense for the year ended July 31, 2007 totaled $2.8 million, up $0.2 millionfrom $2.6 million for the year ended July 31, 2006. The increase was due tohigher interest rates as well as  anincrease in outstanding debt as a result of the tender offer that occurredduring fiscal year 2007. Cash and equity patronage refunds received from CoBanktotaling $132,000 and $144,000 have been netted against interest expense forthe years ended July 31, 2007 and 2006, respectively.

 

***Gain (Loss) on Disposition of Property,Equipment and Other Assets.***The Company incurred aloss on disposition of $0.6 million during fiscal year 2007. Virtually all ofthis loss was related to the retirement of certain equipment in conjunctionwith the capital project at the New Hope, Minnesota facility.

 

***Other Income, net.***Otherincome totaled $1.2 million for the year ended July 31, 2007 and $1.0 millionfor the year ended July 31, 2006. U.S. Customs and Border Protection (“Customs”)has distributed antidumping and countervailing duties assessed on certain pastaimported from Italy and Turkey to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”), which wasenacted in October 2000. The Company received net payments in the amount of$1.3 million and $1.1 million in fiscal years 2007 and 2006, respectively,under the Offset Act. These amounts have been classified as other income. TheCompany cannot reasonably estimate the potential amount, if any, that it mayreceive under the Offset Act in future periods as any such amount will be basedupon future events over which the Company has little or no control, including,but not limited to, the amount of expenditures by domestic pasta producers andthe amount of antidumping and countervailing duties collected by Customs.

 

***Noncontrolling Interests.***Noncontrollinginterests reflects the portion of the DNA Dreamfields net loss allocable to theother members of DNA Dreamfields. The loss allocated to those other memberstotaled $0.1 million and $0.9 million for the years ended July 31, 2007 and2006, respectively. The $0.8 million decrease was due to a reduction in the netloss reported by DNA Dreamfields for the year ended July 31, 2007, whencompared to the prior year.

 

***Income Taxes.***Incometax expense for the years ended July 31, 2007 and 2006 totaled $3.8 million and$2.8 million, respectively, reflecting an effective corporate income tax rateof approximately 37% and 39%, respectively.

 

***Net Income.***Netincome for the year ended July 31, 2007 totaled $6.6 million, an increase of$2.2 million compared to net income of $4.4 million for the year ended July 31, 2006. Netearnings available to common

 

18

----

 

shareholdersfor the years ended July 31, 2007 and 2006 totaled $6.5 million and $3.9million, respectively, after reducing net income for dividends declared onpreferred stock.

 

*Comparison of Fiscal Years ended July 31, 2006 and 2005*

 

***Net Revenues.*** Net revenues increased $15.9million, or 10.2%, to $171.5 million for the year ended July 31, 2006, from$155.6 million for the year ended July 31, 2005. The increase resulted fromhigher pasta sales volumes, particularly in the ingredient market.

 

Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $5.0 million, or 6.6%, for the year ended July 31, 2006 due to a 3.7% increase in average selling prices and a 2.8% increase in volume. Foodservice revenues increased $3.1 million, or 6.5%, for the year ended July 31, 2006 due to a 2.5% increase in average selling prices and a 4.0% increase in volume. Ingredient revenues increased $6.6 million, or 30.7%, due to increased sales volumes to new and existing customers.

 

The Company markets semolina production inexcess of its own requirements as well as durum wheat flour, other flour blendsand by-products of the durum milling process. Revenues from millproduct sales for the year ended July 31, 2006 totaled $11.7 million, anincrease of $1.2 million from the prior year. The increase was primarily due tohigher semolina sales volumes.

 

***Cost of Goods Sold.***Costof goods sold totaled $148.9 million for the year ended July 31, 2006, anincrease of  9.3% compared to the $136.2million reported for the year ended July 31, 2005. The increase was mainly dueto higher sales volumes relative to the prior year. Gross profit as apercentage of net revenues increased to 13.2% in fiscal year 2006 compared to12.5% in fiscal year 2005, largely due to benefits derived from lower durumcosts, which were partially offset by the negative impacts of higher freightcosts.

 

***Marketing, General and Administrative (“MG&A”)Expenses.***MG&A expenses decreased $2.3million, or 14.0%, to $14.2 million for the year ended July 31, 2006, from$16.5 million for the year ended July 31, 2005. The decrease is primarily dueto the reduction in consumer advertising for DreamfieldsTM pastaproducts. MG&A expenses as a percentage of net revenues decreased from10.6% to 8.3%.

 

***Interest Expense.***Interestexpense for the year ended July 31, 2006, totaled $2.6 million, up $0.3 millionfrom $2.3 million for the year ended July 31, 2005. The increase was mainly dueto higher interest rates. Cash and equity patronage refunds received fromCoBank totaling $144,000 and $114,000 have been netted against interest expensefor the years ended July 31, 2006 and 2005, respectively.

 

***Gain (Loss) on Disposition of Property,Equipment and Other Assets.***The Company incurred aLoss on Disposition of $0.5 million during fiscal year 2006. Virtually all ofthis loss was related to the retirement of certain equipment in conjunctionwith the capital project at the New Hope, Minnesota facility.

 

***Other Income, net.***Otherincome totaled $1.0 million and $0.4 million for the years ended July 31, 2006and 2005. The Company received net payments in the amount of $1.1 million and $0.4million in fiscal years 2006 and 2005, respectively, under the Offset Act.These amounts have been classified as other income. The Company cannotreasonably estimate the potential amount, if any, that it may receive under theOffset Act in future periods as any such amount will be based upon futureevents over which the Company has little or no control, including, but notlimited to, the amount of expenditures by domestic pasta producers and theamount of antidumping and countervailing duties collected by Customs.

 

***Noncontrolling Interests.***Noncontrollinginterests reflects the portion of the DNA Dreamfields net loss allocable to theother members of DNA Dreamfields. The loss allocated to those other memberstotaled $0.9 million and $3.0 million for the years ended July 31, 2006 and2005, respectively. The $2.1 million decrease was due to a reduction in the netloss reported by DNA Dreamfields for the year ended July 31, 2006, whencompared to the prior year, partially offset by the Company’s increased ownershipinterest in DNA Dreamfields.

 

19

----

 

***Income Taxes.***Incometax expense for the years ended July 31, 2006 and 2005 totaled $2.8 million and$1.6 million, respectively, reflecting an effective corporate income tax rateof approximately 39%.

 

***Net Income.***Netincome for the year ended July 31, 2006 totaled $4.4 million, an increase of$1.9 million compared to net income of $2.5 million for the year ended July 31, 2005. Netearnings available to common shareholders for the year ended July 31, 2006totaled $3.9 million after reducing net income for dividends declared onpreferred stock.

 

**Liquidity and Capital Resources**

 

The Company’s primary sources of liquidityare cash provided by operations and borrowings under its revolving creditfacility. Net working capital as of July 31, 2007 was $20.8 million compared to$23.3 million as of July 31, 2006.

 

Effective May 31, 2007, the Company secured a$25 million revolving credit facility with CoBank that extends through May 29,2008. Interest on the revolving line is at the 7-day LIBOR rate subject toperformance adjustments depending upon the Company’s ratio of total debt toearnings before interest, taxes, depreciation and amortization or “EBITDA.” Thehigher the ratio the higher the adjustment to the 7-day LIBOR rate within arange of 175 to 275 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available. Balances outstanding under thisrevolving line of credit arrangement totaled $7.4 million as of July 31, 2007.There was no balance outstanding under this revolving line of creditarrangement as of July 31, 2006. The Company had $17.6 million available forborrowings under the line of credit as of July 31, 2007.

 

On February 14, 2007 the Company entered into a $20million term loan agreement with CoBank to partially fund the tender offer topurchase up to 3,920,000 shares of our common stock at $10.00 per share incash. Availability under the term loan was contingent upon at least 50% of theaggregate purchase price of the shares in the tender offer coming from proceedsof the sale of equity securities to MVC Capital, Inc. and La Bella Holdings,LLC. The Company must repay this term loan in 14 equal quarterly installmentsbeginning in May 2011 and concluding in November 2014.  Interest on theterm loan is at the 7-day LIBOR rate subject to performance adjustmentsdepending upon the Company’s ratio of total debt to EBITDA. The higher theratio the higher the adjustment to the 7-day LIBOR rate within a range of 175to 275 basis points above the 7-day LIBOR rate.  Fixed interest rateoptions are also available.

 

On May 10, 2007, the Company closed the sale of 1 million shares ofSeries F convertible preferred stock to MVC Capital, Inc. and the sale of 1million shares of common stock to LaBella Holdings, LLC at a purchase price of$10.00 per share. The Company also received $20 million in loan proceeds undera term loan agreement with CoBank.  With the net proceeds of $38.8 millionfrom these financing transactions and working capital provided by the Company,Dakota Growers accepted 3,917,519 shares of common stock that had been properlytendered to the Company at $10.00 per share net in cash pursuant to the Company’stender offer, which expired on April 27, 2007.

 

The Company also has a $19.0 million termloan facility with CoBank. The balance outstanding under the term loan was$17.0 million as of July 31, 2007 and no further borrowings are available underthis term loan facility.

 

The Master Loan Agreement with CoBankcontains certain restrictive covenants including, but not limited to, financialcovenants which require the Company to maintain, at the end of each of theCompany’s fiscal quarters, a minimum current ratio of 1.20 to 1.00, a maximum totaldebt to earnings before interest, taxes, depreciation and amortization (“EBITDA”)  of 4.25 to 1.00, a minimum fixed charge ratioof 1.00 to 1.00 through and including April 30, 2008 and 1.15 to 1.00thereafter, and a minimum tangible net worth level of at least $25 millionadjusted for subsequent earnings and capital contributions.

 

The Company’s long-term financing is alsoprovided through secured notes held by institutional investors. The NotePurchase Agreement (as amended) with the institutional investors requires theCompany to maintain the

 

20

----

 

following: (a) consolidated net worth of not less than the sum of (1)$27,000,000 plus (2) an aggregate amount equal to 30% of consolidated netincome for each completed fiscal year beginning with the fiscal year ended July31, 1998, (b) a trailing twelve month ratio of consolidated cash flow toconsolidated fixed charges of not less than 2.0 to 1.0 at the end of eachfiscal quarter, and (c) a ratio of consolidated funded debt to consolidatedcash flow ratio not to exceed 3.0 to 1.0 determined at the end of each fiscalquarter for the immediately preceding four fiscal quarters. The Notes (asamended) require the rate of interest on the unpaid balance be increased by onepercent at any time that either (a) the ratio of the Company’s consolidatedfunded debt to consolidated cash flow is greater than 3.0 to 1.0 as of the endof each fiscal quarter for the immediately preceding four fiscal quarters or(b) the Securities Valuation Office of the National Association of InsuranceCommissioners has not assigned a designation category of “1” or “2” to theNotes.

 

The Company was in compliance with all debtcovenants as of July 31, 2007 and the date of this filing.

 

Net cash from operations totaled$6.0 million, $19.1 million and $12.7 million for the years ended July 31,2007, 2006 and 2005, respectively. The $13.1 million net decreasefrom fiscal year 2006 to 2007 was attributable to an increase in receivablesand inventories offset by an increase in net income. The $6.4 million netincrease from fiscal year 2005 to 2006 was attributable to a $1.9 millionincrease in net income, a decrease in receivables and inventories, and anincrease in accounts payable. In March 2005, the Company entered into anagreement with U.S. Foodservice which finalized the economic terms andconditions governing the purchase of dry pasta products by U.S. Foodservicefrom the Company. The agreement included provisions to apply accruedpromotional amounts to marketing prepayments which reduced the time to recoverthe unamortized portion of these marketing prepayments made to U.S.Foodservice. The agreement also eliminated the Company’s right to be theexclusive supplier of dry pasta products to U.S. Foodservice and does notprovide for minimum purchase commitments by U.S. Foodservice.

 

Net cash used for investing activitiestotaled $5.6 million, $10.8 million, and $16.0 million for the years ended July31, 2007, 2006 and 2005, respectively. A majority of the net cash used forinvesting activities for the year ended July 31, 2007 and 2006 related tocapital expenditures for the New Hope facility upgrade project. A majority ofthe net cashed used for fiscal year 2005 related to increased fixed asset expendituresin conjunction with the New Hope production upgrade project and increasedinvestments in DNA Dreamfields.

 

Net cash used for financing activitiestotaled $0.7 million and $8.2 million for the years ended July 31, 2007 and2006. Net cash from financing activities totaled $2.9 million for the year ended July 31, 2005. The $0.7 million of netcash used for financing activities for the year ended July 31, 2007 related topayments on long-term debt and dividends.  Also included are the purchase of common stockand the costs associated with issuing and purchasing stock in conjunction withthe tender offer in fiscal year 2007. These outlays were offset by the proceedson long-term debt and the issuance of common stock and series F preferred stock.The $8.2 million of net cash used for financing activities for the year endedJuly 31, 2006 related primarily to principal payments on short-term andlong-term debt. The $2.9 million of net cash from financing activities for theyear ended July 31, 2005 included $9.1 million in borrowings under the CoBanksecured term loan facility to finance the New Hope production upgrade projectand investments in DNA Dreamfields offset by a $7.2 million for scheduled debtprincipal payments.

 

The Company increased itseconomic ownership in DNA Dreamfields from 24% to 30% effective November 2004,and to 47% effective May 2005. In connection with the May2005 investment in DNA Dreamfields, the Company and the other member/owners ofDNA Dreamfields also entered into an Amended and Restated DNA DreamfieldsCompany, LLC Operating Agreement, under which the Company was named as the “ManagingMember” of DNA Dreamfields.  As such, the Company has authority to makeall decisions with respect to DNA Dreamfields, its business, assets and operationsthat do not expressly require either a unanimous vote of the member/owners ofDNA Dreamfields or a “Super Majority” vote of the holders of 75% of theoutstanding Membership Units in DNA Dreamfields.

 

The Company also entered into a “2005 Line of CreditLoan Agreement” with DNA Dreamfields in fiscal year 2005.  Under thatAgreement, the Company agreed to loan up to $5.0 million to DNA Dreamfields,with

 

21

----

 

DNADreamfields able to repay and reborrow amounts under the Line of Credit LoanAgreement from time to time.  Interest on amounts outstanding under theLine of Credit Loan Agreement accrue from the date of any advance at a variablerate ranging from a high of the then-current LIBOR thirty day rate plus 8.0%per annum to a low of the then-current LIBOR thirty day rate plus 5.0% perannum based on the adjusted income of DNA Dreamfields.  Interest ispayable on a monthly basis. Principal payments due to the Company on a monthlybasis will equal DNA Dreamfields monthly net income (as determined inaccordance with generally accepted accounting principles) reduced by any cashor other reserves established by DNA upon the decision of the Company as themanaging member of DNA Dreamfields.  The Line of Credit Loan Agreementmatures on May 31, 2010.  DNA Dreamfields is also required to complywith certain financial covenants under the Line of Credit Loan Agreement. Tosecure DNA Dreamfield’s obligations under the 2005 Line of Credit LoanAgreement, the member/owners of DNA Dreamfields other than the Company pledgedtheir Membership Units in DNA Dreamfields to the Company pursuant to a “LLCUnit Pledge Agreement”.

 

Effective September 21, 2007, the Company acquiredthe remaining units of DNA Dreamfields, increasing its ownership to 100%. Pursuantto the terms of the Purchase Agreement, the Company acquired the remainingunits for an aggregate purchase price of $2,231,614 or $37,393 per purchasedunit. In conjunction with this purchase, the Company eliminated the noncontrollinginterests and reduced recorded goodwill associated with DNA Dreamfields in theCompany’s first quarter of fiscal year 2008. The Company will continue toinclude DNA Dreamfields in its consolidated financial statements.

 

The following table summarizes the Company’scontractual obligations as of July 31, 2007 (in thousands):

 
| ** **                            | ** ** | ** ** | ** ** | **Payments**              | ** ** | **Payments**       | ** ** | **Payments**       | ** ** | **Payments**       | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Due in Less** | ** ** | **Due in**    | ** ** | **Due in**    | ** ** | **Due After** | ** ** |
| **Contractual Obligations**      | ** ** | **Total**  | ** ** | **Than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years**   | ** ** |
|                                  |       |       |       |                      |       |               |       |               |       |               |       |
| Long-term debt                        |       | $          | 48,545     |                      | $          | 9,171              |       | $                  | 20,724     |               | $          | 10,800 |   | $ | 7,850 |   |
| Capital leases                        |       | 1,617      |       | 310                       |       | 1,071              |       | 236                |       | —             |       |
| Interest on long-term obligations (1) |       | 11,223     |       | 3,000                     |       | 5,994              |       | 1,847              |       | 382                |       |
| Durum purchase obligations            |       | 17,211     |       | 17,211                    |       | —             |       | —             |       | —             |       |
| Warehouse obligations                 |       | 2,527      |       | 2,527                     |       | —             |       | —             |       | —             |       |
| Operating leases                      |       | 580        |       | 317                       |       | 263                |       | —             |       | —             |       |
|                                  |       |       |       |                      |       |               |       |               |       |               |       |
|                                  |       | $          | 81,703     |                      | $          | 32,536             |       | $                  | 28,052     |               | $          | 12,883 |   | $ | 8,232 |   |

 

----

(1) Based on interest rates as of July 31, 2007.

 

The Company forward contracts for a certainportion of its future durum wheat requirements. At July 31, 2007, the Companyhad outstanding commitments for grain purchases totaling $17.2 million relatedto forward purchase contracts. These contracts are set price contracts to delivergrain to the Company’s mill, and are not derivative in nature as they have nonet settlement provision and are not transferable.

 

Management believes that net cash to beprovided by operating activities, along with amounts available under its line ofcredit will be sufficient to meet the Company’s expected capital and liquidityrequirements for the foreseeable future.

 

##### ***Recently IssuedAccounting Standards***

##### * *

In June 2006, the FASBissued FASB Interpretation No. 48 (FIN No. 48), “Accounting forUncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”,which clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS No. 109, “Accounting for Income Taxes.” FINNo. 48 clarifies the application of SFAS No. 109 by defining criteriathat an individual tax position must meet for any part of the

 

22

----

 

benefit of that position to be recognized inthe financial statements. Additionally, FIN No. 48 provides guidance onthe measurement, de-recognition, classification and disclosure of tax positionsalong with the accounting for the related interest and penalties. Theprovisions of FIN No. 48 are effective for the fiscal years beginningafter December 15, 2006, with the cumulative effect of the change inaccounting principle recorded as an adjustment to opening retained earnings.The Company will be required to adopt FIN No. 48 for its fiscal yearbeginning August 1, 2007. The Company does not expect this Statement tohave a material impact on its financial statements upon adoption. However,future changes in the Company’s income tax situation may have a material impacton the Company’s financial statements as a result of this Statement.

 

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value andexpands disclosure of fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements andaccordingly, does not require any new fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. We have not yet assessed the impact, if any, that theimplementation of SFAS No. 157 will have on our consolidated results ofoperations or financial condition.

 

In September 2006, theU.S. Securities and Exchange Commission (SEC) issued Staff AccountingBulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”**(SAB108). SAB 108 addresses the diversity in practice of quantifying financialstatement misstatements resulting in the potential build up of improper amountson the balance sheet. SAB 108 provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be consideredin quantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective in fiscal year 2007. SAB 108allows a one-time transitional cumulative effect adjustment to beginningretained earnings for errors that were not previously deemed material, but arematerial under the guidance in SAB 108. The adoption of SAB 108 did not have amaterial effect on the Company’s financial statements.

 

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”).SFAS 159 expands the use of fair value accounting but does not affect existingstandards which require assets or liabilities to be carried at fair value.Under SFAS 159, a company may elect to use fair value to measure accounts andloans receivable, available-for-sale and held-to-maturity securities, equitymethod investments, accounts payable, guarantees and issued debt. Othereligible items include firm commitments. SFAS No. 159 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.We are currently evaluating the impact that FAS 159 will have on our financialstatements.

 

## **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

## ** **

Market risk is the risk of loss to futureearnings, to fair values or to future cash flows that may result from changesin the price of a financial instrument. The value of a financial instrument maychange as a result of changes in interest rates, commodity prices, exchangerates, equity prices and other market changes. Market risk is attributed to allmarket-risk sensitive financial instruments, including long-term debt.

 

The Company forward contracts for a certainportion of its future durum wheat requirements. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable. TheCompany does not believe it is subject to any material market risk exposurewith respect to interest rates, commodity prices, exchange rates, equity prices,or other market changes that would require disclosure under this item.

 

23

----

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF**

**DAKOTA GROWERS PASTA COMPANY, INC.**

 
| Report of  Independent Registered Public Accounting Firm         |   |
|------------------------------------------------------------------|--------|
|                                                             |   |
| Consolidated Balance Sheets                                      |   |
|                                                             |   |
| Consolidated  Statements of Operations                           |   |
|                                                             |   |
| Consolidated  Statements of Changes in Stockholders’ Equity |   |
|                                                             |   |
| Consolidated  Statements of Cash Flows                           |   |
|                                                             |   |
| Notes to  Consolidated Financial Statements                      |   |

 

24

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the AuditCommittee, Board of Directors and Stockholders 

Dakota Growers PastaCompany, Inc.

Carrington, NorthDakota 

 

Wehave audited the accompanying consolidated balance sheets of Dakota GrowersPasta Company, Inc. and Subsidiary as of July 31, 2007 and 2006, and therelated consolidated statements of operations, changes in stockholders’ equityand cash flows for each of the years ended July 31, 2007, 2006, and 2005. Thesefinancial statements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. 

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we do not express suchan opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. 

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Dakota GrowersPasta Company, Inc. and Subsidiary as of July 31, 2007 and 2006, and theresults of its operations and its cash flows for each of the years ended July31, 2007, 2006, and 2005, in conformity with accounting principles generallyaccepted in the United States of America. 

 
| /s/  Eide Bailly LLP    |
|-------------------------|
|                    |
| Minneapolis,  Minnesota |
| October  25, 2007       |

 

25

----

# ** **

# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED BALANCE SHEETS**

**JULY 31, 2007 AND 2006**

**(In Thousands, Except Share Information)**

 
| ** **                                                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| **ASSETS**                                                                                                             |       |     |       |     |       |
|                                                                                                                   |       |     |       |     |       |
| CURRENT ASSETS                                                                                                         |       |     |       |     |       |
| Cash and cash equivalents                                                                                              |       | $        | 89         |     | $          | 343 |   |
|                                                                                                                   |       |     |       |     |       |
| Trade accounts receivable, less allowance  for cash discounts and doubtful accounts of $1,048 and $1,080, respectively |       | 18,442   |       | 14,441   |       |
|                                                                                                                   |       |     |       |     |       |
| Other receivables                                                                                                      |       | 360      |       | 91       |       |
|                                                                                                                   |       |     |       |     |       |
| Inventories                                                                                                            |       | 31,329   |       | 26,118   |       |
|                                                                                                                   |       |     |       |     |       |
| Prepaid expenses                                                                                                       |       | 1,389    |       | 2,007    |       |
|                                                                                                                   |       |     |       |     |       |
| Deferred income taxes                                                                                                  |       | 1,104    |       | 955      |       |
|                                                                                                                   |       |     |       |     |       |
| Total current assets                                                                                                   |       | 52,713   |       | 43,955   |       |
|                                                                                                                   |       |     |       |     |       |
| PROPERTY AND EQUIPMENT                                                                                                 |       |     |       |     |       |
| In service                                                                                                             |       | 132,655  |       | 124,035  |       |
| Construction in progress                                                                                               |       | 776      |       | 4,093    |       |
|                                                                                                                   |       | 133,431  |       | 128,128  |       |
| Less accumulated depreciation                                                                                          |       | (61,985  | )          | (57,198  | )          |
|                                                                                                                   |       |     |       |     |       |
| Net property and equipment                                                                                             |       | 71,446   |       | 70,930   |       |
|                                                                                                                   |       |     |       |     |       |
| INVESTMENT IN COOPERATIVE BANK                                                                                         |       | 1,310    |       | 1,515    |       |
|                                                                                                                   |       |     |       |     |       |
| GOODWILL                                                                                                               |       | 16,654   |       | 16,654   |       |
|                                                                                                                   |       |     |       |     |       |
| OTHER ASSETS                                                                                                           |       | 1,043    |       | 1,195    |       |
|                                                                                                                   |       |     |       |     |       |
|                                                                                                                   |       | $        | 143,166    |     | $          | 134,249 |   |

 

(continued on next page)

 

26

----

 
| ** **                                                                                                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                    |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       |     |       |     |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| CURRENT LIABILITIES                                                                                                                                                                                     |       |     |       |     |       |
| Notes payable                                                                                                                                                                                           |       | $        | 7,400      |     | $          | — |   |
| Current portion of long-term debt                                                                                                                                                                       |       | 9,481    |       | 6,771    |       |
| Accounts payable                                                                                                                                                                                        |       | 7,352    |       | 7,250    |       |
| Excess outstanding checks over cash on  deposit                                                                                                                                                         |       | 1,759    |       | 704      |       |
| Accrued liabilities                                                                                                                                                                                     |       | 5,921    |       | 5,957    |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| Total current liabilities                                                                                                                                                                               |       | 31,913   |       | 20,682   |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                           |       | —   |       | —   |       |
| LONG-TERM DEBT, net of current portion                                                                                                                                                                  |       | 40,681   |       | 28,545   |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                   |       | 13,474   |       | 12,417   |       |
| OTHER LIABILITIES                                                                                                                                                                                       |       | —   |       | 34       |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| Total liabilities                                                                                                                                                                                       |       | 86,068   |       | 61,678   |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| NONCONTROLLING INTERESTS                                                                                                                                                                                |       | 7,948    |       | 7,979    |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                               |       |     |       |     |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| Series D delivery preferred stock,  non-cumulative, $.01 par value, 11,340,841 authorized, 11,275,297 shares issued  and outstanding                                                                    |       | 113      |       | 113      |       |
| Series F convertible preferred stock,  non-cumulative, $.01 par value, 2,100,000 shares authorized, 1,065,000 and 0  shares issued and outstanding as of July 31, 2007 and July 31, 2006,  respectively |       | 11       |       | —   |       |
| Common stock, $.01 par value, 75,000,000  shares authorized, 10,192,413 and 13,169,382 shares issued and outstanding as  of July 31, 2007 and July 31, 2006, respectively                               |       | 102      |       | 132      |       |
| Additional paid-in capital                                                                                                                                                                              |       | 42,798   |       | 62,872   |       |
| Retained earnings                                                                                                                                                                                       |       | 6,126    |       | 1,475    |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| Total stockholders’ equity                                                                                                                                                                         |       | 49,150   |       | 64,592   |       |
|                                                                                                                                                                                                    |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                         |       | $        | 143,166    |     | $          | 134,249 |   |

 

See Notes to Consolidated Financial Statements

 

27

----

 

# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF OPERATIONS**

###### **YEARS ENDED JULY 31, 2007, 2006 AND 2005**

**(In Thousands, Except Per Share Amounts)**

 
| ** **                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                    |       |     |       |     |       |     |       |
| Net revenues (net of discounts and  allowances of $23,953, $26,474, and $24,184 for 2007, 2006 and 2005,  respectively) |       | $        | 191,062    |     | $          | 171,509  |       | $ | 155,619 |   |
|                                                                                                                    |       |     |       |     |       |     |       |
| Cost of goods sold                                                                                                      |       | 165,575  |       | 148,904  |       | 136,179  |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Gross profit                                                                                                            |       | 25,487   |       | 22,605   |       | 19,440   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Marketing, general and administrative  expenses                                                                         |       | 12,973   |       | 14,190   |       | 16,507   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Operating income                                                                                                        |       | 12,514   |       | 8,415    |       | 2,933    |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Other income (expense)                                                                                                  |       |     |       |     |       |     |       |
| Interest expense, net                                                                                                   |       | (2,772   | )          | (2,573   | )          | (2,283   | )          |
| Gain (loss) on disposition of property,  equipment and other assets                                                     |       | (649     | )          | (546     | )          | 38       |       |
| Other income, net                                                                                                       |       | 1,222    |       | 976      |       | 428      |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Income before noncontrolling interests and  income taxes                                                                |       | 10,315   |       | 6,272    |       | 1,116    |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Noncontrolling interests                                                                                                |       | 52       |       | 894      |       | 3,003    |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Income before income taxes                                                                                              |       | 10,367   |       | 7,166    |       | 4,119    |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Income tax expense                                                                                                      |       | 3,759    |       | 2,793    |       | 1,606    |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Net income                                                                                                              |       | 6,608    |       | 4,373    |       | 2,513    |       |
| Dividends on preferred stock                                                                                            |       | 113      |       | 451      |       | —   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Net earnings on common stock                                                                                            |       | $        | 6,495      |     | $          | 3,922    |       | $ | 2,513 |   |
|                                                                                                                    |       |     |       |     |       |     |       |
| Net earnings per common share                                                                                           |       |     |       |     |       |     |       |
| Basic                                                                                                                   |       | $        | 0.52       |     | $          | 0.30     |       | $ | 0.19 |   |
|                                                                                                                    |       |     |       |     |       |     |       |
| Diluted                                                                                                                 |       | $        | 0.51       |     | $          | 0.30     |       | $ | 0.19 |   |
|                                                                                                                    |       |     |       |     |       |     |       |
| Weighted average common shares outstanding                                                                              |       |     |       |     |       |     |       |
| Basic                                                                                                                   |       | 12,501   |       | 13,169   |       | 13,169   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Diluted                                                                                                                 |       | 13,076   |       | 13,555   |       | 13,549   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Dividends per common share                                                                                              |       | $        | 0.14       |     | $          | 0.04     |       | $ | — |   |

 

See Notes to Consolidated Financial Statements

 

28

----

 

# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

###### **YEARS ENDED JULY 31, 2007, 2006 AND 2005**

**(In Thousands)**

 
| ** **                                        | ** ** | **Series D Delivery** | ** ** | **Series F**        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** ** | ** ** | ** **  | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------|------------|-------------|------------|
| ** **                                        | ** ** | **Preferred Stock**        | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares**                      | ** ** | **Amount**               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings (Deficit)** | ** ** | **Total** | ** ** |
|                                              |       |                            |       |                     |       |                  |       |        |       |            |       |       |       |        |       |   |   |   |   |
| BALANCE, JULY 31,  2004                           |       | 11,275                          |       | $                        | 113        |                  | —     |        | $          | —          |       | 13,169     |       | $           | 132        |   | $ | 62,807 |   | $ | (4,433 | ) | $ | 58,619 |   |
| Net income for  the year ended July 31, 2005      |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | 2,513 |   | 2,513 |   |
| BALANCE, JULY 31,  2005                           |       | 11,275                          |       | $                        | 113        |                  | —     |        | $          | —          |       | 13,169     |       | $           | 132        |   | $ | 62,807 |   | $ | (1,920 | ) | $ | 61,132 |   |
| Dividends on  common stock                        |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | (527 | ) | (527 | ) |
| Dividends on  preferred stock                     |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | (451 | ) | (451 | ) |
| Stock-based  employee compensation                |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | 65          |       | — |   | 65 |   |
| Net income for  the year ended July 31, 2006      |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | 4,373 |   | 4,373 |   |
| BALANCE, JULY 31,  2006                           |       | 11,275                          |       | $                        | 113        |                  | —     |        | $          | —          |       | 13,169     |       | $           | 132        |   | $ | 62,872 |   | $ | 1,475 |   | $ | 64,592 |   |
| Dividends on  common stock                        |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | (1,844 | ) | (1,844 | ) |
| Dividends on  preferred stock                     |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | (113 | ) | (113 | ) |
| Stock-based  employee compensation                |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | 210         |       | — |   | 210 |   |
| Exercise of stock  options                        |       | —                          |       | —                   |       | —                |       | —      |       | 6               |       | —     |       | 22          |       | — |   | 22 |   |
| Issuance of  common stock                         |       | —                          |       | —                   |       | —                |       | —      |       | 1,000           |       | 10         |       | 9,990       |       | — |   | 10,000 |   |
| Purchase of  common stock                         |       | —                          |       | —                   |       | —                |       | —      |       | (3,918          | )          | (39        | )          | (39,136     | )          | — |   | (39,175 | ) |
| Costs associated  with issuing stock              |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | (1,150      | )          | — |   | (1,150 | ) |
| Issuance of  series F preferred stock             |       | —                          |       | —                   |       | 1,000                 |       | 10          |       | —          |       | —     |       | 9,990       |       | — |   | 10,000 |   |
| Conversion of  common stock to series F preferred |       | —                          |       | —                   |       | 65                    |       | 1           |       | (65             | )          | (1         | )          | —      |       | — |   | — |   |
| Net income for  the year ended July 31, 2007      |       | —                          |       | —                   |       | —                |       | —      |       | —          |       | —     |       | —      |       | 6,608 |   | 6,608 |   |
| BALANCE, JULY 31,  2007                           |       | 11,275                          |       | $                        | 113        |                  | 1,065      |        | $          | 11              |       | 10,192     |       | $           | 102        |   | $ | 42,798 |   | $ | 6,126 |   | $ | 49,150 |   |

 

See Notes to Consolidated Financial Statements

 

29

----

# ** **

# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED JULY 31, 2007, 2006 AND 2005**

**(In Thousands)**

 
| ** **                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                        |       |     |       |     |       |     |       |
| OPERATING  ACTIVITIES                                                       |       |     |       |     |       |     |       |
| Net income                                                                  |       | $        | 6,608      |     | $          | 4,373    |       | $ | 2,513 |   |
| Adjustments  to reconcile net income to net cash from operating activities: |       |     |       |     |       |     |       |
| Depreciation  and amortization                                              |       | 6,951    |       | 7,234    |       | 7,675    |       |
| Undistributed  patronage capital from cooperatives                          |       | (27      | )          | (29      | )          | (46      | )          |
| (Gain) loss  on disposition of property, equipment and other assets         |       | 649      |       | 546      |       | (38      | )          |
| Net loss  allocated from joint venture under equity method                  |       | —   |       | —   |       | 914      |       |
| Deferred  income taxes                                                      |       | 908      |       | 998      |       | 1,038    |       |
| Stock-based  employee compensation                                          |       | 210      |       | 65       |       | —   |       |
| Accrued  promotional costs applied to marketing prepayments                 |       | —   |       | —   |       | 5,442    |       |
| Noncontrolling  interests                                                   |       | (52      | )          | (894     | )          | (219     | )          |
| Changes in  assets and liabilities                                          |       |     |       |     |       |     |       |
| Trade  receivables                                                          |       | (4,001   | )          | 1,747    |       | (2,145   | )          |
| Other  receivables                                                          |       | (269     | )          | 320      |       | 626      |       |
| Inventories                                                                 |       | (5,211   | )          | 1,984    |       | (2,891   | )          |
| Prepaid  expenses                                                           |       | 214      |       | (63      | )          | (508     | )          |
| Other assets                                                                |       | (24      | )          | 48       |       | (36      | )          |
| Accounts  payable                                                           |       | 102      |       | 3,053    |       | (899     | )          |
| Other  accrued liabilities                                                  |       | (36      | )          | (272     | )          | 1,273    |       |
|                                                                        |       |     |       |     |       |     |       |
| NET CASH  FROM OPERATING ACTIVITIES                                         |       | 6,022    |       | 19,110   |       | 12,699   |       |
|                                                                        |       |     |       |     |       |     |       |
| INVESTING  ACTIVITIES                                                       |       |     |       |     |       |     |       |
| Purchases of  property and equipment                                        |       | (5,456   | )          | (10,755  | )          | (8,803   | )          |
| Investments  in joint venture                                               |       | —   |       | —   |       | (2,970   | )          |
| Other  investments                                                          |       | 69       |       | (476     | )          | —   |       |
| Proceeds  from cooperative bank equity retirements                          |       | 232      |       | 568      |       | 335      |       |
| Acquisition  of controlling interest in joint venture, net of cash acquired |       | —   |       | —   |       | (3,771   | )          |
| Payments for  package design costs                                          |       | (433     | )          | (180     | )          | (773     | )          |
|                                                                        |       |     |       |     |       |     |       |
| NET CASH  USED FOR INVESTING ACTIVITIES                                     |       | (5,588   | )          | (10,843  | )          | (15,982  | )          |
|                                                                        |       |     |       |     |       |     |       |
| FINANCING  ACTIVITIES                                                       |       |     |       |     |       |     |       |
| Net change  in excess outstanding checks over cash on deposit               |       | 1,055    |       | (2,406   | )          | 3,110    |       |
| Net change  in short-term notes payable                                     |       | 7,400    |       | (10,000  | )          | (2,200   | )          |
| Payments on  long-term debt                                                 |       | (6,771   | )          | (4,771   | )          | (7,176   | )          |
| Principal  payments under capital lease obligation                          |       | (133     | )          | —   |       | —   |       |
| Proceeds  from long-term debt                                               |       | 20,000   |       | 9,931    |       | 9,069    |       |
| Preferred  stock retirements                                                |       | —   |       | (7       | )          | (13      | )          |
| Investments  by noncontrolling interests                                    |       | 21       |       | 78       |       | 133      |       |
| Dividends  paid on common stock                                             |       | (1,844   | )          | (527     | )          | —   |       |
| Dividends  paid on preferred stock                                          |       | (113     | )          | (451     | )          | —   |       |
| Issuance of  common stock                                                   |       | 10,022   |       | —   |       | —   |       |
| Issuance of  series F preferred stock                                       |       | 10,000   |       | —   |       | —   |       |
| Purchase of  common stock                                                   |       | (39,175  | )          | —   |       | —   |       |
| Costs  associated with issuing and purchasing stock                         |       | (1,150   | )          | —   |       | —   |       |
|                                                                        |       |     |       |     |       |     |       |
| NET CASH  FROM (USED FOR) FINANCING ACTIVITIES                              |       | (688     | )          | (8,153   | )          | 2,923    |       |
|                                                                        |       |     |       |     |       |     |       |
| NET CHANGE  IN CASH AND CASH EQUIVALENTS                                    |       | (254     | )          | 114      |       | (360     | )          |
|                                                                        |       |     |       |     |       |     |       |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF YEAR                               |       | 343      |       | 229      |       | 589      |       |
|                                                                        |       |     |       |     |       |     |       |
| CASH AND  CASH EQUIVALENTS, END OF YEAR                                     |       | $        | 89         |     | $          | 343      |       | $ | 229 |   |
|                                                                        |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                          |       |     |       |     |       |     |       |
|                                                                        |       |     |       |     |       |     |       |
| Cash  payments for                                                          |       |     |       |     |       |     |       |
| Interest  (net of amounts capitalized)                                      |       | $        | 2,780      |     | $          | 2,649    |       | $ | 2,363 |   |
|                                                                        |       |     |       |     |       |     |       |
| Income taxes                                                                |       | $        | 2,989      |     | $          | 1,451    |       | $ | 79 |   |
|                                                                        |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES     |       |     |       |     |       |     |       |
|                                                                        |       |     |       |     |       |     |       |
| Acquisition  of pasta equipment through capital lease obligation            |       | $        | 1,750      |     | $          | —   |       | $ | — |   |
|                                                                        |       |     |       |     |       |     |       |
| Acquisition  of controlling interest in joint venture:                      |       |     |       |     |       |     |       |
| Current  assets less cash                                                   |       |     |       |     |       | $        | 38         |   |
| Current  liabilities                                                        |       |     |       |     |       | (238     | )          |
| Goodwill                                                                    |       |     |       |     |       | 16,654   |       |
| Reported  amount of previously held interests in joint venture              |       |     |       |     |       | (3,802   | )          |
| Noncontrolling  interests                                                   |       |     |       |     |       | (8,881   | )          |
|                                                                        |       |     |       |     |       |     |       |
|                                                                        |       |     |       |     |       | $        | 3,771      |   |

 

See Notes to Consolidated Financial Statements

 

30

----

 

# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2007, 2006 AND 2005**

 

**NOTE 1 -       NATUREOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

*Nature of Business*

 

Dakota Growers Pasta Company, Inc. (“Dakota Growers” or “the Company”)is a North Dakota corporation that operates milling and pasta manufacturingfacilities in Carrington, North Dakota. In addition, the Company’s wholly-ownedsubsidiary, Primo Piatto, Inc. (“Primo Piatto”), a Minnesota corporation,operates pasta manufacturing facilities in New Hope, Minnesota.

 

*Principles of Consolidation*

 

The consolidated financial statements are comprised of the Company, itswholly-owned subsidiary Primo Piatto, Inc., and DNA Dreamfields Company, LLC (“DNADreamfields”), which the Company began to consolidate in fiscal year 2005. Allmaterial inter-company accounts and transactions have been eliminated in thepreparation of the consolidated financial statements.

 

The Company acquired an additional 17.25% ownership interest in DNADreamfields, effective May 1, 2005, resulting in an increase in theCompany’s ownership in DNA Dreamfields to 46.7%. As a result of the ownershipincrease and changes in the DNA Dreamfields operating agreement and othercontractual agreements, the Company reevaluated whether DNA Dreamfields was avariable interest entity under FASB Interpretation No. 46(R), “Consolidation ofVariable Interest Entities,” (FIN 46(R)). The Company determined that DNADreamfields was a variable interest entity and that the Company was the primarybeneficiary. Therefore, effective May 1, 2005, the Company began toinclude DNA Dreamfields in its consolidated financial statements.  Thefinancial statements for prior fiscal years have not been restated and thereforedo not include consolidated data pertaining to DNA Dreamfields. The Company hasincluded consolidated amounts for DNA Dreamfields in the income statement forthe years ending July 31, 2005, 2006 and 2007. The Company had previouslyaccounted for its investment in and share of net earnings or losses of itsownership interest in DNA Dreamfields Company, LLC under the equity method.

 

*Estimates*

 

The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the consolidated financial statements and reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

*Reclassifications*

 

Reclassifications have been made to the financial statements as of July31, 2006 and for the years ended July 31, 2006 and 2005 to facilitatecomparability with the statements as of and for the years ended July 31, 2007.Such reclassifications have no effect on the net result of operations.

 

*Risks and Uncertainties*

 

The Company attempts to minimize the effects of durum wheat costfluctuations mainly through forward contracting and through agreements withcertain customers that provide for price adjustments based on raw material costchanges. Such efforts, while undertaken to attempt to minimize the risksassociated with increasing durum costs on profitability, may temporarilyprevent the Company from recognizing the benefits of declining durum prices.

 

31

----

 

Some of the Company’s currently outstanding debt instruments have fixedinterest rates to maturity. If the Company’s operations require additional debtissuance, any changes in interest rates may have an impact on future results.

 

The Company’s cash balances are maintained in various bank depositaccounts. The deposit accounts may exceed federally insured limits at varioustimes throughout the year.

 

##### *Impairmentand Disposal of Long-Lived Assets*

##### * *

The Company accounts for impairment or disposal of long-lived assets inaccordance with the provisions of Statement of Financial Accounting Standards(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” SFAS No. 144 requires that long-lived assets be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability oflong-lived assets to be held and used is measured by a comparison of thecarrying amount of an asset to future net cash flows expected to be generatedby the asset. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets. Long-lived assets to be disposedof by sale are reported at the lower of the carrying amount or fair value lesscosts to sell, and will cease to be depreciated. SFAS No. 144 also requires long-livedassets to be disposed of other than by sale to be considered as held and useduntil disposed of, requiring the depreciable life to be adjusted as anaccounting change.

 

##### *Goodwill*

##### * *

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”the Company does not amortize goodwill. SFAS No. 142 requires that goodwill beevaluated for impairment at least annually or whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. The Company used a discounted cash flow analysis in evaluatinggoodwill for impairment in fiscal years 2007 and 2006 and determined that noimpairment charges were necessary.

 

*Revenue Recognition*

 

Revenues are recognized when risk of loss transfers, which occurs whengoods are shipped. Pricing terms, including promotions and rebates, are finalat that time. Revenues include amounts billed for products as well as anyassociated shipping costs billed to deliver such products.

 

The Company provides allowances for annual promotional programs basedupon annual sales volumes. Revenues are presented net of discounts andallowances of $23,953,000, $26,474,000 and $24,184,000 for the years ended July31, 2007, 2006 and 2005, respectively.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents include cash on hand and in financialinstitutions, and investments with maturities of less than 90 days.

 

*Trade Accounts Receivable and Major Customers*

 

The Company grants unsecured credit to certain customers who meet theCompany’s credit requirements. Trade accounts receivable are uncollateralizedcustomer obligations due under normal terms and are generally non-interestbearing. Payments on trade receivables are allocated to specific invoicesidentified on a customer’s remittance advice or, if unspecified, are generallyapplied to the earliest unpaid invoices. The carrying amount of

 

32

----

 

the receivables is reduced by an amount that reflects management’s bestestimate of amounts that will not be collected. Trade accounts receivable arepresented net of allowances for cash discounts and doubtful accounts, whichtotaled $1,048,000 and $1,080,000 as of July 31, 2007 and 2006, respectively.

 

One customer accounted for 22% and 15% of accounts receivable as ofJuly 31, 2007 and 2006, respectively and 12%, 12% and 13% of net revenues forthe years ended July 31, 2007, 2006 and 2005, respectively.

 
| ** **                       | ** ** | **Balance  at Beginning  of Year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions  from  Allowance** | ** ** | **Balance  at End  of Year** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
|                             |       |                                    |       |                                          |       |                            |       |                              |       |
| Allowance for cash discounts:    |       |                                    |       |                                          |       |                            |       |                              |       |
| Year ended July 31, 2007         |       | $                                       | 180        |                                          | $          | 2,592                           |       | $                                 | (2,559     | ) | $ | 213 |   |
| Year ended July 31, 2006         |       | 157                                     |       | 2,695                                         |       | (2,672                          | )          | 180                               |       |
| Year ended July 31, 2005         |       | 159                                     |       | 2,560                                         |       | (2,562                          | )          | 157                               |       |
|                             |       |                                    |       |                                          |       |                            |       |                              |       |
| Allowance for doubtful accounts: |       |                                    |       |                                          |       |                            |       |                              |       |
| Year ended July 31, 2007         |       | $                                       | 900        |                                          | $          | 9                               |       | $                                 | (74        | ) | $ | 835 |   |
| Year ended July 31, 2006         |       | 1,350                                   |       | 640                                           |       | (1,090                          | )          | 900                               |       |
| Year ended July 31, 2005         |       | 1,050                                   |       | 399                                           |       | (99                             | )          | 1,350                             |       |
|                             |       |                                    |       |                                          |       |                            |       |                              |       |
| Allowance for cash discounts     |       |                                    |       |                                          |       |                            |       |                              |       |
| and doubtful accounts:           |       |                                    |       |                                          |       |                            |       |                              |       |
| Year ended July 31, 2007         |       | $                                       | 1,080      |                                          | $          | 2,601                           |       | $                                 | (2,633     | ) | $ | 1,048 |   |
| Year ended July 31, 2006         |       | 1,507                                   |       | 3,335                                         |       | (3,762                          | )          | 1,080                             |       |
| Year ended July 31, 2005         |       | 1,209                                   |       | 2,959                                         |       | (2,661                          | )          | 1,507                             |       |

 

*Inventories*

 

Inventories are stated at the lower of cost or market, determined on afirst-in, first-out (FIFO) basis, using product specific standard costs. Themajor components of inventories as of July 31, 2007 and 2006 are as follows (inthousands):

 
| ** **                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Finished goods              |       | $        | 22,873     |     | $          | 19,589 |   |
| Raw materials and packaging |       | 8,456    |       | 6,529    |       |
|                        |       |     |       |     |       |
|                        |       | $        | 31,329     |     | $          | 26,118 |   |

 

*Concentration of Sources of Labor*

 

The Company’s total hourly and salaried workforce consists ofapproximately 435 employees, of which 32% are covered by collective bargainingagreements. The expiration dates of the union contracts are December 1, 2007and September 30, 2008. Approximately 26% of the Company’s workforce is coveredby the collective bargaining agreement expiring September 30, 2008.

 

33

----

 

*Property and Equipment*

 

Property and equipment are stated at cost. Expenditures for renewalsand improvements that significantly add to the productive capacity or extendthe useful life of an asset are capitalized. Expenditures for maintenance andrepairs are charged to expense as incurred. When depreciable properties areretired or sold, the cost and related accumulated depreciation are eliminatedfrom the accounts and the resultant gain or loss is reflected in income.Interest is capitalized on construction projects of higher cost and longerduration.

 

The initial acquisition of land by the Company was stated at theestimated fair value of the land at acquisition. Subsequent land acquisitionsare recorded at cost.

 

Depreciation is provided for over the estimated useful lives of theindividual assets using the straight-line method. The estimated useful livesused in the computation of depreciation expense range from 3 to 40 years. Depreciationexpense totaled $6,007,000, $5,686,000 and $5,357,000 for the years ended July31, 2007, 2006 and 2005, respectively.

 

Details relative to property and equipmentare as follows (in thousands):

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Land and improvements             |       | $        | 2,952      |     | $          | 2,934 |   |
| Buildings                         |       | 23,114   |       | 22,899   |       |
| Equipment                         |       | 106,589  |       | 98,202   |       |
|                              |       |     |       |     |       |
| Property and equipment in service |       | 132,655  |       | 124,035  |       |
| Construction in progress          |       | 776      |       | 4,093    |       |
| Less accumulated depreciation     |       | (61,985  | )          | (57,198  | )          |
|                              |       |     |       |     |       |
|                              |       | $        | 71,446     |     | $          | 70,930 |   |

 

*Investmentin Cooperative Bank*

 

Investment in cooperative bank is stated at cost, plus unredeemedpatronage refunds received in the form of capital stock.

 

*Other Assets*

 

The Company capitalizes package design costs, which relate to certainthird party costs to design artwork and to produce die plates and negativesnecessary to manufacture and print packaging materials according to Company andcustomer specifications. These costs are amortized ratably over three to fiveyear periods based on estimated useful life. Minor revisions are expensed asincurred. If a product design is discontinued or replaced prior to the end ofthe amortization period, the remaining unamortized balance is charged toexpense. Package design costs are presented net of accumulated amortizationtotaling $5,281,000 and $4,849,000 as of July 31, 2007 and 2006, respectively.

 

34

----

 

The breakdown of other assets, net of accumulated amortization, is asfollows (in thousands):

 
| ** **           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |
| Package design costs |       | $        | 575        |     | $          | 555 |   |
| Other                |       | 468      |       | 640      |       |
|                 |       |     |       |     |       |
|                 |       | $        | 1,043      |     | $          | 1,195 |   |

 

*Accrued Liabilities*

 

Accrued liabilities consist of the following(in thousands):

 
| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Accrued promotional costs |       | $        | 2,151      |     | $          | 2,213 |   |
| Accrued interest          |       | 647      |       | 664      |       |
| Accrued freight           |       | 582      |       | 418      |       |
| Other                     |       | 2,541    |       | 2,662    |       |
|                      |       |     |       |     |       |
|                      |       | $        | 5,921      |     | $          | 5,957 |   |

 

*Shipping and Handling Costs*

 

Shipping and handling costs are included incost of goods sold upon shipment of the Company’s product to itscustomers.

 

*Advertising*

 

Costs of advertising are expensed as incurred. Advertising expensesincluded in the consolidated income statement totaled $2,089,000, $2,808,000and $5,062,000 (primarily related to consumer advertising for DreamfieldsTM  pasta products) for the years endedJuly 31, 2007, 2006 and 2005, respectively.

 

*Research and Development*

 

Research and development costs are expensed as incurred. Research anddevelopment expenses included in the consolidated income statement for theyears ended July 31, 2007, 2006 and 2005 totaled $602,000, $730,000 and$1,059,000, respectively, including $415,000, $229,000 and $551,000,respectively, incurred by DNA Dreamfields which the Company began toconsolidate in fiscal year 2005.

 

*Interest Expense, Net*

 

The Company earns patronage refunds from its patronage-based debtissued through CoBank based on its share of the net interest income earned byCoBank. These patronage refunds received are applied against interest expense.

 

*Income Taxes*

 

Income taxes are provided for the tax effects of transactions reportedin the financial statements and consist of taxes currently due plus deferredtaxes. Deferred tax assets and liabilities are determined based on differencesbetween the financial reporting and tax bases of assets and liabilities, andare measured using the enacted tax rates

 

35

----

 

expected to apply when the differences are expected to reverse.Deferred tax assets and liabilities represent the future tax returnconsequences of those differences, which will either be taxable or deductiblewhen the assets and liabilities are recovered or settled.

 

*Stock Options*

 

Effective August 1, 2005, the Companyadopted Statement of Financial Accounting Standard No. 123 (revised 2004),“Share Based Payment” (SFAS No. 123R). Under SFAS No. 123R, theCompany is required to recognize, as expense, the estimated fair value of allshare based payments to employees. In accordance with this standard, theCompany has elected to recognize the compensation cost of all service basedawards on a straight-line basis over the vesting period of the award.Performance based awards are recognized ratably for each vesting tranche.

 

Prior to adopting SFAS No.123R, the Company had elected to follow Accounting Principles Board Opinion(APB) No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for its employee stock options and had adoptedthe pro forma disclosure requirements under SFAS No. 123, “Accounting forStock-Based Compensation.” Prior to August 1, 2005, the Company had notrecognized any compensation expense under APB No. 25 upon the granting orexercise of stock options because the exercise price was equal to or greaterthan the market price of the underlying stock on the date of grant.

 

*Earnings per Share*

 

Basic Earnings per Share (EPS) is calculatedby dividing net earnings on common stock by the weighted average number ofcommon shares effective and outstanding during the period. Diluted EPS includesthe effect of all potentially dilutive securities, such as options andconvertible preferred stock.

 

Dilutive securities, consisting of stockoptions and convertible preferred stock, included in the calculation of dilutedweighted average common shares totaled 575,000 shares, 386,000 shares and380,000 shares for the years ended July 31, 2007, 2006 and 2005, respectively.The series F convertible preferred stock is included in the fully diluted EPScalculation and not included in the basic EPS calculation. As there iscurrently no established public trading market for the Company’s common stock,the Company has assumed the proceeds from the exercise of stock options wouldreduce debt and, thus, interest expense for purposes of calculating diluted EPS.

 

##### *RecentlyIssued Accounting Standards*

##### * *

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections”. SFAS 154 replaces Accounting Principles Board OpinionNo. 20, “Accounting Changes” and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements-An Amendment of APB Opinion No. 28”.SFAS 154 provides guidance on the accounting for and reporting of accountingchanges and error corrections. SFAS 154 requires “retrospective application” ofthe direct effect of a voluntary change in accounting principle to priorperiods’ financial statements where it is practicable to do so. SFAS 154 alsoredefines the term “restatement” to mean the correction of an error by revisingpreviously issued financial statements. SFAS 154 is effective for accountingchanges and error corrections made in fiscal years beginning afterDecember 15, 2005 unless adopted early. The adoption of this accountingstandard did not have a material impact on the consolidated financial position,results of operations or cash flows, except to the extent that the statementsubsequently requires retrospective application of a future item.

 

In June 2006, the FASB issued FASBInterpretation No. 48 (FIN No. 48), “Accounting for Uncertainty inIncome Taxes – an Interpretation of FASB Statement No. 109”, whichclarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS No. 109, “Accounting for Income Taxes.” FINNo. 48 clarifies the application of SFAS No. 109 by defining criteriathat an individual tax position must meet for any part of the

 

36

----

 

benefit of that position to be recognized inthe financial statements. Additionally, FIN No. 48 provides guidance onthe measurement, de-recognition, classification and disclosure of tax positionsalong with the accounting for the related interest and penalties. Theprovisions of FIN No. 48 are effective for the fiscal years beginningafter December 15, 2006, with the cumulative effect of the change inaccounting principle recorded as an adjustment to opening retained earnings.The Company will be required to adopt FIN No. 48 for its fiscal yearbeginning August 1, 2007. The Company does not expect this Statement tohave a material impact on its financial statements upon adoption. However,future changes in the Company’s income tax situation may have a material impacton the Company’s financial statements as a result of this Statement.

 

In September 2006, the FASB issued SFAS No.157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value and expands disclosureof fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements and accordingly,does not require any new fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.We have not yet assessed the impact, if any, that the implementation of SFASNo. 157 will have on our consolidated results of operations or financialcondition.

 

In September 2006, the U.S. Securitiesand Exchange Commission (SEC) issued Staff Accounting BulletinNo. 108, “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*”*(SAB108). SAB 108 addresses the diversity in practice of quantifying financialstatement misstatements resulting in the potential build up of improper amountson the balance sheet. SAB 108 provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be consideredin quantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective in fiscal year 2007. SAB 108allows a one-time transitional cumulative effect adjustment to beginningretained earnings for errors that were not previously deemed material, but arematerial under the guidance in SAB 108. The adoption of SAB 108 did not have amaterial effect on the Company’s financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair valueaccounting but does not affect existing standards which require assets orliabilities to be carried at fair value. Under SFAS 159, a company may elect touse fair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt. Other eligible items include firm commitments. SFASNo. 159 is effective for financial statements issued for fiscal years beginningafter November 15, 2007. We are currently evaluating the impact that FAS 159will have on our financial statements.

 

**NOTE 2-        DNADREAMFIELDS COMPANY, LLC**

** **

DNA Dreamfields was formed by the Company and other food technology,manufacturing and consumer products marketing enterprises to develop, manufactureand sell low digestible carbohydrate pasta, rice and potatoes under theDreamfieldsTM brand name. The Company initially acquired a 24%ownership interest in DNA Dreamfields during fiscal year 2004. At that time,the Company accounted for the investment using the equity method afterreviewing the applicability of FIN 46(R) to the Company’s interest in DNADreamfields. The Company increased it economic ownership in DNA Dreamfields to29.5% in November 2004.

 

The Company acquired an additional 17.25% ownership interest in DNADreamfields effective May 1, 2005, resulting in an increase in the Company’sownership in DNA Dreamfields to 46.7%. Inconjunction with the

 

37

----

 

Company’s increase in ownership in DNA Dreamfields,the DNA Dreamfields operating agreement was amended whereby Dakota Growers wasnamed the managing member of DNA Dreamfields. As a result of theownership increase and changes in the DNA Dreamfields operating agreement andother contractual agreements, the Company reevaluated whether DNA Dreamfieldswas a variable interest entity under FIN 46(R). The Company determined that DNADreamfields was a variable interest entity and that the Company was the primarybeneficiary. Therefore, effective May 1, 2005, the Company began toinclude DNA Dreamfields in its consolidated financial statements. Goodwilltotaling $16,654,000 was recorded in conjunction with the Company’sconsolidation of DNA Dreamfields. The financial statements for prior fiscalyears have not been restated and therefore do not include consolidated datapertaining to DNA Dreamfields. The Company has included consolidated amountsfor DNA Dreamfields in the income statements for the years ending July 31,2007, 2006 and 2005. The Company had previously accounted for its investment inand share of net earnings or losses of its ownership interest in DNADreamfields Company, LLC under the equity method.

 

The Company has entered into amanufacturing agreement with DNA Dreamfields whereby Dakota Growers is theexclusive manufacturer of DreamfieldsTM pasta. The Company has alsoentered into a services agreement with DNA Dreamfields under which the Companyprovides administrative, accounting, information technology, sales, customerservice and distribution services to DNA Dreamfields.

 

Pursuant to the terms of theservices agreement with DNA Dreamfields, sales of DreamfieldsTM productsare included in the Company’s net revenues. Manufacturing, distribution, andpromotional costs incurred by the Company related to DreamfieldsTM productsare included in the applicable line items of the Company’s income statement. TheCompany calculates a net amount due to DNA Dreamfields based on the total salesof DreamfieldsTM product less related DreamfieldsTM productand selling costs, as outlined in the manufacturing agreement. All materialinter-company accounts and transactions have been eliminated in the preparationof the consolidated financial statements as of and for the years ended July 31,2007, 2006 and 2005.

 

The Company entered into a “2005Line of Credit Loan Agreement” with DNA Dreamfields in fiscal year2005. Under that Agreement, the Company has agreed to loan up to$5,000,000 to DNA Dreamfields, with DNA Dreamfields able to repay and reborrowamounts under the Line of Credit Loan Agreement from time to time. TheLine of Credit Loan Agreement matures on May 31, 2010. The balanceoutstanding related to advances to DNA Dreamfields under the Line of CreditLoan Agreement totaled $2,283,000 and $2,184,000 as of July 31, 2007 and July31, 2006, respectively. These amounts have been eliminated in the preparationof the consolidated financial statements. To secure the obligations of DNADreamfields under the 2005 Line of Credit Loan Agreement, the other member/ownersof DNA Dreamfields have pledged their Membership Units in DNA Dreamfields tothe Company.

 

The Company acquired theremaining shares of DNA Dreamfields effective September 21, 2007, increasingits ownership to 100%. See Note 17 - Subsequent Events.

 

**NOTE 3 -       SHORT-TERMNOTES PAYABLE**

** **

Effective May 31, 2007, the Company secured a $25 million revolvingcredit facility with CoBank that extends through May 29, 2008. Interest on therevolving line is at the 7-day LIBOR rate subject to performance adjustments dependingupon the Company’s ratio of total debt to earnings before interest, taxes,depreciation and amortization or “EBITDA.” The higher the ratio the higher theadjustment to the 7-day LIBOR rate within a range of 175 to 275 basis pointsabove the 7-day LIBOR rate.  Fixed interest rate options are alsoavailable. Balances outstanding under this revolving line of credit arrangementtotaled $7.4 million as of July 31, 2007. There was no balance outstandingunder this revolving line of credit arrangement as of July 31, 2006. TheCompany had $17.6 million available for borrowings under the line of credit asof July 31, 2007. Weighted average interest rates on

 

38

----

 

short-term borrowings were 7.48%, 6.40% and 4.84% for the years endedJuly 31, 2007, 2006 and 2005, respectively.

 

**NOTE 4 -       LONG-TERMDEBT**

** **

Information regarding long-term debt at July 31, 2007 and 2006 is asfollows (in thousands):

 
| ** **                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                 |       |     |       |     |       |
| Non-patronage term loan from CoBank due in  annual principal         |       |     |       |     |       |
| installments of $1,200,000 through  September 30, 2008,              |       |     |       |     |       |
| interest at 5.71%, collateralized by all  assets of the Company      |       | 2,400    |       | 3,600    |       |
|                                                                 |       |     |       |     |       |
| Senior Secured Guaranteed Notes, Series A,  due in annual            |       |     |       |     |       |
| principal installments of $2,571,000  through August 1, 2008,        |       |     |       |     |       |
| interest at 8.04%, collateralized by all  assets of the Company      |       | 5,145    |       | 7,716    |       |
|                                                                 |       |     |       |     |       |
| Senior Secured Guaranteed Notes, Series B,  due in annual            |       |     |       |     |       |
| principal installments of $1,000,000  through August 1, 2010,        |       |     |       |     |       |
| interest at 8.14%, collateralized by all  assets of the Company      |       | 4,000    |       | 5,000    |       |
|                                                                 |       |     |       |     |       |
| Term loan from CoBank due in quarterly  installments of              |       |     |       |     |       |
| $ 500,000 for four quarters starting August  20, 2006 and of    |       |     |       |     |
| $ 1,100,000 quarterly thereafter through  May 20, 2011,         |       |     |       |     |       |
| variable interest (7.59% at July 31, 2006;  7.07% at July 31, 2007), |       |     |       |     |       |
| collateralized by all assets of the Company                          |       | 17,000   |       | 19,000   |       |
|                                                                 |       |     |       |     |       |
| Term loan from CoBank due in quarterly  installments of              |       |     |       |     |       |
| $ 1,350,000 for fourteen quarters starting  May 2011 and a      |       |     |       |     |       |
| $ 1,100,000 final payment on November 20,  2014,                |       |     |       |     |       |
| variable interest (7.07% at July 31, 2007),                          |       |     |       |     |       |
| collateralized by all assets of the Company                          |       | 20,000   |       | —   |       |
|                                                                 |       |     |       |     |       |
| Capital lease, five year term through March  31, 2012,               |       |     |       |     |       |
| fixed interest at 6.98%                                              |       | 1,617    |       | —   |       |
|                                                                 |       |     |       |     |       |
| Total long-term debt                                                 |       | 50,162   |       | 35,316   |       |
| Less current portion                                                 |       | 9,481    |       | 6,771    |       |
|                                                                 |       |     |       |     |       |
| Net long-term debt                                                   |       | $        | 40,681     |     | $          | 28,545 |   |
|                                                                      |            |          |            |          |            |  |  |

 

39

----

 

Aggregate future maturities required on long-term debt and capitalleases are as follows (in thousands):

 
| **Years ending July 31,** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2008                                     |       | 9,481      |       |
| 2009                                     |       | 9,507      |       |
| 2010                                     |       | 5,756      |       |
| 2011                                     |       | 6,532      |       |
| 2012                                     |       | 5,636      |       |
| Thereafter                               |       | 13,250     |       |
|                                     |       |       |       |
|                                     |       | $          | 50,162     |   |
|                                          |            |            |            |  |

 

The Company has a $2,400,000 letter of creditcommitment with CoBank, securing the non-patronage loan from CoBank. The letterof credit commitment is subject to a commitment fee of 1.0% on an annualizedbasis and expires December 31, 2008. Advances on the letter of creditcommitment are payable on demand.

 

The Company’s debt agreementswith CoBank and the institutional note holders obligate the Company to maintainor achieve certain amounts of equity and financial ratios and imposerestrictions on the Company. The Company was in compliance with these financialcovenants as of July 31, 2007.

 

The Company incurred $3,013,000, $2,960,000and $2,518,000 of interest on long and short-term debt and other obligations infiscal years 2007, 2006 and 2005, respectively, of which $109,000, $243,000 and$121,000 was capitalized in the respective periods. Patronage income fromCoBank of $132,000, $144,000 and $114,000 was netted against interest expenseon the statement of operations for the years ended July 31, 2007, 2006 and2005, respectively.

 

OnFebruary 14, 2007 the Company entered into a $20 million term loan agreementwith CoBank to partially fund a tender offer to purchase up to 3,920,000 sharesof the Company’s common stock at $10.00 per share in cash. Availability underthe term loan was contingent upon at least 50% of the aggregate purchase priceof the shares in the tender offer coming from proceeds of the sale of equitysecurities to MVC Capital, Inc. and La Bella Holdings LLC. The Company mustrepay this term loan in quarterly installments beginning in May 2011 andconcluding in November 2014.  Interest on the term loan is at the 7-dayLIBOR rate subject to performance adjustments depending upon the Company’sratio of total debt to EBITDA. The higher the ratio the higher the adjustmentto the 7-day LIBOR rate within a range of 175 to 275 basis points above the7-day LIBOR rate.  Fixed interest rate options are also available.

 

**NOTE 5 –      STOCKHOLDERS’EQUITY**

** **

The Company is authorized to issue 75,000,000shares of Common Stock, $.01 par value per share, 533 shares of Series APreferred Stock, $100 par value per share, 525 shares of Series B PreferredStock, $100 par value per share, 2,731 shares of Series C Preferred Stock, $100par value per share, 11,340,841 shares of Series D Delivery Preferred Stock,$.01 par value per share, 130,000 shares of Series E Junior ParticipatingPreferred Stock, $.01 par value per share, 2,100,000 shares of Series FConvertible Preferred Stock, $.01 par value per share and 11,425,370****shares of undesignated preferred stock, $.01 par value pershare.

 

Holders of Series C Preferred Stock shall receive payment of anon-cumulative annual dividend at the rate of 6% of the $100 par value on eachshare of Series C Preferred Stock. Each share of Series C Preferred Stock isconvertible into 24 shares of Common Stock and 24 shares of Series D DeliveryPreferred Stock of the Company. The conversion ratio shall be proportionatelyadjusted at any time the outstanding shares of Common Stock are increased ordecreased without payment by or to the Company or the Company’s shareholders.

 

40

----

 

Each share of Series D Delivery Preferred Stock of the Company givesits holder the privilege, but not the obligation, to deliver one bushel ofdurum wheat to the Company each year on a “first-come, first-served” basis.Because the privilege of a holder of Series D Delivery Preferred Stock todeliver durum wheat to the Company only arises if the Company requires durum,the privilege is not absolute. Holders ofSeries D Delivery Preferred Stock will be entitled to receive, if and whendeclared by the Board of Directors, a non-cumulative annual dividend of up to$.04 per share on each share of Series D Delivery Preferred Stock held by suchholder. The Company must pay holders of Series D Delivery Preferred Stock adividend of at least $.01 per share before paying any dividends on CommonStock.

 

Holders of Series F Convertible Preferred Stock have the right,exercisable at any time upon sixty-five (65) days’ written notice to theCompany, to convert any number of the holder’s shares of Series F PreferredStock into an equal number of shares of the Company’s Common Stock, par value$.01 per share. Series F Convertible Preferred Stock shall not carry the rightto vote on matters submitted to the vote of the shareholders of the Company. Exceptas otherwise provided, the Series F Preferred Stock shall have all rights ofthe Common Stock, including but not limited to any rights to dividends or todistributions upon liquidation.

 

The Board of Directors of theCompany adopted a Rights Plan that became effective July 1, 2002. Under theRights Plan, the Board of Directors of the Company has declared a dividend ofone purchase right (a “Right”) for each outstanding share of Common Stock held.Each Right will entitle the holder to purchase from the Company one-hundredthof one share of Series E Junior Participating Preferred Stock at a specifiedprice, subject to certain adjustments. The Rights will not become exercisable,and will not be transferable apart from the Company’s shares of Common Stock,until a person or group has acquired 15% or more of the Company’s Common Stockor has commenced a tender or exchange offer for 15% or more of the Company’sCommon Stock. In those events, each Right will entitle the holder (other thanthe acquiring person or group) to receive, upon exercise, common shares ofeither the Company or the acquiring company having value equal to two times theexercise price of the Right. The Rights issued under the Rights Plan will beredeemable by the Company’s Board of Directors in certain circumstances andwill expire ten years from the date of adoption.

 

On May 10, 2007, the Company closed the saleof 1 million shares of Series F convertible preferred stock to MVC Capital,Inc. (“MVC”) and the sale of 1 million shares of common stock to LaBellaHoldings, LLC at a purchase price of $10.00 per share. The Company alsoreceived $20 million in loan proceeds under a term loan agreement withCoBank.  With the net proceeds of $38.8 million from these financingtransactions and working capital provided by the Company, Dakota Growerspurchased 3,917,519 shares of common stock that had been properly tendered tothe Company at $10.00 per share net in cash pursuant to the Company’s tenderoffer, which expired on April 27, 2007.

 

The Company’s Board of Directors authorized the payment of $0.01 and$0.04 per share dividend on its Series D delivery preferred stock and anon-periodic dividend payment of $0.14 and $0.04 per share on its common stock,payable on January 3, 2007 and January 10, 2006 to shareholders of record as ofDecember 20, 2006 and December 19, 2005, respectively.

 

**NOTE 6 –      EMPLOYEEBENEFIT PLANS**

** **

Dakota Growers Pasta Company, Inc. and Primo Piatto, Inc. have a 401(k)plan that covers employees who have met age and service requirements. The plancovers employees who have reached 18 years of age and who have completed 500hours of service within six months. The Company matches 100% on the first 3% ofthe employees’ elected deferral and 50% on the next 2%. Employer contributionsto the plan totaled $537,000, $499,000 and $437,000 for the years ended July31, 2007, 2006 and 2005, respectively.

 

Primo Piatto, Inc. is also required tocontribute to a multi-employer pension plan covering certain hourly employeessubject to a collective bargaining agreement. Such employees may alsoparticipate in the 401(k) plan but are excluded from amounts contributed byPrimo Piatto. Contributions to the pension plan for the years ended July 31,2007, 2006 and 2005 totaled $106,000, $83,000 and $51,000, respectively.

 

41

----

 

**NOTE 7 -       INCOMETAXES**

** **

Significant components of the Company’sdeferred tax assets and liabilities as of July 31, 2007 and 2006 related totemporary differences are as follows (in thousands):

 
| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Deferred tax assets                 |       |     |       |     |       |
| Accounts receivable allowances      |       | $        | 409        |     | $          | 421 |   |
| Accrued expenses and other reserves |       | 695      |       | 534      |       |
| Other                               |       | —   |       | 68       |       |
| Total deferred tax assets           |       | 1,104    |       | 1,023    |       |
|                                |       |     |       |     |       |
| Deferred tax liabilities            |       |     |       |     |       |
| Property and equipment              |       | (13,264  | )          | (12,485  | )          |
| Other                               |       | (210     | )          | —   |       |
|                                |       |     |       |     |       |
| Net deferred tax liabilities        |       | $        | (12,370    | )        | $          | (11,462 | ) |

 

Classified in theaccompanying balance sheets as follows:

 
| ** **                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Current assets               |       | $        | 1,104      |     | $          | 955 |   |
| Noncurrent liabilities       |       | (13,474  | )          | (12,417  | )          |
|                         |       |     |       |     |       |
| Net deferred tax liabilities |       | $        | (12,370    | )        | $          | (11,462 | ) |

 

At July 31, 2005, the Company had an AMT credit carryforward of$851,000, which was utilized in the year ended July 31, 2006. Managementbelieves it is more likely than not that the deferred tax assets as of July 31,2007 will be realized through the generation of future taxable income and taxplanning strategies.

 

Income tax expense for the years ended July 31, 2007, 2006 and 2005consists of the following (in thousands):

 
| ** **                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Current income tax expense |       | $        | 2,851      |     | $          | 1,795    |       | $ | 568 |   |
| Deferred income taxes      |       | 908      |       | 998      |       | 1,038    |       |
|                       |       |     |       |     |       |     |       |
| Income tax expense         |       | $        | 3,759      |     | $          | 2,793    |       | $ | 1,606 |   |

 

The reconciliation ofthe federal statutory income tax rate to the effective income tax rate for theyears ended July 31, 2007, 2006 and 2005 is as follows:

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Federal statutory income tax rate |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income taxes, net of        |       |     |       |     |       |     |       |
| federal income tax effect         |       | 5.0      |       | 5.0      |       | 5.0      |       |
| Other                             |       | (2.7     | )          | —   |       | —   |       |
|                              |       |     |       |     |       |     |       |
| Effective income tax rate         |       | 36.3     | %          | 39.0     | %          | 39.0     | %          |

 

42

----

** **

**NOTE 8 -   FAIR VALUE OF FINANCIALINSTRUMENTS**

** **

The fair value of a financial instrument is generally defined as theamount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced liquidation sale. Quoted marketprices are generally not available for the Company’s financial instruments.Accordingly, fair values are based on judgments regarding anticipated cashflows, future expected loss experience, current economic conditions, riskcharacteristics of various financial instruments and other factors. Theseestimates involve uncertainties and matters of judgment, and therefore cannotbe determined with precision. Changes in assumptions could significantly affectthe estimates.

 

The carrying amount of cash and cashequivalents, receivables, payables, short-term debt and other current assetsand liabilities approximates fair value because of the short maturity and/orfrequent repricing of those instruments.

 

The Company believes it is not practical to estimate the fair value ofthe securities of non-subsidiary cooperatives without incurring excessive costsbecause there is no established market for these securities and it isinappropriate to estimate future cash flows, which are largely dependent on futurepatronage earnings of the non-subsidiary cooperatives.

 

Based upon current borrowing rates with similar maturities, the fairvalue of the long-term debt approximates the carrying value as of July 31, 2007and 2006.

 

**NOTE 9 -   OPERATING LEASES**

** **

The Company leases equipment and office space under operating leaseagreements. Future obligations for operating leases for fiscal years ended July31 are as follows (in thousands):

 
| **Year ending July 31:** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2008                                    |       | $          | 317        |   |
| 2009                                    |       | 170        |       |
| 2010                                    |       | 79         |       |
| 2011                                    |       | 14         |       |
| 2012                                    |       | —     |       |
| Thereafter                              |       | —     |       |
|                                    |       |       |       |
|                                    |       | $          | 580        |   |

 

Lease expense totaled $1,138,000, $1,462,000 and $1,413,000 for theyears ended July 31, 2007, 2006 and 2005, respectively.

 

**NOTE 10 -   CAPITAL LEASE**

** **

On March 30, 2007, the Company entered into alease agreement for certain pasta equipment, which had previously beenaccounted for in a sale-leaseback transaction as discussed in Note 11, valuedat $1.75 million. The equipment lease, which has a term of 5 years expiring onMarch 31, 2012, is classified as a capital lease.

 

43

----

 

The following is aschedule by years of the future minimum lease payments under the capital leasetogether with the present value of the net minimum lease payments as of July31, 2007 (in thousands):

 
| **Year ending July 31:**     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2008                                        |       | $          | 413        |   |
| 2009                                        |       | 413        |       |
| 2010                                        |       | 413        |       |
| 2011                                        |       | 413        |       |
| Later Years                                 |       | 241        |       |
| Total minimum lease payments                |       | 1,893      |       |
| Less: Amount representing interest          |       | (276       | )          |
| Present value of net minimum lease payments |       | $          | 1,617      |   |

 

The equipment is being depreciated over its estimated useful economiclife and is included in the depreciation expense for the year ending July 31,2007.

 

Certainpasta equipment under capital lease at July 31, 2007 (in thousands):

 
| ** **                     | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|
|                           |       |     |       |
| Equipment                      |       | 1,750    |       |
| Less: Accumulated depreciation |       | (58      | )          |
| Total                          |       | 1,692    |       |

 

**NOTE 11 -   SALE-LEASEBACK**

** **

The Company entered into a sale-leaseback transaction effective March 29,2002, for certain pasta production equipment. Proceeds from the sale totaled $5million. The lease, which was classified as operating, set forth an initialterm of five years and called for lease payments of $72,000 per month. At theend of the initial lease term, the Company could renew the lease at fair rentalvalue, terminate the lease and surrender the equipment with the payment of a10% of equipment cost remarketing fee, or purchase the equipment for $1,750,000.The Company realized a gain on the sale of $255,000, which was deferred and wasamortized in proportion to the gross rentals charged to expense over thefive-year lease term. The Company entered into a capital lease for this pastaproduction equipment on March 30, 2007 for $1.75 million as discussed in Note10.

 

**NOTE 12-   COMMITMENTS AND CONTINGENCIES**

** **

The Company forward contracts for a certainportion of its future durum wheat requirements. At July 31, 2007, the Companyhad outstanding commitments for grain purchases totaling $17,211,000 related toforward purchase contracts. These contracts are set price contracts to delivergrain to the Company’s mill, and are not derivative in nature as they have nonet settlement provision and are not transferable.

 

Pursuant to certainwarehouse agreements, the Company is obligated to minimum monthly storage andhandling amounts totaling $2,527,000 for the year ending July 31, 2008.

 

The Company is subject to various lawsuits and claims which arise inthe ordinary course of its business. While the results of such litigation andclaims cannot be predicted with certainty, management believes the dispositionof all such proceedings, individually or in aggregate, should not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

 

44

----

 

**NOTE 13 -   STOCK OPTION PLANS**

** **

On January 31, 1997 the Cooperative’s Compensation Committee of theBoard of Directors (the “Compensation Committee”) adopted the Dakota GrowersIncentive Stock Option Plan (the “Plan”). The Plan was ratified by theCooperative members at the annual meeting in January 1998. The CompensationCommittee or the Board of Directors has the power to determine the keymanagement employees of the Company to receive options and the number of sharesto be optioned to each of the employees. Options granted under the Plan are forthe purchase of Series C Convertible Preferred Stock at fair market value,which were convertible into Equity Stock as a cooperative, and are nowconvertible into Common Stock and Series D Delivery Preferred Stock as acorporation at the option of the employee, under the applicable conversionratio. The maximum number of preferred shares that may be issued pursuant tooptions granted under the Plan is 15,000, all of which have been issued. Eachshare of Series C Preferred Stock is convertible into 24 shares of Common Stockand 24 shares of Series D Delivery Preferred Stock of the Company. Theconversion ratio is proportionately adjusted if the Company increases theoutstanding shares of Common Stock or Series D Delivery Preferred Stock, as applicable,without payment by or to the Company or the Company’s shareholders for suchadditional shares (e.g. stock split, stock dividend or other action). Optionsgranted under the Plan must be exercised within ten years from the date suchoptions are granted. In the event of the employee’s termination with theCompany, all exercisable options may be exercised within 90 days of thetermination date. If not exercised, such options lapse.

 

The Company’s 2002 Stock Option Plan (the “2002Plan”) was adopted by the Board of Directors on November 21, 2002. All optionsgranted under the 2002 Plan are non-qualified stock options and are for thepurchase of the Company’s Common Stock. The maximum number of shares of CommonStock that may be issued pursuant to options granted under the 2002 Plan is294,456 shares, all of which have been issued. Stock options granted under the2002 Plan expire 10 years from the date of grant.

 

On November 21, 2002 the Board of Directors adopted the Dakota GrowersPasta Company, Inc. 2003 Stock Option Plan (the “2003 Plan”), which wasapproved by the Company’s shareholders at the Annual Meeting on January 11,2003. The 2003 Plan covers 500,000 shares of the Company’s Common Stock.Participation in this Plan shall be limited to officers, directors, employees,vendors or consultants of the Company or any subsidiary of the Company. Optionsgranted under the 2003 Plan may be incentive stock options (as defined underSection 422 of the Code) or non-qualified stock options, as determined by the 2003Plan administrator at the time of grant of an option and subject to theapplicable provisions of Section 422 of the Code and the regulationspromulgated there under. The stock options generally expire 10 years from thedate of grant. If the employment of the Optionee is terminated by any reasonother than his or her death or disability, all exercisable options may beexercised within 90 days of the termination date. If not exercised, suchoptions lapse.

 

45

----

 

The following tables set forth information regarding stock optionsoutstanding and exercisable:

 
| ** **                   | ** ** | **Options to purchase Series C Convertible Preferred Stock** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Number of**                                                                              | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Series C**                                                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Convertible**                                                                                 | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Preferred Shares**                                                                       | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                         |       |                                                                                            |       |   |   |   |   |   |   |
| Outstanding at July 31, 2004 |       | 2,731                                                                                           |       | $ | 100-$150 |   | $ | 112.56 |   | 2,731 |   |
| Exercised                    |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                      |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired            |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at July 31, 2005 |       | 2,731                                                                                           |       | $ | 100-$150 |   | $ | 112.56 |   | 2,731 |   |
| Exercised                    |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                      |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired            |       | (754                                                                                            | )          | $ | 100 |   | $ | 100 |   |   |   |
| Outstanding at July 31, 2006 |       | 1,977                                                                                           |       | $ | 100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                    |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                      |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired            |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at July 31, 2007 |       | 1,977                                                                                           |       | $ | 100-$150 |   | $ | 117.35 |   | 1,977 |   |

 
| ** **                   | ** ** | **Options to purchase Common Stock** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|
| ** **                   | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Number of**                                       | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Common Shares**                                   | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                         |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at July 31, 2004 |       | 374,980                                                  |       | $ | 4.25-$6.25 |   | $ | 5.82 |   | 294,456 |   |
| Exercised                    |       | —                                                   |       |   |   |   |   |   |   |
| Granted                      |       | —                                                   |       |   |   |   |   |   |   |
| Forfeited/Expired            |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at July 31, 2005 |       | 374,980                                                  |       | $ | 4.25-$6.25 |   | $ | 5.82 |   | 334,722 |   |
| Exercised                    |       | —                                                   |       |   |   |   |   |   |   |
| Granted                      |       | 141,256                                                  |       | $ | 4.00 |   | $ | 4.00 |   |   |   |
| Forfeited/Expired            |       | (130,399                                                 | )          | $ | 4.00-$6.25 |   | $ | 5.81 |   |   |   |
| Outstanding at July 31, 2006 |       | 385,837                                                  |       | $ | 4.00-$6.25 |   | $ | 5.16 |   | 242,517 |   |
| Exercised                    |       | (5,550                                                   | )          | $ | 4.00 |   | $ | 4.00 |   |   |   |
| Granted                      |       | 272,726                                                  |       | $ | 5.00 |   | $ | 5.00 |   |   |   |
| Forfeited/Expired            |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at July 31, 2007 |       | 653,013                                                  |       | $ | 4.00-$6.25 |   | $ | 5.10 |   | 317,243 |   |

 

Effective August 1, 2005, the Companyadopted Statement of Financial Accounting Standard No. 123 (revised 2004),“Share Based Payment” (SFAS No. 123R). Under SFAS No. 123R, theCompany is required to recognize, as expense, the estimated fair value of allshare based payments to employees. In accordance with this standard, theCompany has elected to recognize the compensation cost of all service basedawards on a straight-line basis over the vesting period of the award.Performance based awards are recognized ratably for each vesting tranche. Forthe years ended July 31, 2007 and 2006, the Company recorded stock-basedemployee compensation expense of $210,000 and $65,000, respectively.

 

On October 19, 2006, the Board of Directorsgranted incentive stock options to purchase 272,726 shares of the Company’scommon stock at a per share exercise price of $5.00. The vesting of theseoptions is subject to certain qualifications, including but not limited to, thecontinued employment of the optionee with the Company. Subject

 

46

----

 

to the foregoing qualifications and certainother qualifications, fifty percent of these options vest on October 19, 2007,twenty-five percent vest on October 19, 2008, and twenty-five percent vest onOctober 19, 2009.

 

Prior to adopting SFAS No.123R, the Company had elected to follow Accounting Principles Board Opinion(APB) No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for its employee stock options and had adoptedthe pro forma disclosure requirements under SFAS No. 123, “Accounting forStock-Based Compensation.” Prior to August 1, 2005, the Company had notrecognized any compensation expense under APB No. 25 upon the granting orexercise of stock options because the exercise price was equal to or greaterthan the market price of the underlying stock on the date of grant.

 

The fair value of the stockoptions granted was estimated at the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions:  2007 – risk free interest rate of 4.7%,expected dividend yield of 1.0%, expected life of 5 years and volatility of25%; 2006 - risk free interest rate of 4.4%, expected dividend yield of 1.0%,expected life of 5 years and volatility of 30%. The pro forma application ofStatement of Financial Accounting Standard (SFAS) No. 123 “Accounting forStock-Based Compensation” would not have had a material impact on net incomeand earnings per share for the year ended July 31, 2005.

 

A summary of the status of the Company’s issuedbut nonvested stock options as of July 31, 2007, and changes during the yearended July 31, 2007, is presented below:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                            | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options** | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
|                                  |       |       |       |                 |       |
| Nonvested at July 31, 2006            |       | 143,320    |       | $                    | 4.03       |   |
| Granted                               |       | 272,726    |       | $                    | 5.00       |   |
| Vested                                |       | (80,276    | )          | $                    | 4.05       |   |
| Forfeited/Expired                     |       | —     |       |                 |       |
| Nonvested at July 31, 2007            |       | 335,770    |       | $                    | 4.81       |   |

 

As of July 31, 2007, there was approximately $296,000 of totalunrecognized compensation cost related to nonvested employee stockoptions.  That cost is expected to be recognized over a period of 2.25years.

 

**NOTE 14 -   RELATED PARTYTRANSACTIONS**

** **

Amounts due from executive officers totaled$47,000 as of July 31, 2007 and 2006.

 

In May 2007, the Company paid MVC Financial Services, Inc. and LaBellaHoldings LLC $200,000 each in closing fees. The payments were based on 2% ofthe issuance of 1,000,000 shares of series F preferred stock at $10 per shareand 1,000,000 shares of common stock at $10 per share. See Note 5 –Stockholders’ Equity. MVC Financial Services, Inc. is an affiliate of MVCCapital, Inc., a holder of 5% or greater of the Company’s Common Stock. MichaelT. Tokarz, a director of the Company, is a stockholder and Chairman of MVCCapital, Inc. LaBella Holdings LLC is a holder of 5% or greater of the Company’sCommon Stock. Richard Thompson, a director of the Company, is a managing memberof LaBella Holdings LLC.

 

**NOTE 15 -   CONTINUED DUMPING ANDSUBSIDY OFFSET ACT OF 2000**

** **

U.S. Customs and Border Protection (“Customs”) has distributedantidumping and countervailing duties assessed on certain pasta imported fromItaly and Turkey to affected domestic producers pursuant to the ContinuedDumping and Subsidy Offset Act of 2000 (the “Offset Act”), which was enacted inOctober 2000. The Company received payments in the amount of $1,300,000,$1,103,000 and $425,000 in December 2006, 2005 and 2004, respectively, underthe Offset Act. The net proceeds received under the Offset Act have beenclassified as Other Income on the Income Statement. The Company cannotreasonably estimate the potential amount, if any, that it may receive under theOffset Act in future periods as any such amount will be based upon futureevents over

 

47

----

 

which the Company has little or no control, including, but not limitedto, the amount of expenditures by domestic pasta producers and the amount ofantidumping and countervailing duties collected by Customs.

 

**NOTE 16 -   QUARTERLY FINANCIAL DATA(UNAUDITED)**

** **

Summary quarterly results are as follows (inthousands, except per share amounts):

 
| ** **                          | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2007            |       |        |       |        |       |        |       |        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Net revenues                        |       | $           | 48,933     |        | $          | 47,174      |       | $           | 46,084     |   | $ | 48,871 |   |
| Gross profit                        |       | 6,073       |       | 5,102       |       | 6,834       |       | 7,478       |       |
| Operating income                    |       | 2,831       |       | 1,626       |       | 3,646       |       | 4,411       |       |
| Net income                          |       | 894         |       | 1,497       |       | 1,882       |       | 2,335       |       |
| Basic net earnings per common share |       | 0.07        |       | 0.11        |       | 0.14        |       | 0.20        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2006:           |       |        |       |        |       |        |       |        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Net revenues                        |       | $           | 44,072     |        | $          | 42,490      |       | $           | 41,968     |   | $ | 42,979 |   |
| Gross profit                        |       | 5,240       |       | 4,366       |       | 6,403       |       | 6,596       |       |
| Operating income                    |       | 1,372       |       | 120         |       | 3,047       |       | 3,876       |       |
| Net income                          |       | 399         |       | 617         |       | 1,487       |       | 1,870       |       |
| Basic net earnings per common share |       | 0.03        |       | 0.01        |       | 0.11        |       | 0.15        |       |

 

The above quarterly financial data isunaudited, but in the opinion of management, all adjustments necessary for a fairpresentation of the selected data for these interim periods presented have beenincluded.

 

**NOTE 17 -   SUBSEQUENT EVENTS**

** **

Effective September 21, 2007, the Company acquired the remaining unitsof DNA Dreamfields, increasing its ownership to 100%. Pursuant to the terms ofthe purchase agreement, the Company acquired the remaining units for anaggregate purchase price of $2,231,614 or $37,393 per purchased unit. Inconjunction with this purchase, the Company eliminated the noncontrollinginterest and reduced recorded goodwill associated with DNA Dreamfields in theCompany’s first quarter of fiscal year 2008. The Company will continue toinclude DNA Dreamfields in its consolidated financial statements.

 

48

----

 

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

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

**a) Evaluationof Disclosure Controls and Procedures.**

 

The Company’sChief Executive Officer, Timothy J. Dodd, and Chief Financial Officer, EdwardO. Irion, have evaluated the Company’s disclosure controls and procedures as ofthe end of the period covered by this report. Based upon the review, they haveconcluded that these controls and procedures are effective.

 

**b) Changes inInternal Controls over Financial Reporting.**

 

There were nochanges in the Company’s internal controls over financial reporting during the Company’s most recently completedfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’sinternal control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

49

----

 

**PART III.**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

**Board of Directors**

 

The Board of Directors currently consists ofeleven members. The Board may consist of a minimum of seven members and amaximum of fifteen members. The Articles of Incorporation and Bylaws of theCompany require that at least five members of the Board of Directors beresidents of the State of North Dakota and that at least three members beagricultural producers. The Board ofDirectors is divided into three classes: Class I, Class II and Class III. ClassI, Class II and Class III are to consist of an equal number of directors,except that, if the Board of Directors consists of a number of directors suchthat mathematically there cannot be an equal number of directors in each ofClass I, Class II and Class III, then the one remaining director shall be madea member of Class I and, if there is more than one remaining director, thefirst remaining director shall be made a member of Class I and the secondremaining director shall be made a member of Class II. Each director in each ofClass I, Class II and Class III will hold office until the third regularmeeting of shareholders following the regular meeting of the shareholders atwhich such director or such director’s predecessor was elected, until hissuccessor shall have been elected and shall qualify, or until he resigns or isremoved.

 

The table below sets forth certaininformation concerning the directors of the Company. The directors have beenelected to serve three-year terms expiring at the annual meeting in thecalendar years indicated in the table below.

 
| **Name**              | ** ** | **Age** | ** ** | **Term Expires** | ** ** | **Class** | ** ** |
|-----------------------|------------|---------|------------|-----------------------|------------|-----------|------------|
|                  |       |    |       |                  |       |      |       |
| John S. Dalrymple III |       | 59      |       | 2009                  |       | I         |       |
| Allyn K. Hart         |       | 68      |       | 2008                  |       | III       |       |
| Roger A. Kenner (1)   |       | 58      |       | 2010                  |       | II        |       |
| James F. Link         |       | 80      |       | 2009                  |       | I         |       |
| Eugene J. Nicholas    |       | 62      |       | 2010                  |       | II        |       |
| John D. Rice, Jr. (1) |       | 53      |       | 2009                  |       | I         |       |
| Richard Thompson      |       | 55      |       | 2008                  |       | II        |       |
| Michael T. Tokarz     |       | 57      |       | 2009                  |       | I         |       |
| Jeffrey O. Topp       |       | 48      |       | 2010                  |       | II        |       |
| Curtis R. Trulson     |       | 55      |       | 2008                  |       | III       |       |
| Michael E. Warner     |       | 57      |       | 2008                  |       | III       |       |

 

----

(1) Mr. Kenner and Mr. Rice are first cousins.

 

**John S. Dalrymple III**.Mr. Dalrymple has been Chairman of the Board of Directors of the Company since1991. He became Lieutenant Governor of North Dakota in 2000. Mr. Dalrymple hadbeen a state representative since 1984 and served as Chairman of the HouseAppropriations Committee and of the Budget Section of the North Dakota House ofRepresentatives. He previously served on the board of directors of the U.S.Durum Growers Association. He has been a farmer in the Casselton, North Dakotaarea since 1971.

 

**Allyn K. Hart.** Mr.Hart has been a director of the Company since 1991. Mr. Hart has served on theboard of directors of Cavalier County Job Development Authority and U.S. DurumGrowers Association and presently serves on the board of Maple Manor CareCenter in Langdon, ND. He has been a farmer in the Cavalier County, NorthDakota area since 1961.

 

**Roger A. Kenner.** Mr.Kenner has been a director of the Company since 1991. Mr. Kenner is chairman ofGolden Plains Frozen Foods LLC and is a director of Blue Cross Blue Shield ofNorth Dakota. He has been a farmer and certified seed producer in the Leeds,North Dakota area since 1964.

 

**James F. Link.** Mr.Link has been a director of the Company since 1991. Mr. Link has served on theboards of directors of Farm Credit and Minn-Dak Farmers cooperative, including15 years as its chairman. He has been a farmer in the Wahpeton, North Dakotaarea since 1947.

 

50

----

 

**Eugene J. Nicholas.** Mr.Nicholas had been a director of the Company since 1991. Mr. Nicholas had been astate representative, and served aschairman of the North Dakota House of Representatives Agriculture Committee.Mr. Nicholas also serves on the board of directors of Country Bank USA, Cando,North Dakota, and the board of governors of Golden Plains Frozen Foods LLC. Mr.Nicholas previously served on the board of directors of the U.S. Durum GrowersAssociation.

 

**John D. Rice, Jr.**Mr.Rice is the Vice Chairman of the Board of Directors and has been a director ofthe Company since 1991. He also served on the boards of directors of theNational Pasta Association and U.S. Durum Growers Association. He has been afarmer in the Maddock, North Dakota area since 1968.

 

**Richard Thompson.**  Mr. Thompson was appointed to the Boardof Directors in May 2007. Mr. Thompson is the co-founder and has been amanaging member and chief executive officer of GO7 Brands, LLC since May 2006. Hestarted American Italian Pasta Company (AIPC) in 1986 and grew it into thelargest pasta manufacturing and durum milling company in North America. He hasmade numerous appearances in the national media including speaking engagementson entrepreneurial, manufacturing, and branding topics. He has also receivedpositive press from a variety of national and local publications and has servedon several boards including public companies. Mr. Thompson serves or has servedon various organizations board of directors such as ASPCA, Nashville HumaneAssociation, Pet Food Institute and “ARF” Animal Rescue Fund of the Hamptons. Inaddition, he is a member of Parents Campaign Development and Alumni Relationsat Vanderbilt University, George Washington University - Parents Campaign, andGrocery Manufacturing Association - President’s Advisory Council.

 

**Michael T. Tokarz.**Mr.Tokarz has been a director of the Company since 2004. Mr. Tokarz is theChairman of MVC Capital, a registered investment company traded on the New YorkStock Exchange (Ticker: MVC) that makes equity and debt investments. Inaddition, Mr. Tokarz is the Managing Member of The Tokarz Group, which managesMr. Tokarz’s personal investments. From 1985 to 2002, Mr. Tokarz was a seniorGeneral Partner and Administrative Partner at Kohlberg Kravis Roberts &Co., a private equity firm specializing in management buyouts. Prior to joiningKKR, Mr. Tokarz was with Continental Illinois National Bank and Trust Companyof Chicago, joining the firm in 1973. He serves or has served on the Board ofDirectors of numerous companies, including: Conseco, Inc., Walter Industries,Inc., Mueller Water Products, Inc., Safeway, Inc., IDEX Corporation, PRIMEDIA,Inc., Neway Anchorlok International, Inc., Flagstar Corporation, ConAgra FoodCorporation, KSL Recreation Corporation, RJR Nabisco Corp, Evenflo &Spalding Holdings Corporation, Beatrice Foods Corporation, Nexstar FinancialCorporation, Apertio Limited (UK), United Fixtures Company, StonewaterControls, Lomonosov Porcelain (Russia), Kamaz A.O. (Russia). Mr. Tokarz alsoserves on the Board of the University of Illinois Foundation and its InvestmentCommittee and as Chairman of its Budget and Finance Committee. He is a memberof the Board of Managers of Illinois Ventures and Chairman of Illinois EmergingTechnology Fund, both affiliated with the University of Illinois.

 

**Jeffrey O. Topp**. Mr. Topp has been a director of the Companysince 1991. He serves on the board of directors of Farmers Elevator, Inc. inGrace City, North Dakota. He is a partner in T-T Ranch and has been a farmer inthe Grace City area since 1978.

 

**Curtis R. Trulson.** Mr. Trulson has been a director of the Companysince 1991. He previously served on the boards of directors of the NationalAssociation of Wheat Growers and the North Dakota Grain Growers Association,including service as its President. He has been a farmer in Mountrail County,North Dakota, since 1975.

 

**Michael E. Warner.** Mr. Warner has been a director of the Companysince 1992. Mr. Warner has been a farmer in the Hillsboro, North Dakota areasince 1967. He also currently serves on the board of directors of WarnerEquipment Co. and Agriceutical Resources LLC. In 2002, Mr. Warner was awarded afellowship by the University of Missouri. He served on the board of directorsof American Crystal Sugar Company from 1989 through 1996, as part of a 23-yearcareer of service to the sugar industry. He is a past member of the board of

 

51

----

 

trustees of Meritcare Health Systems of Fargo, North Dakota, thelargest hospital/multiple clinic system between Minneapolis, Minnesota andSeattle, Washington.

 

**Committees of the Board of Directors**

 

*Audit Committee*. The AuditCommittee is responsible for overseeing the accounting and financial reportingprocesses of the Company and audits of the Company’s financial statements,including assessing and ensuring the independence of the independent auditor,evaluating audit performance and approving the services to be provided by theindependent auditor. The Audit Committee has the sole authority to retain,compensate, oversee and terminate the independent auditors. The Audit Committeereviews the Company’s annual audited financial statements, quarterly financialstatements and filings with the Securities and Exchange Commission. The AuditCommittee reviews reports on various matters, including critical accountingpolicies of the Company, significant changes in the Company’s selection orapplication of accounting principles and the Company’s internal controlprocesses. The Audit Committee also pre-approves all audit and non-auditservices performed by the independent auditor.

 

The Audit Committee operates under a writtencharter adopted by the Board of Directors. The Company’s Audit Committeepresently consists of Messrs. Curtis R. Trulson (Chair), Michael E. Warner andJohn S. Dalrymple III. Under the Company’s bylaws, the Audit Committee of theBoard of Directors must be composed of at least three directors who are notemployees of the Company. The charter of the Audit Committee requires thatmembers of the Audit Committee must be independent, and the Board of Directorshas determined that all members of the Audit Committee are independentdirectors. The Board of Directors has also determined that Mr. Trulson meetsthe Securities and Exchange Commission definition of an “audit committeefinancial expert.”

 

*Compensation Committee.* TheCompensation Committee operates under a written charter and reviews andapproves the compensation and other terms of employment of the Company’s ChiefExecutive Officer and other senior management of the Company. Among its otherduties, the Compensation Committee is responsible for overseeing the Company’sstock-based compensation plans for executive officers and, in consultation withthe Nomination Committee, making recommendations on succession plans for theChief Executive Officer. The Compensation Committee is to annually review theChief Executive Officer’s compensation and evaluate the Chief Executive Officer’sperformance. The current members of the Compensation Committee are Messrs. JohnS. Dalrymple III (Chair), Curtis R. Trulson and Michael E. Warner.

 

The charter of the Compensation Committeerequires that the Committee consist of independent directors. Each member ofthe Compensation Committee must also be an “outside director” for purposes ofSection 162(m) of the Internal Revenue Code. Each member of the Company’sCompensation Committee meets these requirements.

 

*Nomination Committee*.The Nomination Committee operates under a written charter and is charged withthe responsibilities of nominating and evaluating Board member candidates andestablishing criteria for nomination, developing and recommending governanceguidelines and reviewing them periodically, facilitating annual evaluations ofthe performance of the Board and its members, reviewing the structure andmembership of the Company’s Board and committees, and reviewing Boardcompensation policies. Additionally, the Nomination Committee, in consultationwith the Compensation Committee, facilitates development of the mission andobjectives of the Chief Executive Officer, succession for the Chief ExecutiveOfficer and annual evaluation of the performance of the Chief ExecutiveOfficer.

 

The Company’s bylaws require that theNomination Committee be comprised of the Chairman of the Board, theVice-Chairman and the Chief Executive Officer, except that if one individualholds two of the designated offices, the Board of Directors shall appoint athird member to the Nomination committee, who need not be a director of theCompany. Additionally, as required by its charter, the Nomination Committee iscomposed of a majority of independent directors. The current members of theNomination Committee are Messrs. John S.

 

52

----

 

Dalrymple III(Chair), John D. Rice, Jr. and Timothy J. Dodd. The Board of Directors hasdetermined that Messrs. Dalrymple and Rice are independent directors.

 

*Policy Committee.*The Policy Committee operates pursuant to a written Policy Committee Charter.The Policy Committee is to provide oversight of the Company’s governanceobligations to assure compliance with all applicable laws, regulations,Articles of Incorporation and By-laws by adoption and periodic review of agovernance policy. The members of the Policy Committee are Allyn K. Hart(Chair), Curtis R. Trulson and James F. Link. Each member of the committee is anon-employee director and the Board of Directors has determined that there areno relationships that would interfere with a Policy Committee member’s exerciseof independent judgment in carrying out his responsibilities as a member of thepolicy committee.

 

**Executive Officers**

 

The table below lists the executive officersof the Company. Officers are elected annually by the Board of Directors.

 
| **Name**        | ** ** | **Age** | ** ** | **Position**                          |
|-----------------|------------|---------|------------|---------------------------------------|
|            |       |    |       |                                  |
| Timothy J. Dodd |       | 52      |       | President and Chief Executive Officer |
| Edward O. Irion |       | 36      |       | Chief Financial Officer               |

 

**Timothy J. Dodd.**Mr. Dodd is the President and Chief ExecutiveOfficer of the Company. Prior to joining the Company in December 1991, he hadbeen the Vice President of Manufacturing for American Italian Pasta Companysince 1988. Previously, Mr. Dodd participated in the construction andmanagement of two other grain processing facilities, one in Texas and one inCando, North Dakota. Mr. Dodd serves on the board of directors of Country BankUSA, Cando, North Dakota.

 

**Edward O. Irion.**Mr. Irion was appointed as the Company’sChief Financial Officer effective February 21, 2006. Mr. Irion joined theCompany in December 1999 and served as the Company’s Assistant VicePresident – Planning and Control until August 2000.  FromAugust 2000 until his appointment as Chief Financial Officer,Mr. Irion served as the Company’s Vice President – Finance and ChiefAccounting Officer. He received a Bachelor of Science degree in accounting fromMinnesota State University-Moorhead and is a certified public accountant.

 

**Code of Conduct**

 

The Company has adopted a Code of Conductapplicable to all employees. A Code of Ethics certification for seniorfinancial officers, including the principal executive officer, principalfinancial officer and principal accounting officer, is included within the Codeof Conduct.

 

A copy of the Code of Conduct is availableunder the “Investors” portion of the Company’s website at *www.dakotagrowers.com*. A copy of the Company’s Code ofConduct will also be provided, without charge, upon written request to:

 

Investor Relations

Dakota Growers Pasta Company, Inc.

One Pasta Avenue

Carrington, ND 58421

 

53

----

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

**Compensation Overview**

 

This section explains our philosophy,policies and practices relating to executive compensation and presents a reviewand analysis of the compensation earned during the fiscal year ended July 31,2007 by our Chief Executive Officer and our Chief Financial Officer to whom werefer collectively as the “named executive officers.”

 

**Compensation Philosophy and Objectives**

 

The Company’scompensation policies with respect to its executive officers, established bythe Compensation Committee, are based on the principles that compensationshould, to a significant extent, reflect the financial performance of theCompany and the individual contribution of the executives to this financialperformance. It is the policy of the committee to set executive compensation atlevels that are sufficiently competitive with food processing companies ofcomparable size to attract, retain and motivate the highest quality individualsto contribute to the Company’s goals, objectives and overall financial success.A portion of certain executives’ incentive compensation has historically beenpaid in stock options in order to align executive and stockholder interests.

 

**The Role of the Compensation Committee**

 

The Compensation Committee operates under awritten charter and reviews and approves the compensation and other terms ofemployment of the Company’s Chief Executive Officer and other senior managementof the Company. Among its other duties, the Compensation Committee isresponsible for overseeing the Company’s stock-based compensation plans forexecutive officers and, in consultation with the Nomination Committee, makingrecommendations on succession plans for the Chief Executive Officer. The CompensationCommittee is to annually review the Chief Executive Officer’s compensation andevaluate the Chief Executive Officer’s performance.

 

**Total Compensation for Executive Officers**

 

*Base Salary.*The base salary of each of ournamed executive officers is reviewed by the committee as part of the overallannual review of executive compensation. The Compensation Committee setsexecutive compensation by subjective evaluation of the individual performanceof each executive and by marketplace compensation of comparable executives,although salary determinations are not based upon any specific or constantcriteria.

 

*Annual Incentive Bonus.*Executives areeligible for annual incentive cash bonuses based on individual and Companyperformance. As no formal criteria have yet been established, thesecalculations are determined on a subjective basis. These awards are notintended to be in addition to market level compensation but instead aredesigned to cause a significant part of an executive’s annual compensation to bedependent on the Compensation Committee’s assessment of the executive’sperformance and the executive’s contributions to the Company’s financialperformance and strategic objectives.

 

*Long-Term, Equity-Based IncentiveCompensation.*The stock option component of theexecutive officers’ compensation has been designed to provide executives withincentives for the enhancement of stockholder value. Options are granted atfair market value on the date of grant and generally vest over a number ofyears. No constant criteria are used year after year in the granting of stockoptions. For stock option awards for executive officers, the CompensationCommittee makes a subjective determination of the effectiveness of theexecutive and the extent of the executive’s contributions to the Company’ssuccess and, based on that determination, option grants, if any, are awarded toeach executive. Because the options are granted with exercise prices equal tothe fair market value of the underlying Common Stock on the date of grant, anyvalue that ultimately accrues to the

 

54

----

 

executive is based entirely upon the Company’s performance as perceivedby investors who establish the market price for the Common Stock.

 

*PostRetirements Benefits.*The Company maintains a 401(k)Profit Sharing Plan, in which eligible employees may participate, including thenamed executive officers. The Company will make a matching contribution to thePlan of 100% of the first 3% of the employees’ annual compensation and 50% ofthe next 2%. Employee voluntary contributions are immediately vested as well asthe employer matching contributions.

 

*Other Compensation.*Allfull-time employees, including the named executive officers, may participate inhe Company’s health and welfare benefit programs, including medical and dentalcare coverage, disability insurance and life insurance.

 

**Compensation Committee Report**

 

The Committee has reviewed and discussed theCompensation Discussion and Analysis with management. Based upon the review anddiscussions, the Committee directed that the Compensation Discussion andAnalysis be included in this annual report on Form 10-K.

 

**Compensation Committee Interlocks and Insider Participation**

 

The members of the Compensation Committee areJohn S. Dalrymple III, Curtis R. Trulson and Michael E. Warner. None of thesedirectors are or have been an officer or employee of the Company. During fiscalyear 2007 no executive officer of the Company served as a director or member ofthe Compensation Committee (or other committee serving an equivalent function)of any other entity, one of whose executive officers served as a director of ormember of the Compensation Committee of the Company.

 

Compensation Committee:

 

John S. Dalrymple III

Curtis R. Trulson

Michael E. Warner

 

55

----

 

**Summary Compensation Table**

 

The following table summarizes the amount ofcompensation paid to the Company’s President and Chief Executive Officer andChief Financial Officer for the fiscal year ended July 31, 2007.

 

**Summary Compensation Table**

 
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **       | ** ** | **Change in** | ** ** | ** **          | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------------|------------|------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **       | ** ** | **Pension**        | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | **Non-**         | ** ** | **Value and** | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | **Equity**       | ** ** | **Nonqualified**   | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | **Incentive**    | ** ** | **Deferred**       | ** ** | **All**             | ** ** | ** ** | ** ** |
| **Name and**           | ** ** | **Fiscal** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option**          | ** ** | **Plan**         | ** ** | **Compensation**   | ** ** | **Other**           | ** ** | ** ** | ** ** |
| **Principal Position** | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards (2)** | ** ** | **Compensation** | ** ** | **Earnings**       | ** ** | **Compensation(1)** | ** ** | **Total**  | ** ** |
|                        |       |       |       |       |       |       |       |       |       |                |       |             |       |               |       |                |       |       |       |
| Timothy J. Dodd             |       |       |       |       |       |       |       |       |       |                |       |             |       |               |       |                |       |       |       |
| President and Chief         |       |       |       |       |       |       |       |       |       |                |       |             |       |               |       |                |       |       |       |
| Executive Officer           |       | 2007       |       | $          | 247,889    |       | $          | 55,300     |       | $                   | —     |             | $          | 50,803             |       | $                   | —     |       | $          | — |   | $ | 11,628 |   | $ | 365,620 |   |
|                        |       |       |       |       |       |       |       |       |       |                |       |             |       |               |       |                |       |       |       |
| Edward O. Irion             |       |       |       |       |       |       |       |       |       |                |       |             |       |               |       |                |       |       |       |
| Chief Financial Officer     |       | 2007       |       | $          | 192,544    |       | $          | 37,000     |       | $                   | —     |             | $          | 26,718             |       | $                   | —     |       | $          | — |   | $ | 13,802 |   | $ | 270,064 |   |

 

----

(1)          Includes the Company’s 401(k) matchingcontribution, excess life insurance, the taxable portion of reimbursablebusiness expenses and the taxable portion of other benefits.

(2)          The awards shown in this column include stockoptions granted under our 2003 Stock Option Plan. The amounts are based on thecompensation expense recognized for the award pursuant to Statement ofFinancial Standards No. 123R. See Note 13 to the consolidated FinancialStatements for a discussion of the relevent assumptions used in calculatinggrant date fair value pursuant to FAS 123R.

 

**Grants ofPlan-Based Awards in Fiscal Year 2007**

 

The following table sets forthcertain information with respect to stock options granted to purchase CommonStock during the fiscal year ended July 31, 2007.

 
| ** **      | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                         | ** ** | ** **                  | ** ** | ** **         | ** ** | **All other**         | ** ** | ** **                     | ** ** | ** **       | ** ** |
|-----------------|------------|------------|------------|------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|-----------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **      | ** ** | ** ** | ** ** | **Estimated Future Payouts**   | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                         | ** ** | **Stock Awards:**      | ** ** | **All other** | ** ** | **Exercise or**       | ** ** |
| ** **      | ** ** | ** ** | ** ** | **Under Non-Equity Incentive** | ** ** | **Estimated Future Payouts Under** | ** ** | **Number of Shares** | ** ** | **Option Awards:**            | ** ** | **Base Price of** | ** ** |
| ** **      | ** ** | **Grant**  | ** ** | **Plan Awards**                     | ** ** | **Equity Incentive Plan Awards**   | ** ** | **of Stock**              | ** ** | **Number of Securities** | ** ** | **Option Awards**      | ** ** |
| **Name**        | ** ** | **Date**   | ** ** | **Threshold($)**                         | ** ** | **Target($)**                                     | ** ** | **Maximum($)**                 | ** ** | **Threshold(#)**                   | ** ** | **Target(#)**               | ** ** | **Maximum(#)**     | ** ** | **or Units (#)** | ** ** | **Underlying Options(#)** | ** ** | **($ /sh)** | ** ** |
|            |       |       |       |                                     |       |                                              |       |                           |       |                               |       |                        |       |               |       |                       |       |                           |       |             |       |
| Timothy J. Dodd |       | 10/19/2006 |       | N/A                                      |       | N/A                                               |       | N/A                            |       | N/A                                |       | N/A                         |       | N/A                |       | N/A                        |       | 62,752                         |       | $                | 5.00       |   |
| Edward O. Irion |       | 10/19/2006 |       | N/A                                      |       | N/A                                               |       | N/A                            |       | N/A                                |       | N/A                         |       | N/A                |       | N/A                        |       | 39,362                         |       | $                | 5.00       |   |

 

----

(1)  The vesting of these options is subject tocertain qualifications, including but not limited to, the continued employmentof the optionee with the Company. Subject to the foregoing qualifications andcertain other qualifications, fifty percent of these options vest on October19, 2007, twenty-five percent vest on October 19, 2008, and twenty-five percentvest on October 19, 2009.

 

56

----

 

**Outstanding Equity Awards at July31, 2007**

 

The following table summarizes stock options held for Series C ConvertiblePreferred Stock at the end of fiscal year 2007.

 

 
| ** **      | ** ** | **Option  Awards** | ** ** | **Stock  Awards** | ** ** |
|-----------------|------------|--------------------|------------|-------------------|------------|
| ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** | **Equity  Incentive** | ** ** |
| ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | **Equity  Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive  Plan** | ** ** | **Plan  Awards:** | ** ** |
| ** **      | ** ** | **Number of**      | ** ** | **Number  of**    | ** ** | **Plan  Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Awards:** | ** ** | **Market  or** | ** ** |
| ** **      | ** ** | **Securities**     | ** ** | **Securities**    | ** ** | **Number  of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number  of** | ** ** | **Market  Value** | ** ** | **Number  of** | ** ** | **Payout  Value** | ** ** |
| ** **      | ** ** | **Underlying**     | ** ** | **Underlying**    | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares  or** | ** ** | **of  Shares or** | ** ** | **Unearned  Shares,** | ** ** | **of  Unearned** | ** ** |
| ** **      | ** ** | **Unexercised**    | ** ** | **Unexercised**   | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **Units or  Other** | ** ** | **Shares,  Units** | ** ** |
| ** **      | ** ** | **Options**        | ** ** | **Options**       | ** ** | **Unexercised** | ** ** | **Option** | ** ** | **Option** | ** ** | **Stock  That** | ** ** | **Stock  That** | ** ** | **Rights  That** | ** ** | **or Other  Rights** | ** ** |
| ** **      | ** ** | **(#)**            | ** ** | **(#)**           | ** ** | **Unearned  Options** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **That  Have Not** | ** ** |
| **Name**        | ** ** | **Exercisable(1)** | ** ** | **Unexercisable** | ** ** | **(#)** | ** ** | **Prices  ($)** | ** ** | **Date** | ** ** | **Vested  (#)** | ** ** | **Vested  (#)** | ** ** | **Vested  (#)** | ** ** | **Vested($)** | ** ** |
|            |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy J. Dodd |       | 506                |       | —            |       | — |   | $ | 100.00 |   | 12/1/2011 |   | — |   | — |   | — |   | $ | — |   |
|            |       | 785                |       | —            |       | — |   | 100.00 |   | 12/1/2011 |   | — |   | — |   | — |   | — |   |
|            |       | 686                |       | —            |       | — |   | 150.00 |   | 1/1/2013 |   | — |   | — |   | — |   | — |   |
|                 |            |                    |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)** **Mr. Dodd has beengranted options that are currently exercisable or exercisable within 60 days ofJuly 31, 2007, to purchase 1,977 shares of the Company’s Series C Preferred Stock.Each share of Series C Preferred Stock is convertible into 24 shares of CommonStock and 24 shares of Series D Delivery Preferred Stock of the Company.

 

The following table summarizes stock options held for Common Stock atthe end of fiscal year 2007.

 
| ** **      | ** ** | **Option  Awards** | ** ** | **Stock Awards**  | ** ** |
|-----------------|------------|--------------------|------------|-------------------|------------|
| ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** | **Equity  Incentive** | ** ** |
| ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | **Equity  Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive  Plan** | ** ** | **Plan  Awards:** | ** ** |
| ** **      | ** ** | **Number of**      | ** ** | **Number  of**    | ** ** | **Plan  Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Awards:** | ** ** | **Market  or** | ** ** |
| ** **      | ** ** | **Securities**     | ** ** | **Securities**    | ** ** | **Number  of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number  of** | ** ** | **Market  Value** | ** ** | **Number  of** | ** ** | **Payout  Value** | ** ** |
| ** **      | ** ** | **Underlying**     | ** ** | **Underlying**    | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares  or** | ** ** | **of  Shares or** | ** ** | **Unearned  Shares,** | ** ** | **of  Unearned** | ** ** |
| ** **      | ** ** | **Unexercised**    | ** ** | **Unexercised**   | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **Units or  Other** | ** ** | **Shares,  Units** | ** ** |
| ** **      | ** ** | **Options**        | ** ** | **Options**       | ** ** | **Unexercised** | ** ** | **Option** | ** ** | **Option** | ** ** | **Stock  That** | ** ** | **Stock  That** | ** ** | **Rights  That** | ** ** | **or Other  Rights** | ** ** |
| ** **      | ** ** | **(#)**            | ** ** | **(#)**           | ** ** | **Unearned  Options** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **That  Have Not** | ** ** |
| **Name**        | ** ** | **Exercisable**    | ** ** | **Unexercisable** | ** ** | **(#)** | ** ** | **Prices  ($)** | ** ** | **Date** | ** ** | **Vested  (#)** | ** ** | **Vested  (#)** | ** ** | **Vested  (#)** | ** ** | **Vested($)** | ** ** |
|            |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy J. Dodd |       | 190,800            |       | —            |       | — |   | $ | 6.25 |   | 12/1/2012 |   | — |   | — |   | — |   | $ | — |   |
|            |       | 13,511             |       | —            |       | — |   | 4.25 |   | 2/1/2014 |   | — |   | — |   | — |   | — |   |
|            |       | 17,696             |       | 17,696            |       | — |   | 4.00 |   | 12/22/2015 |   | — |   | — |   | — |   | — |   |
|            |       | —             |       | 62,752            |       | — |   | 5.00 |   | 10/19/2016 |   | — |   | — |   | — |   | — |   |
|            |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edward O. Irion |       | 7,723              |       | —            |       | — |   | $ | 4.25 |   | 2/1/2014 |   | — |   | — |   | — |   | $ | — |   |
|            |       | 5,408              |       | 5,408             |       | — |   | 4.00 |   | 12/22/2015 |   | — |   | — |   | — |   | — |   |
|            |       | —             |       | 39,362            |       | — |   | 5.00 |   | 10/19/2016 |   | — |   | — |   | — |   | — |   |

 

**Employment Agreements**

 

The Company does not have any employment agreements in place at thecurrent time.

 

**Stock Option Plans**

 

On January 31, 1997 the Cooperative’sCompensation Committee of the Board of Directors (the “Compensation Committee”)adopted the Dakota Growers Incentive Stock Option Plan (the “Plan”). The Planwas ratified by the Cooperative members at the annual meeting in January 1998.The Compensation Committee or the Board of Directors has the power to determinethe key management employees of the Company to receive options and the numberof shares to be optioned to each of the employees. Options granted under thePlan are for the purchase of Series C Convertible Preferred Stock at fairmarket value, which were convertible into Equity Stock as a cooperative, andare now convertible into Common Stock and Series D Delivery Preferred Stock asa corporation at the option of the employee, under the applicable conversionratio. The maximum number of preferred shares that may be issued pursuant tooptions granted under the Plan is 15,000, all of which have been

 

57

----

 

issued. Each share of Series C PreferredStock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company. The conversion ratio isproportionately adjusted if the Company increases the outstanding shares ofCommon Stock or Series D Delivery Preferred Stock, as applicable, withoutpayment by or to the Company or the Company’s shareholders for such additionalshares (e.g. stock split, stock dividend or other action). Options grantedunder the Plan must be exercised within ten years from the date such optionsare granted. In the event of the employee’s termination with the Company, allexercisable options may be exercised within 90 days of the termination date. Ifnot exercised, such options lapse.

 

The Company’s 2002 StockOption Plan (the “2002 Plan”) was adopted by the Board of Directors on November21, 2002. All options granted under the 2002 Plan are non-qualified stockoptions and are for the purchase of the Company’s Common Stock. The maximumnumber of shares of Common Stock that may be issued pursuant to options grantedunder the 2002 Plan is 294,456 shares, all of which have been issued. Stockoptions granted under the 2002 Plan expire 10 years from the date of grant.

 

On November 21, 2002 theBoard of Directors adopted the Dakota Growers Pasta Company, Inc. 2003 StockOption Plan (the “2003 Plan”), which was approved by the Company’s shareholdersat the Annual Meeting on January 11, 2003. The 2003 Plan covers 500,000 sharesof the Company’s Common Stock. Participation in this Plan shall be limited toofficers, directors, employees, vendors or consultants of the Company or anysubsidiary of the Company. Options granted under the 2003 Plan may be incentivestock options (as defined under Section 422 of the Code) or non-qualified stockoptions, as determined by the 2003 Plan administrator at the time of grant ofan option and subject to the applicable provisions of Section 422 of the Codeand the regulations promulgated there under. The stock options generally expire10 years from the date of grant. If the employment of the Optionee isterminated by any reason other than his or her death or disability, all exercisableoptions may be exercised within 90 days of the termination date. If notexercised, such options lapse.

 

58

----

 

**COMPENSATION OF DIRECTORS**

 

Members of the Board of Directors receivecompensation for serving on the Board of Directors, as determined from time totime by the Nomination Committee, but with full discussion and action by theBoard.

 

**Director Compensation Table**

 

The table below summarizes the compensation paid by the Company tonon-employee Directors during the fiscal year ended July 31, 2007.

 
| ** **               | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | **Non equity** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------|------------|---------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Fees earned**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive**       | ** ** | **All**          | ** ** | ** ** | ** ** |
| ** **               | ** ** | **or paid**          | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Plan**            | ** ** | **Other**        | ** ** | ** ** | ** ** |
| **Name**                 | ** ** | **in cash (1)** | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation**    | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
|                     |       |                      |       |       |       |       |       |                |       |             |       |       |       |
| John S. Dalrymple III    |       | $                         | 25,200     |       | $          | —     |       | $                   | —     |             | $          | —     |       | $ | — |   | $ | 25,200 |   |
| Allyn K. Hart            |       | 20,000                    |       | —     |       | —     |       | —              |       | 275              |       | 20,275     |       |
| Roger A. Kenner          |       | 19,750                    |       | —     |       | —     |       | —              |       | —           |       | 19,750     |       |
| James F. Link            |       | 21,500                    |       | —     |       | —     |       | —              |       | —           |       | 21,500     |       |
| Eugene J. Nicholas       |       | 19,750                    |       | —     |       | —     |       | —              |       | —           |       | 19,750     |       |
| John D. Rice, Jr.        |       | 19,750                    |       | —     |       | —     |       | —              |       | —           |       | 19,750     |       |
| Richard Thompson (3)     |       | 4,000                     |       | —     |       | —     |       | —              |       | 200,000          |       | 204,000    |       |
| Michael T. Tokarz (2)(3) |       | 18,250                    |       | —     |       | —     |       | —              |       | 275,000          |       | 293,250    |       |
| Jeffrey O. Topp          |       | 19,250                    |       | —     |       | —     |       | —              |       | —           |       | 19,250     |       |
| Curtis R. Trulson        |       | 25,500                    |       | —     |       | —     |       | —              |       | —           |       | 25,500     |       |
| Michael E. Warner        |       | 21,000                    |       | —     |       | —     |       | —              |       | —           |       | 21,000     |       |
|                          |            |                           |            |            |            |            |            |                     |            |                  |            |            |            |  |  |  |  |  |  |

 

----

(1)                                 This column represents annual director fees,committee chairman fees and meeting attendance fees earned in fiscal year 2007.Directors are reimbursed for out-of-pocket travel expenses which are notincluded on this table.

(2)                                 In July 2004, the Company and MVC FinancialServices, Inc. (“MVC Financial”) entered into a consulting agreement pursuantto which MVC Financial will provide certain business consulting services to theCompany for annual compensation of $75,000 per year and the reimbursement ofexpenses. MVC Financial Services, Inc. is an affiliate of MVC Capital, Inc., aholder of 5% or greater of the Company’s Common Stock. Michael T. Tokarz, a directorof the Company, is a stockholder and Chairman of MVC Capital, Inc. The term ofthe consulting agreement shall continue until the earlier of (a) the occurrenceof a Liquidity Event or (b) the termination by written notice from MVCFinancial to the Company. For purposes of this consulting agreement, a “LiquidityEvent” shall have occurred on such date that MVC Capital, Inc. no longerbeneficially owns at least fifty percent (50%) of the shares of the Company’sCommon Stock acquired by MVC Capital Inc. pursuant to the Stock PurchaseAgreement dated July 30, 2004 (as adjusted for stock splits, stock dividends,share contributions and the like) or the earlier sale of substantially all ofthe assets of the Company and the distribution of substantially all of the netproceeds thereof.

(3)                                 In May 2007, the Company paid MVC FinancialServices, Inc. and LaBella Holdings LLC (“LBH”) 2% in  closing fees relating to the issuance of1,000,000 shares of series F preferred stock at $10 per share and 1,000,000shares of common stock at $10 per share. Mr. Thompson is the Chief ExecutiveOfficer and is a member of the Board of Managers of LBH.

 

The Companyprovided its directors with compensation consisting of (i) a per diem paymentof $500 (except for the Chairman of the Board and Chairman of the AuditCommittee who each receive $600 per day) for any day on which a directorundertakes activities on the Company’s behalf, including board meetings andother functions of the Company, (ii) a monthly fee of $1,000 (except for theChairman of the Board and Chairman of the Audit Committee who each receive$1,200 per month), and (iii) reimbursement for out-of-pocket expenses incurredon behalf of the Company.

 

Effective October 2007, thecompensation of the Company’s directors changed to (i) a per diem payment of$1,000 (except for the Chairman of the Board and Chairman of the AuditCommittee who will each receive $1,200 per day) for any day on which a directorundertakes activities on the Company’s behalf, including board meetings andother functions of the Company, (ii) a monthly fee of $2,000 (except for theChairman of the Board

 

59

----

 

and Chairman of the Audit Committee who will each receive $2,400 permonth), and (iii) reimbursement for out-of-pocket expenses incurred on behalfof the Company.

 

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

 

The following table furnishes information asto the beneficial ownership of the Company’s Common Stock, Series C ConvertiblePreferred Stock, Series D Delivery Preferred Stock and Series F ConvertiblePreferred Stock by (a) each person known by us to beneficially own more than 5%of the issued and outstanding shares of the Company’s voting securities, (b)each of the Company’s executive officers, (c) each of the Company’s directorsand (d) all of the Company’s directors and executive officers as a group.

 

The address of each person listed below isc/o Dakota Growers Pasta Company, Inc., One Pasta Avenue, Carrington, NorthDakota 58421. Except as otherwise noted, each person listed below has soleinvestment discretion and voting power. In accordance with the Securities andExchange Commission’s rules, in computing the number of shares beneficiallyowned by a person and the percentage ownership of that person, securitiessubject to options held by that person that are currently exercisable orexercisable within 60 days of July 31, 2007 are treated as outstanding. Theseshares, however, are not treated as outstanding for the purpose of computingthe percentage ownership of any other person.

 
| ** **                                               | ** ** | **Beneficially Owned Securites** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **Number of**                         | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** |
| **Name of**                                         | ** ** | **Shares of**                         | ** ** | **Total Common** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** |
| **Beneficial Owner**                                | ** ** | **Common Stock**                      | ** ** | **Stock** | ** ** | **C Preferred** | ** ** | **C Preferred** | ** ** | **D Preferred** | ** ** | **D Preferred** | ** ** | **F Preferred** | ** ** | **F Preferred** | ** ** |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John S. Dalrymple  III (1)                               |       | 204,731                                    |       | 2.0 | % | — |   | — |   | 315,000 |   | 2.8 | % | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn K. Hart                                            |       | 12,223                                     |       | 0.1 |   | — |   | — |   | 15,000 |   | 0.1 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Roger A. Kenner  (2)                                     |       | 109,596                                    |       | 1.1 |   | — |   | — |   | 140,000 |   | 1.2 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James F. Link (3)                                        |       | 49,685                                     |       | 0.5 |   | — |   | — |   | 54,550 |   | 0.5 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eugene J.Nicholas  (4)                                   |       | 53,394                                     |       | 0.5 |   | — |   | — |   | 58,951 |   | 0.5 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John D. Rice, Jr.  (5)                                   |       | 17,427                                     |       | 0.2 |   | — |   | — |   | 20,200 |   | 0.2 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jeffrey O. Topp  (6)                                     |       | 325,541                                    |       | 3.2 |   | — |   | — |   | 271,420 |   | 2.4 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Curtis R. Trulson  (7)                                   |       | 43,403                                     |       | 0.4 |   | — |   | — |   | 61,750 |   | 0.5 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael E. Warner(8)                                     |       | 38,061                                     |       | 0.4 |   | — |   | — |   | 57,038 |   | 0.5 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy J. Dodd (9)                                      |       | 274,148                                    |       | 2.6 |   | 1,977 |   | 100 | % | 238,248 |   | 2.1 |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edward O. Irion (10)                                     |       | 13,131                                     |       | 0.1 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael Tokarz (11)                                      |       | 1,016,195                                  |       | 10.0 |   | — |   | — |   | — |   | — |   | 1,065,000 |   | 100 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MVC Capital, Inc.  (11)                                  |       | 1,016,195                                  |       | 10.0 |   | — |   | — |   | — |   | — |   | 1,065,000 |   | 100 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Richard Thompson  (12)                                   |       | 1,000,000                                  |       | 9.8 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| La Bella Holdings  LLC (12)                              |       | 1,000,000                                  |       | 9.8 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| All directors and  officers as a Group (13 persons) (13) |       | 3,157,535                                  |       | 30.1 |   | 1,977 |   | 100 |   | 1,232,157 |   | 10.9 |   | 1,065,000 |   | 100 |   |

 

----

(1)         Includes 23,415 sharesof Common Stock and 36,000 shares of Series D Delivery Preferred Stock held inthe name of Mr. Dalrymple’s spouse and 111,121 shares of Common Stock and171,000 shares of Series D Delivery Preferred Stock held in the name of theJohn S. Dalrymple III Trust, of which Mr. Dalrymple is a trustee.

(2)         Includes 54,798 sharesof Common Stock and 70,000 shares of Series D Delivery Preferred Stock held inthe name of Mr. Kenner’s spouse.

(3)         Includes 48,052 sharesof Common Stock and 53,050 shares of Series D Delivery Preferred Stock held inthe name of Link Sugar Beet Farms Limited Partnership, of which Link Farms LLPis the general partner. Mr. Link has been granted a proxy to vote all commonstock of the Company held by Link Sugar Beet Farms Limited Partnership. Mr.Link is also the sole holder of the class of limited partnership interests ofLink Sugar Beet Farms relating to the Company’s common stock and under thepartnership agreement, the approval of the reporting person is required withrespect to certain dispositions of the Company’s common stock by Link SugarBeet Farms Limited Partnership. Mr. Link disclaims beneficial ownership to theextent his interest in Link Sugar Beet Farms Limited Partnership does notconstitute a pecuniary interest.

(4)         Includes 26,548 sharesof Common Stock and 23,850 shares of Series D Delivery Preferred Stock held inthe name of Mr. Nicholas’ spouse.

(5)         Includes 15,298 sharesof Common Stock and 13,750 shares of Series D Delivery Preferred Stock held inthe name of John Rice Farm.

 

60

----

 

(6)          Includes 120,000 sharesof Common Stock and 129,000 shares of Series D Delivery Preferred Stock held inthe name of T-T Ranch and 11,482 shares of Common Stock and 16,125 shares ofSeries D Delivery Preferred Stock held in the name of Mr. Topp’s spouse andchildren.

(7)          Includes 2,203 shares ofCommon Stock and 6,750 shares of Series D Delivery Preferred Stock held in the nameof Trulson Brothers.

(8)          Mr. Warner has pledgedthe securities as collateral.

(9)          Mr. Dodd has beengranted options that are currently exercisable or exercisable within 60 days ofJuly 31, 2007, to purchase 1,977 shares of the Company’s Series C Preferred Stockand 222,007 shares of the Company’s Common Stock. Each share of Series CPreferred Stock is convertible into 24 shares of Common Stock and 24 shares ofSeries D Delivery Preferred Stock of the Company. The number of shares ofCommon Stock presented for Mr. Dodd includes 47,448 shares of Common Stockissuable upon exercise of the options to purchase Series C Preferred Stock ofthe Company and conversion of each such share of Series C Preferred Stock into24 shares of Common Stock in the Company. The number of shares of Series DDelivery Preferred Stock presented for Mr. Dodd includes 47,448 of Series DDelivery Preferred Stock issuable upon exercise of the options to purchaseSeries C Preferred Stock of the Company and conversion of each such share ofSeries C Preferred Stock into 24 shares of Common Stock in the Company, withone share of Series D Delivery Preferred Stock issuable for each share ofCommon Stock so issued upon conversion. The number of shares of Common Stockpresented for Mr. Dodd includes 222,007 shares of Common Stock issuable uponexercise of the options to purchase Common Stock.

(10)    Mr. Irion has beengranted options that are currently exercisable or exercisable within 60 days ofJuly 31, 2007. The number of shares presented for Mr. Irion relate to CommonStock shares issuable upon the exercise of the options to purchase CommonStock.

(11)   Includes 1,016,195 shares of Common Stock and1,065,000 Series F Convertible Preferred Stock held by MVC Capital, Inc. Mr.Tokarz is listed as a beneficial owner as he is a stockholder and Chairman of MVC Capital, Inc. Mr. Tokarz shares voting and dispositivecontrol over all shares held by MVC Capital, Inc. Mr. Tokarz disclaims anybeneficial ownership of the Company’s securities for purposes of Section 16(a)under the Securities Exchange Act of 1934, as amended, or otherwise, except tothe extent of Mr. Tokarz’s pecuniary interests therein. (The holder of Series FConvertible Preferred Stock has the right, exercisable at any time uponsixty-five (65) days’ written notice to the Company, to convert any number ofthe holder’s shares of Series F Convertible Preferred Stock into an equalnumber of shares of the Company’s Common Stock.)

(12)   Includes 1,000,000 shares of Common Stock heldby La Bella Holdings LLC (“LBH”) Mr. Thompson is listed as a beneficial owneras he is the Chief Executive Officer and is a member of the board of managersof LBH. Mr. Thompson shares voting and dispositive control over all shares heldby La Bella Holdings LLC. Mr. Thompson disclaims any beneficial ownership ofthe Company’s securities for purposes of Section 16(a) under the SecuritiesExchange Act of 1934, as amended, or otherwise, except to the extent of Mr.Thompson’s pecuniary interests therein.

(13)   Includes 235,138shares of Common Stock and 1,977 shares of Series C Preferred Stock issuableupon exercise of options exercisable within 60 days of July 31, 2007, andincludes an additional 47,448 shares of Common Stock and 47,448 shares ofSeries D Delivery Preferred Stock issuable upon conversion of the Series CPreferred Stock underlying such options.

 

61

----

 

**Equity Compensation Plan Information**

 

See “Item 11. ExecutiveCompensation” for a discussion of the material features of the Company’s StockOption Plans. The following table provides information regarding the Company’sequity compensation plans as of July 31, 2007.

 

 
| ** **                                                  | ** ** | ** **                                                        | ** ** | ** **                      | ** ** | **Number of Securities**

**Remaining Available** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Number of Securities**                                | ** ** | **Weighted-Average**            | ** ** | ** **                                                       |
| ** **                                                  | ** ** | **to be Issued**                                        | ** ** | **Exercise Price of** | ** ** | **for Future Issuance**                                | ** ** |
| ** **                                                  | ** ** | **Upon Exercise of**                                    | ** ** | **Outstanding**                 | ** ** | **Under Equity**                                            | ** ** |
| **Plan Category**                                      | ** ** | **Outstanding Options**                                      | ** ** | **Options**                     | ** ** | **Compensation Plans**                                      | ** ** |
|                                                        |       |                                                              |       |                            |       |                                                             |       |
|                                                        |       | **Options to purchase Series C Convertible  Preferred Stock (1)** |       |
| Equity compensation plans approved by security  holders     |       | 1,977                                                             |       | $                               | 117.35     |                                                             | —     |   |
|                                                        |       |                                                              |       |                            |       |                                                             |       |
|                                                        |       | **Options to purchase Common Stock**                              |       |
| Equity compensation plans approved by security  holders     |       | 462,213                                                           |       | $                               | 4.63       |                                                             | 32,237     |   |
|                                                        |       |                                                              |       |                            |       |                                                             |       |
| Equity compensation plans not approved by  security holders |       | 190,800                                                           |       | $                               | 6.25       |                                                             | —     |   |

 

----

(1)          Each share of Series C Convertible PreferredStock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company.

 

62

----

 

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

** **

**IndependentDirectors**

 

Although noneof the company’s securities are listed on the stock exchange or system ofdealer quotation, the Company’s Board of Directors follow the rules of theSecurities and Exchange Commission and the Nasdaq Stock Market in determiningindependence for the Board of Directors and the Committees. Under the Nasdaqlisting standards, at least a majority of the company’s directors must meet thetest of “independence” as defined by Nasdaq. The Nasdaq standards provide that,to qualify as an “independent” director, in addition to satisfying certainbright-line criteria, the Board of Directors must affirmatively determine thata director has no relationship which would interfere with the exercise ofindependent judgment in carrying out the responsibilities of a director. TheBoard of Directors has determined that each current director, other than Mr.Tokarz, is “independent” as defined by the listing standards of the Nasdaq.

 

The Companyhas a Conflict of Interest policy which defines areas where the directorsshould avoid conflicts of interest or any appearance of a conflict of interest,so that the affairs of the Company will be carried out in an ethical manner.Pursuant to the policy, all directors are to fully disclose to the Company anyproposed transaction that may give rise to a conflict of interest before it isconsummated. The Board of Directors shall determine whether a conflict ofinterest exists and whether a proposed transaction may be approved.

 

See Item 10 –Directors, Executive Officers and Corporate Governance for the discussion ofthe Board of Directors independence on each of the committees.

 

63

----

 

 

**ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The following table representsaggregate fees billed (in thousands) to the Company for fiscal years ended July31, 2007 and 2006 by Eide Bailly LLP, the Company’s principal accounting firm.

 
| ** **             | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Audit Fees             |       | $                               | 64         |   | $ | 64 |   |
| Audit-Related Fees (a) |       | 10                              |       | 9 |   |
| Tax Fees (b)           |       | 16                              |       | 15 |   |
| All Other Fees         |       | —                          |       | — |   |
|                   |       |                            |       |   |   |
| Total Fees (c)         |       | $                               | 90         |   | $ | 88 |   |

 

----

(a)                                  Primarilybenefit plan audit services.

 

(b)                                 Primarilytax advisory and preparation services.

 

(c)                                  TheAudit Committee has approved all fees.

 

**Auditor Services Pre-approval Policy**

 

The Audit Committee has a formalpolicy concerning pre-approval of all services to be provided by Eide BaillyLLP, the Company’s independent auditor, including audit, audit-related, tax andother services. The Chair of the Committee has the authority to pre-approvepermitted services that require action between regular Committee meetings,provided a report of these services is given to the full Committee at the nextregular meeting. The Committee approved all services provided by Eide BaillyLLP during fiscal year 2007.

 

64

----

 

**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENTSCHEDULES.**

 

(a)          The following are filedas part of this report:

 

**1.****              Financial Statements**

 

Report of Independent Registered PublicAccounting Firm

 

Consolidated Balance Sheets as of July 31,2007 and 2006

 

Consolidated Statements of Operations for theyears ended July 31, 2007, 2006 and 2005

 

Consolidated Statements of Changes inStockholders’ Equity for the years ended July 31, 2007, 2006 and 2005

 

Consolidated Statements of Cash Flows for theyears ended July 31, 2007, 2006 and 2005

 

Notes to Consolidated Financial Statements

 

**2.****              Financial StatementSchedules**

 

All schedules are omitted as the requiredinformation is inapplicable or the information is presented in the consolidatedfinancial statements or related notes.

 

**3.**              **Exhibits**

 

2.1                                SecondAmended and Restated Plan of Merger between Dakota Growers Pasta Company andDakota Growers Pasta Restructuring Cooperative. (Incorporated by reference to Exhibit 2.1from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

2.2                                SecondAmended and Restated Merger Agreement between Dakota Growers PastaRestructuring Cooperative and Dakota Growers Corporation. (Incorporated byreference to Exhibit 2.2 from the Company’s Pre-Effective Amendment No. 2to Form S-4 Registration Statement, File No. 333-81946, dated April 19,2002).

 

2.3                                SecondAmended and Restated Merger Agreement between Dakota Growers Corporation andthe Company, formerly Dakota Growers Restructuring Company, Inc.(Incorporated by reference to Exhibit 2.3 from the Company’s Pre-EffectiveAmendment No. 2 to Form S-4 Registration Statement, File No. 333-81946,dated April 19, 2002).

 

2.4                                SecondAmended and Restated Transaction Agreement between Dakota Growers PastaCompany, Dakota Growers Pasta Restructuring Cooperative, Dakota GrowersCorporation and the Company, formerly Dakota Growers Restructuring Company, Inc.(Incorporated by reference to Exhibit 2.4 from the Company’s Pre-EffectiveAmendment No. 2 to Form S-4 Registration Statement, File No. 333-81946,dated April 19, 2002).

 

3.1                                SecondAmended and Restated Articles of Incorporation of the Company, formerly DakotaGrowers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.1from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

64

----

 

3.2                                SecondAmended and Restated Bylaws of the Company, formerly Dakota GrowersRestructuring Company, Inc. (Incorporated by reference to Exhibit 3.3from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

3.3                                Certificateof Designation of Series E Junior Participating Preferred Stock of theCompany, formerly Dakota Growers Restructuring Company, Inc. (Incorporatedby reference to Exhibit 3.2 from the Company’s Pre-Effective Amendment No. 2to Form S-4 Registration Statement, File No. 333-81946, dated April 19,2002).

 

3.4                                Certificateof Designation of Series F Convertible Preferred Stock of the Company. (Incorporatedby reference to Exhibit 3.1 from the Company’s Report on Form 8-K,File No. 000-50111, filed February 15, 2007).

 

4.1                                NotePurchase Agreement dated July 15, 1998. (Incorporated by reference to Exhibit 4.1from Dakota Growers Pasta Company’s Amendment No. 1 to Form S-1Registration Statement on Form S-1/A, File No. 333-65071, declaredeffective October 21, 1998).

 

4.2                                Waiverand First Amendment to Note Purchase Agreements dated November 28, 2000.(Incorporated by reference to Exhibit 4.1 from Dakota Growers PastaCompany’s Quarterly Report on Form 10-Q, File No. 33-99834, for thequarter ended October 31, 2000).

 

4.3                                Waiverand Second Amendment to Note Purchase Agreement and Notes dated June 1,2001. (Incorporated by reference to Exhibit 4.3 from Dakota Growers PastaCompany’s Annual Report on Form 10-K for the fiscal year ended July 31,2001, File No. 33-99834).

 

10.1                          IncentiveStock Option Plan. (Incorporated by reference to Exhibit 10.1 from DakotaGrowers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834,for the quarter ended April 30, 1998).

 

10.2                          MasterLease Agreement dated March 6, 2002 and related Schedule A dated March 29,2002 between Dakota Growers Pasta Company and Farm Credit Leasing ServicesCorporation. (Incorporated by reference to Exhibit 10.2 from the Company’sPre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

10.3                          Amendedand Restated Share Rights Agreement, dated as of April 19, 2002, by andamong the Company, formerly Dakota Growers Restructuring Company, Inc.,and Wells Fargo Bank Minnesota, National Association, as Rights Agent.(Incorporated by reference to Exhibit 10.1 from the Company’sPre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

10.4                          DakotaGrowers Pasta Company, Inc. 2002 Stock Option Plan. (Incorporated byreference to Exhibit 10.16 from the Company’s Annual Report on Form 10-K,File No. 000-50111, for the year ended July 31, 2003).

 

10.5                          DakotaGrowers Pasta Company, Inc. Amended and Restated 2003 Stock Option Plan.(Incorporated by reference to Exhibit 10.6 from the Company’s QuarterlyReport on Form 10-Q, File No. 000-50111, for the quarter ended January 31,2004).

 

10.6                          ManufacturingAgreement dated December 26, 2003 between the Company and DNA DreamfieldsCompany, LLC. (Incorporated by reference to Exhibit 10.2 from the Company’sQuarterly Report on Form 10-Q, File No. 000-50111, for the quarterended January 31, 2004). Confidential treatment has been granted withrespect to portions of the Exhibit.

 

10.7                          ServicesAgreement dated December 26, 2003 between the Company and DNA DreamfieldsCompany, LLC. (Incorporated by reference to Exhibit 10.3 from the Company’sQuarterly Report on 

 

65

----

 

Form 10-Q, File No. 000-50111, forthe quarter ended January 31, 2004). Confidential treatment has beengranted with respect to portions of the Exhibit.

 

10.8                          TrademarkLicense Agreement dated December 26, 2003 between the Company and DNADreamfields Company, LLC. (Incorporated by reference to Exhibit 10.4 fromthe Company’s Quarterly Report on Form 10-Q, File No. 000-50111, forthe quarter ended January 31, 2004).

 

10.9                          TechnologySublicense Agreement dated December 26, 2003 between the Company and DNADreamfields Company, LLC. (Incorporated by reference to Exhibit 10.5 fromthe Company’s Quarterly Report on Form 10-Q, File No. 000-50111, forthe quarter ended January 31, 2004).

 

10.10                    Stock PurchaseAgreement dated July 30, 2004 between the Company and MVC Capital, Inc.(Incorporated by reference to Exhibit 99.2 from the Company’s Report on Form 8-K,File No. 000-50111, filed August 6, 2004).

 

10.11                    RegistrationRights Agreement dated July 30, 2004 between the Company and MVC Capital, Inc.(Incorporated by reference to Exhibit 99.3 from the Company’s Report on Form 8-K,File No. 000-50111, filed August 6, 2004).

 

10.12                    ConsultingAgreement dated July 30, 2004 between the Company and MVC FinancialServices, Inc. (Incorporated by reference to Exhibit 99.4 from theCompany’s Report on Form 8-K, File No. 000-50111, filed August 6,2004).

 

10.13                    Membership UnitPurchase Agreement effective May 1, 2005 between and among Dakota GrowersPasta Company, Inc., B-New, LLC, TechCom Group, LLC and Buhler, Inc. (Incorporatedby reference to Exhibit 10.1 from the Company’s Report on Form 8-K,File No. 000-50111, filed July 1, 2005).

 

10.14                    Amended andRestated DNA Dreamfields Company, LLC Operating Agreement effective May 1,2005 between the Company, B-New, LLC, TechCom Group, LLC and Buhler, Inc. (Incorporatedby reference to Exhibit 10.2 from the Company’s Report on Form 8-K,File No. 000-50111, filed July 1, 2005).

 

10.15                    2005 Line ofCredit Loan Agreement effective May 31, 2005 by and between the Company (“Lender”)and DNA Dreamfields Company, LLC (“Borrower”). (Incorporated by reference to Exhibit 10.3from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1,2005).

 

10.16                    PromissoryNote effective May 31, 2005 executed by DNA Dreamfields Company, LLC. (Incorporatedby reference to Exhibit 10.4 from the Company’s Report on Form 8-K,File No. 000-50111, filed July 1, 2005).

 

10.17                    LLC UnitPledge Agreement effective May 31, 2005 between and among B-New, LLC,TechCom Group, LLC, Buhler, Inc. (collectively the “Pledgors”) and theCompany (“Lender”). (Incorporated by reference to Exhibit 10.5 from theCompany’s Report on Form 8-K, File No. 000-50111, filed July 1,2005).

 

10.18                    Master LoanAgreement dated May 23, 2005 between the Company and CoBank, ACB. (Incorporatedby reference to Exhibit 10.1 from the Company’s Report on Form 8-K,File No. 000-50111, filed July 7, 2005).

 

10.19                    StatusedRevolving Credit Supplement dated May 23, 2007 between the Company andCoBank, ACB. (Incorporated by reference to Exhibit 10.1 from the Company’sReport on Form 8-K, File No. 000-50111, filed May 30, 2007).

 

66

----

 

10.20                    Non-RevolvingCredit Supplement dated May 23, 2007 between the Company and CoBank, ACB. (Incorporatedby reference to Exhibit 10.2 from the Company’s Report on Form 8-K,File No. 000-50111, filed May 30, 2007).

 

10.21                    MultipleAdvance Term Loan Supplement dated February 14, 2007 between the Company andCoBank, ACB. (Incorporated by reference to Exhibit 10.3 from the Company’sReport on Form 8-K, File No. 000-50111, filed February 15,2007).

 

10.22                    ContinuingGuarantee Agreement dated May 23, 2005 between Primo Piatto, Inc., awholly-owned subsidiary of the Company, and CoBank, ACB. (Incorporated byreference to Exhibit 10.5 from the Company’s Report on Form 8-K, FileNo. 000-50111, filed July 7, 2005).

 

10.23                    SecurityAgreement dated May 23, 2005 between Primo Piatto, Inc. and CoBank,ACB. (Incorporated by reference to Exhibit 10.6 from the Company’s Reporton Form 8-K, File No. 000-50111, filed July 7, 2005).

 

10.24                    MultipleAdvance Term Loan Supplement dated February 14, 2007 between the Company andCoBank, ACB. (Incorporated by reference to Exhibit 10.2 from the Company’sReport on Form 8-K, File No. 000-50111, filed February 15,2007). 

 

10.25                    Stock PurchaseAgreement dated February 9, 2007 between the Company and MVC Capital, Inc.and  La Bella Holdings, LLC.(Incorporated by reference to Exhibit 10.1 from the Company’s Report on  Form 8-K, File No. 000-50111, filedFebruary 15, 2007). 

 

10.26                    Amendment tothe Master Loan Agreement dated February 14, 2007 between CoBank, ACB. andthe  Company. (Incorporated by referenceto Exhibit 10.4 from the Company’s Report on  Form 8-K, File No. 000-50111, filedFebruary 15, 2007).

 

10.27                    Amendment tothe Master Loan Agreement dated April 25, 2007 between CoBank, ACB. andthe  Company. (Incorporated by referenceto Exhibit 10.2 from the Company’s Report on  Form 8-K, File No. 000-50111, filedMay 1, 2007). 

 

10.28                    Extended Term Schedule Adated March 30, 2007 of the Master Lease Agreement dated March 6, 2002between  the Company and Farm CreditLeasing Services Corporation. (Incorporated by reference to Exhibit 10.1 from the Company’s Report on form 8-K,File No. 000-50111, filed April  4, 2007).

 

10.29                   Unit PurchaseAgreement dated September 21, 2007 between the Company, TechCom Group, LLC,Buhler Inc. and B-New, LLC. (Incorporated by reference to Exhibit 10.1from the Company’s Report on form 8-K, File No. 000-50111, filed September27, 2007).

 

21                                   Subsidiaryof the registrant.

 
| **Name of  Subsidiary** | ** ** | **Jurisdiction of Incorporation** |
|-------------------------|------------|-----------------------------------|
|                    |       |                              |
| Primo Piatto, Inc. |       | Minnesota                         |

 

23                                   Consentof Independent Registered Public Accounting Firm; Eide Bailly LLP. 

 

31.1                          Certificationof Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14(a) or15d-14(a). 

 

31.2                          Certificationof Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14(a) or15d-14(a). 

 

32.1                          Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, 18 U.S.C. Section 1350. 

 

67

----

 

32.2                          Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, 18 U.S.C. Section 1350.

 

68

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | DAKOTA GROWERS PASTA COMPANY, INC. |
|--------|-----------------------------------------|
|   |                                    |   |
|   |                                    |   |
|   | By:                                     | /s/ Timothy  J. Dodd |
|   |                                    |   |
|   |                                    | Timothy J.  Dodd, |
|   |                                    | PRESIDENT  AND CHIEF EXECUTIVE OFFICER, |
|   |                                    | AND  PRINCIPAL EXECUTIVE OFFICER |
|   |                                    |   |
|   | Dated: October 29, 2007            |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**               | ** ** | **Title**                                     | ** ** | **Date**               |
|-----------------------------|------------|-----------------------------------------------|------------|------------------------|
|                        |       |                                          |       |                   |
|                        |       |                                          |       |                   |
| /s/ Timothy  J. Dodd        |       | President  and Chief Executive Officer        |       |                   |
| Timothy J.  Dodd            |       | (Principal  Executive Officer)                |       | October 29,  2007 |
|                        |       |                                          |       |                   |
|                        |       |                                          |       |                   |
| /s/ Edward  O. Irion        |       | Chief  Financial Officer                      |       |                   |
| Edward O.  Irion            |       | (Principal  Financial and Accounting Officer) |       | October 29,  2007 |
|                        |       |                                          |       |                   |
|                        |       |                                          |       |                   |
| /s/ John S.  Dalrymple III  |       |                                          |       |                   |
| John S.  Dalrymple III      |       | Director                                      |       | October 29,  2007 |
|                        |       |                                          |       |                   |
|                        |       |                                          |       |                   |
| /s/ John D.  Rice, Jr. |       |                                          |       |                   |
| John D. Rice, Jr.      |       | Director                                      |       | October 29,  2007 |

 

69

----

 
| **Signature**           | ** ** | **Title** | ** ** | **Date**               |
|-------------------------|------------|-----------|------------|------------------------|
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Curtis  R. Trulson  |       |      |       |                   |
| Curtis R.  Trulson      |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Allyn K.  Hart      |       |      |       |                   |
| Allyn K.  Hart          |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Roger A.  Kenner    |       |      |       |                   |
| Roger A.  Kenner        |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ James F.  Link      |       |      |       |                   |
| James F.  Link          |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Eugene  J. Nicholas |       |      |       |                   |
| Eugene J.  Nicholas     |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Richard  Thompson   |       |      |       |                   |
| Richard  Thompson       |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Michael  T. Tokarz  |       |      |       |                   |
| Michael T.  Tokarz      |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Jeffrey  O. Topp    |       |      |       |                   |
| Jeffrey O.  Topp        |       | Director  |       | October 29,  2007 |
|                    |       |      |       |                   |
|                    |       |      |       |                   |
| /s/ Michael  E. Warner  |       |      |       |                   |
| Michael E.  Warner      |       | Director  |       | October 29,  2007 |

 

70

----