##### Table of Contents



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

FORM 10-Q

|    |                                                                                         | 
|--- | --------------------------------------------------------------------------------------- | 
|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 | 

For the quarterly period ended May 31, 2001

OR

|      |                                                                                          | 
|----- | ---------------------------------------------------------------------------------------- | 
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 | 

For the transition period from ___________________ to _______________________

Commission File No. 0-11488

Penford Corporation

---

(Exact name of registrant as specified in its charter)


|                                    |  |                                                
|----------------------------------- |  | -----------------------------------------------
|Washington
(State of Incorporation) |  | 91-1221360
(I.R.S. Employer
Identification No.)

|                                                |  |           
|----------------------------------------------- |  | ----------
|777-108th Avenue N.E., Suite 2390, Bellevue, WA |  | 98004-5193
|                                               
|(Address of principal executive offices)        |  | (Zip Code)

Registrants telephone number, including area code: (425) 462-6000

Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.



| | Yes   [X]      No   [   ]
| | -------------------------

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of July 6, 2001.

|                              |  |             |           | 
|----------------------------- |  | ----------- | --------- | 
|Class                         |  | Outstanding
|                              |  |            
|Common stock, par value $1.00 |  |             | 7,499,769 | 



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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1 Financial Statements                                                                  
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW      
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|PART II  OTHER INFORMATION   
|                               | Item 1 Legal Proceedings                                                                     
|                               | Item 2 Changes in Securities                                                                 
|                               | Item 3 Defaults Upon Senior Securities                                                       
|                               | Item 4 Submission of Matters to a Vote of Security Holders                                   
|                               | Item 5 Other Information                                                                     
|                               | Item 6 Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                    
|EXHIBIT 10.17                 
|EXHIBIT 10.18                 
|EXHIBIT 10.19                 



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##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES

INDEX

|                                                                                               |                                                           |  |       |          |  | 
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  | ----- | -------- |  | 
|                                                                                               |                                                           |  |       | Page No.
|                                                                                               |                                                           |  |       |         
|PART I - FINANCIAL INFORMATION                                                                
|                                                                                              
|                                                                                              
|                                                                                              
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|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 1 - Financial Statements                                                                 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Condensed Consolidated Balance Sheets                                                         
|                                                                                               | May 31, 2001 and August 31, 2000                          |  |       | 3        | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Condensed Consolidated Statements of Operations                                               
|                                                                                               | Three and Nine Months Ended May 31, 2001
and May 31, 2000 |  |       | 4        | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Condensed Consolidated Statements of Cash Flow                                                
|                                                                                               | Nine Months Ended May 31, 2001 and
May 31, 2000           |  |       | 5        | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Notes to Condensed Consolidated Financial Statements                                           |                                                           |  | 6-11  |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                           |  | 12-15 |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 3 - Quantitative and Qualitative Disclosures
About Market Risk                            |                                                           |  | 16    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|PART II - OTHER INFORMATION                                                                   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 1 - Legal Proceedings                                                                     |                                                           |  | 17    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 2 - Changes in Securities                                                                 |                                                           |  | 17    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 3 - Defaults Upon Senior Securities                                                       |                                                           |  | 17    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 4 - Submission of Matters to a Vote of Security Holders                                   |                                                           |  | 17    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
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|                                                                                              
|Item 5 - Other Information                                                                     |                                                           |  | 17    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
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|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                           |  | 17-19 |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|SIGNATURES                                                                                     |                                                           |  | 20    |         



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1           Financial Statements




PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

|                                        |                                               |                                            |         |              |         |                 |         |         |         | 
|--------------------------------------- | --------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | --------------- | ------- | ------- | ------- | 
|                                        |                                               |                                            |         | May 31, 2001 |         | August 31, 2000
|                                        |                                               |                                            |         |              |         |                
|ASSETS                                 
|                                       
|                                       
|                                       
|                                       
|Current assets:                        
|                                       
|                                       
|                                       
|                                       
|                                        | Trade accounts receivable                     |                                            | $       | 28,960       |         |                 | $       | 17,530  |        
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories:                                 
|                                       
|                                       
|                                       
|                                       
|                                        |                                               | Raw materials and other                    |         |              | 10,078  |                 |         |         | 3,016   | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                               | Work in progress                           |         |              | 641     |                 |         |         | 502     | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                               | Finished goods                             |         |              | 13,000  |                 |         |         | 6,701   | 
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               |                                            | 23,719  |              |         |                 | 10,219  |        
|                                       
|                                       
|                                       
|                                       
|                                        | Prepaid expenses and other                    |                                            |         | 6,625        |         |                 |         | 5,580   |        
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               | Total current assets                       |         |              | 59,304  |                 |         |         | 33,329  | 
|                                       
|                                       
|                                       
|                                       
|Net property, plant and equipment       |                                               |                                            | 141,957 |              |         |                 | 114,848 |        
|                                       
|                                       
|                                       
|                                       
|Deferred income taxes                   |                                               |                                            | 11,441  |              |         |                 | 11,466  |        
|                                       
|                                       
|                                       
|                                       
|Restricted cash value of life insurance |                                               |                                            | 11,859  |              |         |                 | 12,330  |        
|                                       
|                                       
|                                       
|                                       
|Other assets                            |                                               |                                            | 5,635   |              |         |                 | 3,650   |        
|                                       
|                                       
|                                       
|                                       
|Goodwill, net                           |                                               |                                            | 15,025  |              |         |                 |        |        
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               | Total assets                               |         | $            | 245,221 |                 |         | $       | 175,623 | 
|                                        |                                               |                                            |         |              |         |                 |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY   
|                                       
|                                       
|                                       
|                                       
|Current liabilities:                   
|                                       
|                                       
|                                       
|                                       
|                                        | Bank overdraft, net                           |                                            | $       | 844          |         |                 | $       | 313     |        
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts payable                              |                                            |         | 14,005       |         |                 |         | 10,068  |        
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued liabilities                           |                                            |         | 5,877        |         |                 |         | 8,305   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Current portion of long-term debt             |                                            |         | 15,492       |         |                 |         | 2,857   |        
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               | Total current liabilities                  |         |              | 36,218  |                 |         |         | 21,543  | 
|                                       
|                                       
|                                       
|                                       
|Long-term debt                          |                                               |                                            | 102,783 |              |         |                 | 47,824  |        
|                                       
|                                       
|                                       
|                                       
|Other postretirement benefits           |                                               |                                            | 11,047  |              |         |                 | 10,805  |        
|                                       
|                                       
|                                       
|                                       
|Deferred income taxes                   |                                               |                                            | 22,377  |              |         |                 | 21,048  |        
|                                       
|                                       
|                                       
|                                       
|Other liabilities                       |                                               |                                            | 7,891   |              |         |                 | 6,539   |        
|                                       
|                                       
|                                       
|                                       
|Shareholders equity:                  
|                                       
|                                       
|                                       
|                                       
|                                        | Common stock                                  |                                            |         | 9,480        |         |                 |         | 9,392   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Additional paid-in capital                    |                                            |         | 24,018       |         |                 |         | 23,129  |        
|                                       
|                                       
|                                       
|                                       
|                                        | Retained earnings                             |                                            |         | 65,562       |         |                 |         | 68,100  |        
|                                       
|                                       
|                                       
|                                       
|                                        | Treasury stock                                |                                            |         | (32,757      | )       |                 |         | (32,757 | )      
|                                       
|                                       
|                                       
|                                       
|                                        | Accumulated other comprehensive income (loss) |                                            |         | (1,398       | )       |                 |         |        |        
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               | Total shareholders equity                 |         |              | 64,905  |                 |         |         | 67,864  | 
|                                        |                                               |                                            |         |              |         |                 |         |        
|                                        |                                               | Total liabilities and shareholders equity |         | $            | 245,221 |                 |         | $       | 175,623 | 
|                                        |                                               |                                            |         |              |         |                 |         |        

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents






PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)

|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |        |      | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------- | ------- | --------- | ------------------------- | ----- | ------------------------ | --------- | ------ | ---- | ---- | --------- | ------ | ----- | - | --------- | ------ | ---- | 
|                                                                                           |                                                   |         |           | Three Months Ended May 31 |       | Nine Months Ended May 31
|                                                                                           |                                                   |         |           |                           |       |                         
|                                                                                           |                                                   |         |           | 2001                      |       | 2000                     |           | 2001   |      | 2000
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |     
|Sales                                                                                      |                                                   | $       | 53,485    |                           |       | $                        | 39,744    |        |      | $    | 151,046   |        |       | $ | 118,629   |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Cost of sales                                                                              |                                                   |         | 43,961    |                           |       |                          | 28,633    |        |      |      | 121,551   |        |       |   | 85,248    |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                           | Gross margin                                      |         |           | 9,524                     |       |                          |           | 11,111 |      |      |           | 29,495 |       |   |           | 33,381 |     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Operating expenses                                                                         |                                                   |         | 6,292     |                           |       |                          | 4,243     |        |      |      | 17,116    |        |       |   | 13,313    |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Research and development                                                                   |                                                   |         | 1,539     |                           |       |                          | 1,365     |        |      |      | 4,883     |        |       |   | 4,031     |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                           | Income from operations                            |         |           | 1,693                     |       |                          |           | 5,503  |      |      |           | 7,496  |       |   |           | 16,037 |     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Interest expense                                                                           |                                                   |         | (2,522    | )                         |       |                          | (1,051    | )      |      |      | (7,852    | )      |       |   | (3,532    | )     
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Income (loss) before taxes and
extraordinary item |         |           | (829                      | )     |                          |           | 4,452  |      |      |           | (356   | )     |   |           | 12,505 |     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Income tax expense (benefit)                                                               |                                                   |         | (221      | )                         |       |                          | 1,558     |        |      |      | (51       | )      |       |   | 4,377     |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Income (loss) before extraordinary item           |         |           | (608                      | )     |                          |           | 2,894  |      |      |           | (305   | )     |   |           | 8,128  |     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Extraordinary loss on early extinguishment
of debt, net of applicable income
taxes of $478 |                                                   |         |          |                           |       |                          |          |        |      |      | 888       |        |       |   |          |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Net income (loss)                                                                          |                                                   | $       | (608      | )                         |       | $                        | 2,894     |        |      | $    | (1,193    | )      |       | $ | 8,128     |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|Weighted average common shares and
equivalents outstanding, assuming
dilution              |                                                   |         | 7,487,429 |                           |       |                          | 7,795,053 |        |      |      | 7,460,030 |        |       |   | 7,758,400 |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Earnings per common share:                                                                
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Net income (loss)                                
|                                                                                           |                                                   | Basic   |           | $                         | (0.08 | )                        |           | $      | 0.39 |      |           | $      | (0.16 | ) |           | $      | 1.10 | 
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|                                                                                           |                                                   | Diluted |           | $                         | (0.08 | )                        |           | $      | 0.37 |      |           | $      | (0.16 | ) |           | $      | 1.05 | 
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       
|Dividends declared per common share                                                        |                                                   | $       | 0.06      |                           |       | $                        | 0.06      |        |      | $    | 0.18      |        |       | $ | 0.16      |       
|                                                                                           |                                                   |         |           |                           |       |                          |           |        |      |      |           |        |       |   |           |       

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents






PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)

|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |         |        |        |  
|--------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------ | ------- | ------------------------ | ------ | ---- | ------- | ------ | ------ | -
|                      |                                                                         |                                                                                                       |                                      |         | Nine Months Ended May 31
|                      |                                                                         |                                                                                                       |                                      |         |                         
|                      |                                                                         |                                                                                                       |                                      |         | 2001                     |        | 2000
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |     
|Operating Activities:
|                     
|                     
|                     
|                     
|                      | Net income (loss)                                                       |                                                                                                       | $                                    | (1,193  | )                        |        | $    | 8,128   |       
|                     
|                     
|                     
|                     
|                      | Adjustments to reconcile net income (loss)
to net cash from operations:
|                     
|                     
|                     
|                     
|                      |                                                                         | Loss on early extinguishment of debt                                                                  |                                      |         | 888                      |        |      |         |       |       
|                     
|                     
|                     
|                     
|                      |                                                                         | Depreciation and amortization                                                                         |                                      |         | 13,481                   |        |      |         | 10,168 |       
|                     
|                     
|                     
|                     
|                      |                                                                         | Deferred income taxes                                                                                 |                                      |         | 213                      |        |      |         | (444   | )     
|                     
|                     
|                     
|                     
|                      |                                                                         | Change in operating assets and liabilities
excluding impact of Penford Australia Limited
acquisition:
|                     
|                     
|                     
|                     
|                      |                                                                         |                                                                                                       | Trade receivables                    |         |                          | (2,300 | )    |         |        | 660    |  
|                     
|                     
|                     
|                     
|                      |                                                                         |                                                                                                       | Inventories                          |         |                          | (1,307 | )    |         |        | (1,528 | )
|                     
|                     
|                     
|                     
|                      |                                                                         |                                                                                                       | Accounts payable, prepaids and other |         |                          | (4,404 | )    |         |        | 2,113  |  
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Net cash from operating activities                                      |                                                                                                       |                                      | 5,378   |                          |        |      | 19,097  |       
|                     
|                     
|                     
|                     
|Investing Activities:
|                     
|                     
|                     
|                     
|                      | Additions to property, plant and equipment, net                         |                                                                                                       |                                      | (10,296 | )                        |        |      | (13,938 | )     
|                     
|                     
|                     
|                     
|                      | Acquisition of Penford Australia Limited                                |                                                                                                       |                                      | (55,886 | )                        |        |      |        |       
|                     
|                     
|                     
|                     
|                      | Other                                                                   |                                                                                                       |                                      | 471     |                          |        |      | 575     |       
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Net cash used by investing activities                                   |                                                                                                       |                                      | (65,711 | )                        |        |      | (13,363 | )     
|                     
|                     
|                     
|                     
|Financing Activities:
|                     
|                     
|                     
|                     
|                      | Proceeds from revolving line of credit                                  |                                                                                                       |                                      | 59,726  |                          |        |      | 44,177  |       
|                     
|                     
|                     
|                     
|                      | Payments on revolving line of credit                                    |                                                                                                       |                                      | (53,009 | )                        |        |      | (43,692 | )     
|                     
|                     
|                     
|                     
|                      | Proceeds from long-term debt                                            |                                                                                                       |                                      | 106,752 |                          |        |      |        |       
|                     
|                     
|                     
|                     
|                      | Payments on long-term debt                                              |                                                                                                       |                                      | (52,110 | )                        |        |      | (3,277  | )     
|                     
|                     
|                     
|                     
|                      | Payment of fees for early extinguishment of debt                        |                                                                                                       |                                      | (1,366  | )                        |        |      |        |       
|                     
|                     
|                     
|                     
|                      | Exercise of stock options                                               |                                                                                                       |                                      | 791     |                          |        |      | 466     |       
|                     
|                     
|                     
|                     
|                      | Purchase of treasury stock                                              |                                                                                                       |                                      |        |                          |        |      | (1,858  | )     
|                     
|                     
|                     
|                     
|                      | Payment of dividends                                                    |                                                                                                       |                                      | (1,339  | )                        |        |      | (1,118  | )     
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Net cash provided (used) by financing activities                        |                                                                                                       |                                      | 59,445  |                          |        |      | (5,302  | )     
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Effect of exchange rate changes on cash and cash equivalents            |                                                                                                       |                                      | 357     |                          |        |      |        |       
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Net increase (decrease) in cash and equivalents                         |                                                                                                       |                                      | (531    | )                        |        |      | 432     |       
|                     
|                     
|                     
|                     
|                      | Cash and cash equivalents (bank overdraft) at
beginning of period       |                                                                                                       |                                      | (313    | )                        |        |      | 15      |       
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        
|                      | Cash and cash equivalents (bank overdraft) at
end of period             |                                                                                                       | $                                    | (844    | )                        |        | $    | 447     |       
|                      |                                                                         |                                                                                                       |                                      |         |                          |        |      |        

See accompanying notes to condensed consolidated financial statements.



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PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Penford Corporation (Penford or the Company) is in the business of
developing, manufacturing and marketing specialty natural-based
ingredient systems for various applications, including papermaking,
textiles and food products. The Company operates manufacturing
facilities in the United States, Australia, and New Zealand. Penfords
products provide excellent binding and film-forming characteristics that
make customers products better through natural, convenient and cost
effective solutions. Sales of the Companys products are generated using
a combination of direct sales and distributor agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Company has extensive research and development capabilities, which
are used in understanding the complex chemistry of carbohydrate-based
materials and their application. In addition, the Company has specialty
processing capabilities for a variety of modified starches, all of which
have similar production methods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|2. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation for the
interim periods presented have been included. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Operating
results for the three and nine month periods ended May 31, 2001 are not
necessarily indicative of the results that may be expected for the year
ending August 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in
Penford Corporations annual report on Form 10-K for the fiscal year
ended August 31, 2000.



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|3. |  | Recent Accounting Developments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes standards
for recognition and measurement of derivatives and hedging activities.
In the first quarter of fiscal 2001, the Company recorded an immaterial
cumulative effect of change in accounting principle to other
comprehensive income for derivatives which hedge the variable cash flows
of certain forecasted transactions.                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | On June 29, 2001, the FASB approved the final standards resulting from
its business combinations project. The FASB will issue SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, in July 2001. SFAS No. 141 is effective for any business
combination accounted for by the purchase method that is completed after
June 30, 2001. SFAS No. 142, which includes the requirements to test
goodwill and intangible assets with indefinite lives for impairment
rather than amortize them, will be effective for fiscal years beginning
after December 15, 2001 with early adoption permitted for companies with
fiscal years beginning after March 15, 2001, provided they have not yet
issued their first quarter financial statements. The Company is in the
process of assessing the impact of adoption of these standards.                                                                           
|  
|4. |  | Acquisition of Penford Australia Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | On September 29, 2000, Penford Corporation completed its acquisition of
Starch Australasia Limited from Goodman Fielder Limited for $54.2 million
(USD) in cash, plus costs incurred directly related to the acquisition of
approximately $1.7 million (USD), including accounting, financial
consulting, taxation, legal and other due diligence efforts. Starch
Australasia Limited, renamed Penford Australia Limited (Penford
Australia), is Australias sole producer of corn starch products and a
world leader in the research, development and commercialization of novel
starch-based products. Penford Australia manufactures products used to
enhance the functionality of packaged food products, as well as products
used in the mining and paper industries. Its operations include three
manufacturing facilities, two in Australia and one in New Zealand, for
processing specialty corn starches and wheat related products.
|  
|   |  | The acquisition was recorded using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to net
tangible and intangible assets acquired based on their estimated fair
values. The balance of the purchase price was recorded as goodwill,
which is being amortized over a twenty-year period. Eight months of
Penford Australias results of operations, from the September 29, 2000
date of acquisition, are included in the consolidated financial
statements for the nine months ended May 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                



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| |  | The following unaudited pro forma financial information presents the
combined results of operations of the Company and Penford Australia, as
if the acquisition had occurred on September 1, 2000 and 1999,
respectively. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred
had the Company and Penford Australia constituted a single entity during
such periods (dollars in thousands except per share data).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     |                                         |   |                   |      |      |   |         |      | 
|---------------------------------------------------- | --------------------------------------- | - | ----------------- | ---- | ---- | - | ------- | ---- | 
|                                                     |                                         |   | Nine Months Ended
|                                                     |                                         |   | May 31           
|                                                     |                                         |   |                  
|                                                     |                                         |   | 2001              |      | 2000
|                                                     |                                         |   |                   |      |     
|Sales                                                |                                         | $ | 157,678           |      |      | $ | 164,928 |     
|                                                    
|                                                    
|                                                    
|                                                    
|Income (loss) before extraordinary item              |                                         |   | (228              | )    |      |   | 9,353   |     
|                                                    
|                                                    
|                                                    
|                                                    
|Net income (loss)                                    |                                         |   | (1,116            | )    |      |   | 9,353   |     
|                                                    
|                                                    
|                                                    
|                                                    
|Earnings (loss) per common share:                   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income (loss) before extraordinary item |   | $                 | (.03 | )    |   | $       | 1.26 | 
|                                                     |                                         |   |                   |      |      |   |         |     
|                                                     | Net income (loss)                       |   | $                 | (.15 | )    |   | $       | 1.26 | 
|                                                     |                                         |   |                   |      |      |   |         |     
|Earnings (loss) per common share, assuming dilution:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income (loss) before extraordinary item |   | $                 | (.03 | )    |   | $       | 1.21 | 
|                                                     |                                         |   |                   |      |      |   |         |     
|                                                     | Net income (loss)                       |   | $                 | (.15 | )    |   | $       | 1.21 | 
|                                                     |                                         |   |                   |      |      |   |         |     



|5. |  | Credit Facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On September 29, 2000, the Company obtained interim financing to finance
the acquisition of Penford Australia and to replace its existing credit
facilities. As a result, except for a $5 million uncommitted line of
credit that remained in place, all outstanding debt as of August 31, 2000
was replaced by a $120 million bridge loan with a group of banks,
consisting of the same three banks responsible for the previous $75
million unsecured credit facility. Borrowings under the bridge loan
facility totaled $109.5 million.                                                                                                                                                                                                                                                 
|  
|   |  | Of the facilities replaced by the bridge loan, $18.6 million was
principal repaid to holders of private placement debt. Terms of the
private placements also required a prepayment fee of $1.4 million, which
has been presented as an extraordinary item, net of the related tax
benefit of $478,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | On November 15, 2000, a new $130 million credit facility was completed
with the aforementioned group of banks, plus the addition of an
Australian bank, which replaced the bridge loan. The credit facility
consists of various agreements with $65 million in term loans and $65
million of revolving lines of credit. The revolving lines of credit
expire on October 31, 2003, and the term loans expire on October 31,
2005. Borrowing rates available to the Company under the entire credit
facility are based on either the LIBOR or prime rate, depending on the
selection of borrowing options. All of Penfords assets secure the
credit facility, and the new agreements include, among other terms,
financial covenants with limitations on indebtedness, minimum net worth
and



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|   |  | maintenance of certain leverage, interest and fixed charge coverage
ratios. The bank
group has provided waivers for noncompliance with certain of the
financial covenants through May 31, 2001, and has amended the covenant
levels to reflect the Companys current operating environment.                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Other Costs                                                                                                                                                                                                                                                                                                             
|  
|   |  | During the quarter ended May 31, 2001, the Company incurred non-recurring
charges of $0.5 million for transaction costs related to terminated joint
venture discussions and severance costs of $0.3 million relating to a
workforce reduction of administrative employees. The costs are included
in operating expenses.
|  
|7. |  | Income Taxes                                                                                                                                                                                                                                                                                                            
|  
|   |  | The effective tax rate for the third quarter and first nine months of
fiscal 2001 varied from the Federal statutory rates due to the effects of
state and foreign taxes, and the non-deductible nature of goodwill
amortization related to the Penford Australia acquisition.                                           
|  
|8. |  | Comprehensive Income                                                                                                                                                                                                                                                                                                    
|  
|   |  | The components of comprehensive income (loss) are as follows (dollars in
thousands):                                                                                                                                                                                                                                    

|                                                                                      |  |                    |      |                   |  |      |       |      |  |   |        |   |  |   |       | 
|------------------------------------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | 
|                                                                                      |  | Three Months Ended |      | Nine Months Ended
|                                                                                      |  | May 31             |      | May 31           
|                                                                                      |  |                    |      |                  
|                                                                                      |  | 2001               |      | 2000              |  | 2001 |       | 2000
|                                                                                      |  |                    |      |                   |  |      |       |     
|Net income (loss)                                                                     |  | $                  | (608 | )                 |  | $    | 2,894 |      |  | $ | (1,193 | ) |  | $ | 8,128 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Change in unrealized gains on derivative
instruments that qualify as cash flow hedges |  |                    | 409  |                   |  |      |      |      |  |   | 408    |   |  |   |      | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Foreign currency translation adjustments                                              |  |                    | (256 | )                 |  |      |      |      |  |   | (1,806 | ) |  |   |      | 
|                                                                                      |  |                    |      |                   |  |      |       |      |  |   |        |   |  |   |       | 
|Comprehensive income (loss)                                                           |  | $                  | (455 | )                 |  | $    | 2,894 |      |  | $ | (2,591 | ) |  | $ | 8,128 | 
|                                                                                      |  |                    |      |                   |  |      |       |      |  |   |        |   |  |   |       | 



| |  | The foreign currency translation adjustment reflects the translation of
the Companys investment in its Australian operations to U.S. dollars
from Australian dollars. The foreign currency exchange rates as of
September 29, 2000 (date of acquisition), February 28, 2001, and May 31,
2001 were $0.542, $0.526, and $0.513 U.S. dollar to the Australian
dollar, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|9. |  | Segment Reporting                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operates in one business segment: developing, manufacturing,
and marketing specialty natural-based ingredient systems for various
applications.                                              
|  
|   |  | Information about the Companys operations by geographic area, including
its operations in North America and its recently acquired business in
Australia and New Zealand, follows (dollars in thousands):

|                                                        |                         |   |                    |        |                   |   |        |   |      |   |         |        |  |   |         |   | 
|------------------------------------------------------- | ----------------------- | - | ------------------ | ------ | ----------------- | - | ------ | - | ---- | - | ------- | ------ |  | - | ------- | - | 
|                                                        |                         |   | Three Months Ended |        | Nine Months Ended
|                                                        |                         |   | May 31             |        | May 31           
|                                                        |                         |   |                    |        |                  
|                                                        |                         |   | 2001               |        | 2000              |   | 2001   |   | 2000
|                                                        |                         |   |                    |        |                   |   |        |   |     
|Sales
- North America                                   |                         | $ | 39,645             |        |                   | $ | 39,744 |   |      | $ | 114,087 |        |  | $ | 118,629 |  
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | - Australia/New Zealand |   |                    | 13,840 |                   |   |        |  |      |   |         | 36,959 |  |   |         |  | 
|                                                        |                         |   |                    |        |                   |   |        |   |      |   |         |        |  |   |         |  
|                                                        |                         | $ | 53,485             |        |                   | $ | 39,744 |   |      | $ | 151,046 |        |  | $ | 118,629 |  
|                                                        |                         |   |                    |        |                   |   |        |   |      |   |         |        |  |   |         |  
|Income (loss) before extraordinary item
- North America |                         | $ | (685               | )      |                   | $ | 2,894  |   |      | $ | (596    | )      |  | $ | 8,128   |  
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | - Australia/New Zealand |   |                    | 77     |                   |   |        |  |      |   |         | 291    |  |   |         |  | 
|                                                        |                         |   |                    |        |                   |   |        |   |      |   |         |        |  |   |         |  
|                                                        |                         | $ | (608               | )      |                   | $ | 2,894  |   |      | $ | (305    | )      |  | $ | 8,128   |  
|                                                        |                         |   |                    |        |                   |   |        |   |      |   |         |        |  |   |         |  

|                                 |                         |   |              |        |                 |   |         |   | 
|-------------------------------- | ----------------------- | - | ------------ | ------ | --------------- | - | ------- | - | 
|                                 |                         |   | May 31, 2001 |        | August 31, 2000
|                                 |                         |   |              |        |                
|Total Assets
    - North America |                         | $ | 176,810      |        |                 | $ | 175,623 |  
|                                
|                                
|                                
|                                
|                                 | - Australia/New Zealand |   |              | 68,411 |                 |   |         |  | 
|                                 |                         |   |              |        |                 |   |         |  
|                                 |                         | $ | 245,221      |        |                 | $ | 175,623 |  
|                                 |                         |   |              |        |                 |   |         |  



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|10. |  | Earnings (Loss) Per Common Share                                                                                                  
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following table presents the computation of basic and diluted
earnings per share (dollars in thousands except per share data):

|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |      |      | 
|------------------------------------------------------------- | --------------------------------------- | ------------------ | --------- | ------------------ | ----- | ----------------- | --------- | ---- | ---- | ---- | --------- | ----- | ----- | - | --------- | ---- | ---- | 
|                                                              |                                         |                    |           | Three Months Ended |       | Nine Months Ended
|                                                              |                                         |                    |           | May 31             |       | May 31           
|                                                              |                                         |                    |           |                    |       |                  
|                                                              |                                         |                    |           | 2001               |       | 2000              |           | 2001 |      | 2000
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |     
|Weighted average common
shares outstanding                    |                                         |                    | 7,487,429 |                    |       |                   | 7,417,229 |      |      |      | 7,460,030 |       |       |   | 7,419,943 |     
|                                                             
|                                                             
|                                                             
|                                                             
|Net effect of dilutive
stock options                          |                                         |                    |          |                    |       |                   | 377,824   |      |      |      |          |       |       |   | 338,457   |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|Weighted average common shares
outstanding, assuming dilution |                                         |                    | 7,487,429 |                    |       |                   | 7,795,053 |      |      |      | 7,460,030 |       |       |   | 7,758,400 |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|Earnings (loss) per common share:                            
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Income (loss) before
extraordinary item |                    | $         | (0.08              | )     |                   | $         | 0.39 |      |      | $         | (0.04 | )     |   | $         | 1.10 |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|                                                              | Extraordinary loss                      |                    | $         |                   |       |                   | $         |     |      |      | $         | (0.12 | )     |   | $         |     |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|                                                              | Net income (loss)                       |                    | $         | (0.08              | )     |                   | $         | 0.39 |      |      | $         | (0.16 | )     |   | $         | 1.10 |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|Earnings (loss) per common share,
assuming dilution:         
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Income (loss) before
extraordinary item |                    | $         | (0.08              | )     |                   | $         | 0.37 |      |      | $         | (0.04 | )     |   | $         | 1.05 |     
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|                                                              |                                         | Extraordinary loss |           | $                  |      |                   |           | $    |     |      |           | $     | (0.12 | ) |           | $    |     | 
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     
|                                                              |                                         | Net income (loss)  |           | $                  | (0.08 | )                 |           | $    | 0.37 |      |           | $     | (0.16 | ) |           | $    | 1.05 | 
|                                                              |                                         |                    |           |                    |       |                   |           |      |      |      |           |       |       |   |           |     



| |  | Basic earnings per share reflects only the weighted average common
shares outstanding. Diluted earnings per share reflects weighted
average common shares outstanding and the effect of any dilutive common
stock equivalent shares.    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Due to the loss quarter and year ended May 31, 2001, common stock
equivalent shares of 109,001 and 173,219, respectively, were
anti-dilutive, and therefore, not included in the weighted average
common shares outstanding calculation.



11





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|       |                                                                                       | 
|------ | ------------------------------------------------------------------------------------- | 
|Item 2 | MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 

Results of Operations

Sales increased to $53.5 million from $39.7 million, or 34.6%, in the third
quarter of fiscal 2001 compared to the same prior year period. Sales for the
first nine months of fiscal 2001 increased to $151.0 from $118.6, or 27.3%,
versus last years same nine-month period. The increases in sales for the
quarter and nine-month period were primarily due to the acquisition of Penford
Australia and higher sales volume of the Companys specialty starch-based
ingredient systems for the food industry. The increase of these specialty
potato-based food starches over last year was primarily due to continued
penetration of existing markets, and the success of several new products in
select food industry market segments. However, lower sales volumes for paper
customers due to the current weakness of the North American paper industry
offset overall sales growth. The Company expects similar sales levels in the
near term, with continuing trends of strong sales in specialty food starches
and, continuing weakness in the North American paper industry, which we expect
will suppress sales to our paper customers.

Gross margin decreased to $9.5 million, or 17.8% of sales, in the third
quarter, from $11.1 million, or 28.0% of sales, in the corresponding prior year
period. The decline in gross margin was caused primarily by higher natural gas
and electricity costs in North America, which significantly impacted
manufacturing costs, offset by increased sales of higher margin specialty food
ingredients. For these same reasons, gross margin for the nine months ended
May 31, 2001 decreased to $29.5 million, or 19.5% of sales, from $33.4 million,
or 28.1% of sales, for the same nine-month period in the prior year. As market
prices for natural gas have declined recently, some improvement is expected in
our gross margins as we enter into new delivery contracts at these lower market
prices.

Operating expenses in the third quarter of $6.3 million were approximately $2.0
million higher compared to the same quarter in the prior year. For the nine
months ended May 31, 2001, operating expenses rose to $17.1 million from $13.3
million, or 28.6%. The increases are primarily due to the addition of Penford
Australia, as well as non-recurring charges of $0.5 million for transaction
costs related to joint venture discussions that were terminated during the
quarter ended May 31, 2001 and severance costs of $0.3 million for a workforce
reduction of administrative employees. The Company has announced further
workforce reductions in administrative staffing in the fourth quarter, which
will result in a charge of similar magnitude.

Research and development expenses increased in the third quarter and first nine
months of fiscal 2001 to $1.5 million and $4.9 million, respectively,
representing increases of 12.7% and 21.1% from the corresponding periods in the
prior year. The increases in research and development expenses are primarily
due to the inclusion of Penford Australia in the Companys operating results.
The Company expects to maintain its investment in technology improvements to
provide solutions to customer needs.

Net interest expense for the third quarter and first nine months of fiscal 2001
was $2.5 million and $7.9 million, respectively, compared to $1.1 million and
$3.5 million, respectively, in the corresponding periods in the prior year.
The increases are attributed to higher debt balances as a result of the
acquisition of Penford Australia.



12





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The effective tax rate for the third quarter and first nine months of fiscal
2001 varied from the Federal statutory rates due to the effects of state and
foreign taxes, and the non-deductible nature of goodwill amortization related
to the Penford Australia acquisition.

The net loss for the quarter ended May 31, 2001 was $0.6 million, or $0.08 per
share, versus net income of $2.9 million, or $0.37 per share, in the third
quarter of last year. In the first nine months of fiscal 2001, Penford lost
$0.3 million before extraordinary item, or $0.04 per share, compared to net
income of $8.1 million, or $1.05 per share, for the corresponding period a year
ago.

During the first quarter of fiscal 2001, the Company prepaid its private
placement debt facilities in connection with a comprehensive refinancing to
fund the acquisition of Penford Australia. The prepayment of the private
placements required prepayment fees resulted in a loss on early extinguishment
of debt of $1.4 million, which is presented as an extraordinary item, net of
the related tax benefit of $478,000.

Due to operating results that were less than projected, the Company did not
meet all of the financial covenants of its credit agreement for which it has
obtained waivers. Further, the Company has obtained an amendment to its credit
agreement to adjust covenant levels to reflect its current operating
environment. In consideration for this amendment to its credit agreement, the
Company will pay amendment fees and may pay a higher margin over base interest
rates depending on the level of its leverage ratio. However, given the current
decline in overall market interest rates, the Company does not expect a
significant increase in its overall effective interest rate.

Liquidity and Capital Resources

In connection with the acquisition of Penford Australia on September 29, 2000,
the Company obtained interim financing to replace its credit facilities, to
fund the acquisition and to fund the prepayment fee of $1.4 million incurred
upon retirement of the private placement facilities. The interim financing was
replaced by a new $130 million credit facility completed on November 15, 2000,
with a group of banks. The credit facility consists of various agreements with
$65 million in term loans and $65 million of revolving lines of credit. The
revolving lines of credit expire on October 31, 2003, and the term loans expire
on October 31, 2005. At May 31, 2001, there was $110.3 million outstanding
under the facilities. Borrowing rates available to the Company under the
entire credit facility are based on either the LIBOR or prime rate, depending
on the selection of borrowing options. All of Penfords assets secure the
credit facility, and the new agreements include, among other terms, financial
covenants with limitations on indebtedness, minimum net worth and maintenance
of certain leverage, interest and fixed charge coverage ratios. The Company
has obtained waivers for the interest coverage requirement as of November 30,
2000 and the leverage ratio requirement through May 31, 2001. The bank group
has provided amended covenant levels to reflect the Companys current operating
environment. The next date on which compliance with this ratio will be
measured is August 31, 2001.



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At May 31, 2001, Penford had working capital of $23.1 million and $46.9 million
outstanding under the $65 million revolving lines of credit. The Company also
has a $5 million uncommitted line of credit under which there was $3.2 million
outstanding. The Company used its debt proceeds and operating cash flow to
finance the purchase of Penford Australia and other capital expenditures during
the first nine months of fiscal 2001.

Cash flow from operations for the nine months ended May 31, 2001 was $5.4
million compared to $19.1 million in the corresponding period of the prior
year. The decrease in operating cash flow is mainly due to the lower earnings
experienced during the current fiscal year.

Additions to property, plant and equipment during the nine months ended May 31,
2001 were $10.3 million. Third quarter additions of $2.6 million were
primarily for various improvements at the Companys industrial facility in
Cedar Rapids, Iowa and equipment additions and improvements at all of the
Companys food-grade manufacturing facilities. We expect, in the near term, to
continue our capital investment at a level similar to that of our third
quarter. We do not plan to make commitments for significant new capital
projects until we improve the cash generated from operations. In the meantime,
we continue to make efficiency and safety improvements as required to maintain
our operations in good working order.

The Company began paying a quarterly cash dividend of $0.05 per share in 1992
and has continued to pay quarterly dividends ever since. On April 3, 2000, the
Board of Directors approved an increase in the quarterly cash dividend to $0.06
per share. The Company has paid $1.3 million in dividend payments to its
shareholders this fiscal year.

The Board of Directors has authorized a stock repurchase program for the
purchase of up to 500,000 shares of the outstanding common stock of the
Company. Repurchases under the program to date have totaled 281,300 shares for
$4.3 million in prior years. The Company has not purchased any of its common
stock during fiscal 2001, and does not plan to do so in the near future.

Forward-looking Statements

This report contains forward-looking statements concerning the performance and
results of the Company, including North American paper product sales,
anticipated increases in specialty food starch sales, declines in natural gas
prices, and the level of anticipated interest rates. There are a variety of
factors which could cause actual events or results to differ materially from
those projected in the forward-looking statements, including, without
limitation, competition; the possibility of interruption of business activities
due to equipment problems, accidents, strikes, weather or other factors;
product development risk; changes in corn and other raw material prices;
changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix; unanticipated costs, expenses or third party
claims; the risk that results may be affected by construction delays, cost
overruns, technical difficulties, nonperformance by contractors or changes in
capital improvement project requirements or specifications; interest rate and
energy cost volatility; foreign currency exchange rate fluctuations; or other
unforeseen developments in the industries in which the Company operates.
Accordingly, there can be no assurance that future activities or results will
be as anticipated.



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Forward-looking statements are based on the estimates and opinions of
management on the date the statements are made. The Company assumes no
obligation to update any forward-looking statements if circumstances or
managements estimates or opinions should change.

Additional information which could affect the Companys financial results is
included in the Companys 2000 Annual Report to Shareholders and its Form 10-K
for the fiscal year ended August 31, 2000 on file with the Securities and
Exchange Commission.



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|       |                                                            | 
|------ | ---------------------------------------------------------- | 
|Item 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK | 

Market Risk Sensitive Instruments and Positions

The market risk associated with the Companys market risk sensitive instruments
is the potential loss from adverse changes in interest rates, foreign currency
exchange rates, and commodities prices.

The Company is unaware of any material changes to the market risk disclosures
referred to in the Companys Report on Form 10-K for the year ended August 31,
2000, other than the increase in the amount of borrowings undertaken
principally to finance the acquisition of Penford Australia.



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PART II  OTHER INFORMATION




|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1 |  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|       |  | A complaint was filed in late November 1999 against Penford in the
United States District Court for the District of Idaho. An Amended
Complaint filed in December 2000 alleges various violations of the
Federal Clean Air Act, as well as claims for trespass, nuisance,
emotional distress and outrage. The claims are based upon
allegations that Penford violated its Clean Air Act permit and
breached duties to the individual plaintiffs by allegedly excessive
airborne emissions from Penfords Idaho Falls starch processing
plant. The complaint sought civil penalties for the Clean Air Act
claims and private damages for trespass and nuisance against the
individual plaintiffs.                                                                             
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|       |  | By agreement of the parties in June 2000, the Federal Clean Air Act
claims were supposed to have been dismissed with prejudice. The
Amended Complaint sought to re-assert those claims notwithstanding
the parties agreement. By an Order issued in May 2001, the Federal
Magistrate Judge to whom the case has been assigned for pretrial
proceedings issued a Report and Recommendation to dismiss the Clean
Air Act claims and award Penford its costs and fees incurred in
bringing the motion to dismiss. The plaintiffs have not filed an
objection to the Report and Recommendation within the time frame
permitted. If adopted, only the state law claims will remain pending
against Penford. Penford continues its efforts to resolve those
claims by negotiation.
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|       |  | Penford has received notice from the plaintiffs counsel in Lytle
alleging several other alleged violations of the Clean Air Act for
which the plaintiffs intended to sue, although no such suit has yet
been filed. Penford denies the factual allegations of the notice
letter, and will defend the suit if filed.                                                                                                                                                                                                                                                                                                                                                                                                                                                         




|       |  |                      
|------ |  | ---------------------
|Item 2 |  | Changes in Securities
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|       |  | Not applicable       




|       |  |                                
|------ |  | -------------------------------
|Item 3 |  | Defaults Upon Senior Securities
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|       |  | Not applicable                 




|       |  |                                                    
|------ |  | ---------------------------------------------------
|Item 4 |  | Submission of Matters to a Vote of Security Holders
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|       |  | Not applicable                                     




|       |  |                  
|------ |  | -----------------
|Item 5 |  | Other Information
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|       |  | Not applicable   




|       |  |                                  
|------ |  | ---------------------------------
|Item 6 |  | Exhibits and Reports on Form 8-K.
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|(a)    |  | Exhibits:                        

| |       |  |                                                                                                                                                                                                                                                              
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2.1) |  | Starch Australasia Share Sale Agreement completed as
of September 29, 2000 among Penford Holdings Pty Limited, a
wholly owned subsidiary of Registrant, and Goodman Fielder
Limited (filed as an exhibit to Registrants Form 8-K/A dated
September 29, 2000)



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| |         |  |                                                                                                                                                                                                                                            
| | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| | (3.1)   |  | Restated Articles of Incorporation of Registrant
(filed as an exhibit to Registrants Form 10-K for fiscal year
ended August 31, 1995)                                                                                                     
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| | (3.2)   |  | Articles of Amendment to Restated Articles of
Incorporation of Registrant (filed as an exhibit to Registrants
Form 10-K for fiscal year ended August 31, 1997)                                                                            
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| | (3.3)   |  | Bylaws of Registrant as amended and restated as of
October 20, 1997 (filed as an exhibit to Registrants Form 10-K
for fiscal year ended August 31, 1997)                                                                                  
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| | (4.1)   |  | Amended and Restated Rights Agreement dated as of
April 30, 1997 (filed as an exhibit to Registrants Amendment to
Registration Statement on Form 8-A/A dated May 5, 1997)                                                                 
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| | (10.1)  |  | Penford Corporation Supplemental Executive Retirement Plan,
dated March 19, 1990 (filed as an exhibit to Registrants Form
10-K for the fiscal year ended August 31, 1991)                                                                 
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| | (10.2)  |  | Penford Corporation Supplemental Survivor Benefit Plan, dated
January 15, 1991 (filed as an exhibit to Registrants Form 10-K
for the fiscal year ended August 31, 1991)                                                                   
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| | (10.3)  |  | Penford Corporation Deferred Compensation Plan, dated January
15, 1991 (filed as an exhibit to Registrants Form 10-K for the
fiscal year ended August 31, 1991)                                                                           
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| | (10.4)  |  | Change of Control Agreements between Penford Corporation and
Messrs. Cook, Horn, Keeley, and Kunerth (a representative copy of
these agreements is filed as an exhibit to Registrants Form 10-K
for the fiscal year ended August 31, 1995)
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| | (10.5)  |  | Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an exhibit to Registrants Form 10-Q for the
quarter ended November 30, 1993)                                                                               
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| | (10.6)  |  | Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 21, 1997 (filed on Form S-8 dated March
17, 1997)                                                                                                         
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| | (10.7)  |  | Penford Corporation Stock Option Plan for Non-Employee
Directors (filed as an exhibit to the Registrants Form 10-Q for
the quarter ended May 31, 1996)                                                                                    
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| | (10.8)  |  | Separation Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrants Form 8-K dated August 31, 1998)                                                                     
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| | (10.9)  |  | Services Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co. (filed as an exhibit to
Registrants Form 8-K dated August 31, 1998)                                                                       
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| | (10.10) |  | Employee Benefits Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrants Form 8-K dated August 31, 1998)                                                              



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| |         |  |                                                                                                                                                                                                                                                                                                                             
| | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| | (10.11) |  | Tax Allocation Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrants Form 8-K dated August 31, 1998)                                                                                                                                                  
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| | (10.12) |  | Excipient Supply Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrants Form 8-K dated August 31, 1998)                                                                                                                                                
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| | (10.13) |  | Amended and Restated Credit Agreement dated as of November 15,
2000 among Penford Corporation and Penford Products Co. as
borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders
(filed as an exhibit to Registrants Form 8-K/A dated September
29, 2000)
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| | (10.14) |  | Debenture Trust Deed dated as of November 15, 2000 among
Penford Holdings Pty Limited as issuer and ANZ Capel Court
Limited as trustee (filed as an exhibit to Registrants Form
8-K/A dated September 29, 2000)                                                                                                            
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| | (10.15) |  | Syndicated Facility Agreement dated as of November 15, 2000
among Penford Australia Limited, a wholly owned subsidiary of
Penford Holdings Pty Limited, as borrowers, and Australia and New
Zealand Banking Group Limited as lender and agent (filed as an
exhibit to Registrants Form 8-K/A dated September 29, 2000)     
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| | (10.16) |  | Intercreditor Agreement dated as of November 15, 2000 by and
among The Bank of Nova Scotia, KeyBank National Association, U.S.
National Association and Australia and New Zealand Banking Group
Limited (filed as an exhibit to Registrants Form 8-K/A dated
September 29, 2000)                                           
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| | (10.17) |  | First Amendment dated as of April 12, 2001 to Amended and
Restated Credit Agreement dated as of November 15, 2000 among
Penford Corporation and Penford Products Co. as borrowers, and
certain commercial lending institutions as lenders, and the Bank
of Nova Scotia, as agent for the lenders                            
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| | (10.18) |  | Waiver Agreement dated as of April 12, 2001 to Amended and
Restated Credit Agreement dated as of November 15, 2000 among
Penford Corporation and Penford Products Co. as borrowers, and
certain commercial lending institutions as lenders, and the Bank
of Nova Scotia, as agent for the lenders                           
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| | (10.19) |  | Second Amendment dated as of May 31, 2001 to Amended and
Restated Credit Agreement dated as of November 15, 2000 among
Penford Corporation and Penford Products Co. as borrowers, and
certain commercial lending institutions as lenders, and the Bank
of Nova Scotia, as agent for the lenders                             

(b)   Reports on Form 8-K



| |  | A Form 8-K dated May 15, 2001 was filed reporting under Item
5, Registrants agreement with Cargill to call off a
proposed joint venture to combine their industrial starch
businesses in North America. Filed as an exhibit was a copy
of the press release dated May 4, 2001.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|              |                                                     
|------------- | ----------------------------------------------------
|              | Penford Corporation                                 
|              |                                                     
|              | (Registrant)                                        
|              |                                                     
|              |                                                     
|July 13, 2001 | /s/ Jacqueline L. Davidson                          
|              |                                                     
|Date          | Jacqueline L. Davidson                              
|              | Vice President of Finance (Chief Accounting Officer)



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