<PAGE>   1
                                  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, 1998

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

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

                                 (425) 462-6000
              (Registrant's telephone number, including area code.)

         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, 1998.

           Class                                                  Outstanding
           -----                                                  -----------
Common stock, par value $1.00                                      7,333,708

                                       1

<PAGE>   2

                      PENFORD CORPORATION AND SUBSIDIARIES

                                      INDEX


<TABLE>
<CAPTION>
                                                                                Page No.
                                                                                --------
<S>                                                                             <C>
PART I  -  FINANCIAL INFORMATION

Item 1 -   Financial Statements

Condensed Consolidated Balance Sheets                                               3
           May 31, 1998 and August 31, 1997

Condensed Consolidated Statements of Income                                         4
           Three Months and Nine Months Ended May 31, 1998
           and May 31, 1997
Condensed Consolidated Statements of Cash Flow                                      5
           Nine Months Ended May 31, 1998 and
           May 31, 1997

Notes to Condensed Consolidated Financial Statements                               6-9


Item 2 -   Management's Discussion and Analysis of                                10-14
           Financial Condition and Results of Operations

Item 3 -   Quantitative and Qualitative Disclosures                                14
           About Market Risk


PART II - OTHER INFORMATION

Item 1 -   Legal Proceedings                                                       15

Item 2 -   Changes in Securities                                                   15

Item 3 -   Defaults Upon Senior Securities                                         15

Item 4 -   Submission of Matters to a Vote of Security Holders                     15

Item 5 -   Other Information                                                       15

Item 6 -   Exhibits and Reports on Form 8-K                                        15-17


SIGNATURES                                                                         18

</TABLE>

                                       2

<PAGE>   3

                         PART I - FINANCIAL INFORMATION

Item 1            Financial Statements

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

<TABLE>
<CAPTION>
                                                             May 31, 1998         August 31, 1997
                                                             ------------         ---------------
<S>                                                          <C>                  <C>      
                                                 ASSETS
                                                 ------
Current assets:
         Trade accounts receivable                             $  21,178           $  22,469
         Inventories:
              Raw materials and other                              6,781               4,995
              Work in progress                                       956                 885
              Finished goods                                       9,718               8,396
                                                               ---------           ---------
                                                                  17,455              14,276
         Prepaid expenses and other                                5,637               4,938
                                                               ---------           ---------
              Total current assets                                44,270              41,683

Net property, plant and equipment                                107,339             108,099
Deferred income taxes                                             13,073              11,007
Restricted cash value of life insurance                           13,765              12,691
Other assets                                                       5,071               5,138
Net assets of discontinued operations                             37,305              35,959
                                                               ---------           ---------

              Total assets                                     $ 220,823           $ 214,577
                                                               =========           =========
                                        
                                   LIABILITIES AND SHAREHOLDERS' EQUITY
                                   -------------------------------------
Current liabilities:
         Bank overdraft, net                                   $   1,749           $   1,019
         Accounts payable                                          6,669               8,131
         Accrued liabilities                                       4,760               7,094
         Current portion of long-term debt                        13,697               5,955
         Accrued liabilities, discontinued operations              4,831                  --
                                                               ---------           ---------

              Total current liabilities                           31,706              22,199

Long-term debt                                                    57,460              61,791
Other postretirement benefits                                     10,360              10,143
Deferred income taxes                                             24,109              21,867
Other liabilities                                                  9,022               8,407

Shareholders' equity:
         Common stock                                              9,116               9,093
         Additional paid-in capital                               19,704              18,466
         Retained earnings                                        89,718              93,854
         Treasury stock                                          (29,946)            (30,604
         Note receivable from Savings and
              Stock Ownership Plan                                  (426)               (639)
                                                               ---------           ---------

         Total shareholders' equity                               88,166              90,170
                                                               ---------           ---------

         Total liabilities and shareholders' equity            $ 220,823           $ 214,577
                                                               =========           =========

</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                       3

<PAGE>   4

                      PENFORD CORPORATION AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                  (Dollars in thousands except per share data)


<TABLE>
<CAPTION>
                                                         Three Months Ended May 31             Nine Months Ended May 31
                                                      ------------------------------        ------------------------------

                                                          1998               1997               1998               1997
                                                      -----------        -----------        -----------        -----------
<S>                                                   <C>                <C>                <C>                <C>        
Sales                                                 $    40,306        $    42,797        $   122,773        $   127,854

Cost of sales                                              28,976             30,997             88,634             96,767
                                                      -----------        -----------        -----------        -----------

      Gross margin                                         11,330             11,800             34,139             31,087

Operating expenses                                          6,061              6,680             19,354             18,836

Restructure costs                                           1,931                                 1,931
                                                      -----------        -----------        -----------        -----------

      Income from operations                                3,338              5,120             12,854             12,251

Other income                                                                                                         1,200

Interest expense, net                                      (1,470)            (1,431             (4,350             (4,007)
                                                      -----------        -----------        -----------        -----------

      Income from continuing operations
      before income taxes                                   1,868              3,689              8,504              9,444

Income taxes                                                  654              1,254              2,971              3,133
                                                      -----------        -----------        -----------        -----------

Income from continuing operations                           1,214              2,435              5,533              6,311

Discontinued Operations

        Loss from operations, net of
        applicable income tax benefit                      (2,330)              (623)            (5,137)            (1,836)

        Estimated loss on disposal,
        including provision for operating
        losses through disposal date, net
        of applicable income tax benefit                   (3,436)                --             (3,436)                --
                                                      -----------        -----------        -----------        -----------

Net income (loss)                                     $    (4,552)       $     1,812        $    (3,040)       $     4,475
                                                      ===========        ===========        ===========        ===========


Weighted average common
shares assuming dilution                                7,545,607          7,033,535          7,534,001          7,021,230

Earnings per share from continuing  
       operations, diluted                            $      0.16        $      0.35        $      0.74        $      0.90

Loss per share from discontinued
       operations, diluted                            $     (0.76)       $     (0.09)       $     (1.14)       $     (0.26)
                                                      -----------        -----------        -----------        -----------

Earnings (loss) per common share, diluted             $     (0.60)       $      0.26        $     (0.40)       $      0.64
                                                      ===========        ===========        ===========        ===========

Dividends declared per common share                   $      0.05        $      0.05        $      0.15        $      0.15
                                                      ===========        ===========        ===========        ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>   5

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


<TABLE>
<CAPTION>
                                                                                       Nine Months Ended May 31
                                                                                       ------------------------
                                                                                          1998            1997
                                                                                       --------        --------
<S>                                                                                    <C>             <C>     
Operating Activities:
            Income from continuing operations                                          $  5,533        $  6,311

            Adjustments to reconcile income from continuing operations to net
                      cash from continuing operations:
                        Depreciation and amortization                                     9,040           7,813
                        Deferred income taxes                                               176             488
                        Change in operating assets and liabilities of continuing
                             operations:
                              Trade receivables                                           1,291             341
                              Inventories                                                (3,179)           (347)
                              Accounts payable, prepaids and other                       (2,814)            714
                                                                                       --------        --------
            Net cash flow from continuing operations                                     10,047          15,320

            Net cash used in discontinued operations                                     (5,088)         (3,303)
                                                                                         --------        --------

            Net cash provided by operating activities                                     4,959          12,017

Investing Activities:
            Additions to property, plant and equipment, net                              (8,228)        (17,294)
            Other                                                                           931           1,341
                                                                                       --------        --------
            Net cash used by investing activities                                        (7,297)        (15,953)

Financing Activities:
            Proceeds from unsecured line of credit                                       68,885          68,555
            Payments on unsecured line of credit                                        (64,728)        (66,785)
            Proceeds of long-term debt                                                    5,000           5,000
            Payments on long-term debt                                                   (5,746)         (3,810)
            Exercise of stock options                                                       451           3,624
            Purchase of life insurance for officers' benefit plan                        (1,158)         (1,158)
            Payment of dividends                                                         (1,096)         (1,028)
                                                                                       --------        --------
            Net cash from financing activities                                            1,608           4,398
                                                                                       --------        --------

            Net increase (decrease) in cash and equivalents                                (730)            462
            Net bank overdraft at beginning of period                                    (1,019)           (796)
                                                                                       --------        --------

Net bank overdraft at end of period                                                    $ (1,749)       $   (334)
                                                                                       ========        ========
</TABLE>


See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>   6


                         PENWEST, LTD. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.        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 of the
         interim periods presented have been included. Operating results for the
         three and nine month periods ended May 31, 1998 are not necessarily
         indicative of the results that may be expected for the year ending
         August 31, 1998. For further information, refer to the consolidated
         financial statements and footnotes thereto included in Penford
         Corporation's ("Penford" or the "Company") annual report on Form 10-K
         for the fiscal year ended August 31, 1997.

         Certain prior year amounts have been reclassified to conform with
         current year presentation. These reclassifications had no effect on
         previously reported results of operations.

2.        DISCONTINUED OPERATIONS

         During the third quarter of fiscal 1998, the Company announced the
         approval of a plan to effect a tax-free spin-off to its shareholders of
         its wholly-owned pharmaceuticals subsidiary, Penwest Pharmaceuticals
         Co. ("PPC"). The spin-off represents the culmination of the previously
         announced plan to foster the growth potential of the Company's
         pharmaceutical business, and separately, its specialty paper chemicals
         and food ingredients businesses.

         The original plan was for PPC to complete an initial public offering
         ("IPO") of up to 20% of its common stock, followed by a tax-free
         spin-off. The IPO was postponed on December 18, 1997 due to market
         conditions for new issues in general as well as for health care and
         technology stocks in particular. The Company subsequently concluded
         that its objectives could best be achieved through the tax-free
         spin-off of PPC to Penford shareholders, rather than wait for
         improvement in the IPO market for healthcare/pharmaceuticals companies.
         As a result of the announced spin-off, PPC has been reported as a
         discontinued operation in the accompanying financial statements.


                                       6
<PAGE>   7

         Penwest Pharmaceuticals Co. operations generated a pre-tax loss in the
         third quarter of $3.6 million compared to a pre-tax loss of $945,000 in
         the same quarter of fiscal 1997. Corresponding pre-tax losses of PPC
         for the nine month periods ended May 31, 1998 and 1997 were $7.9
         million and $2.8 million, respectively. The increased loss in the third
         quarter of 1998 is due primarily to the write-off of certain costs
         incurred in connection with the previously planned IPO aggregating $1.7
         million, and higher research and development expenses related to PPC's
         controlled release drug delivery technology. The increased year-to-date
         loss is attributed to higher operating costs including research and
         development costs, expenses associated with building the infrastructure
         to support anticipated growth, the write off of the previously planned
         IPO costs, and the absence of royalty and licensing fee income in 1998.

         One time charges totaling $7.0 million ($4.5 million after tax, or
         $0.60 per share) were included as a component of discontinued
         operations reflecting the costs of separating the two businesses
         including direct costs such as professional fees and investment banking
         fees and other costs of establishing PPC as a separate public company
         which approximated $3.3 million, the write-off of certain costs
         incurred in connection with the previously planned IPO of PPC referred
         to above, and estimated future operating losses of approximately $2.0
         million through the planned spin-off date, currently anticipated to be
         by the end of the fiscal year, August 31, 1998. Additional
         restructuring costs of $1.9 million were charged to continuing
         operations reflecting other costs associated with implementing the
         spin-off including adjustments to the corporate infrastructure and
         other facilities charges.

         Penford will forgive intercompany advances to PPC on the spin-off date.
         As of May 31, 1998, the intercompany balance approximated $42.0
         million. Summarized comparative quarterly financial data of PPC as of
         May 31, 1998, and for the three and nine months then ended follows (in
         000's):

<TABLE>
<CAPTION>
                                                         Three Months                     Nine Months
                                                         Ended May 31                     Ended May 31
                                                      --------------------            -------------------
                                                      1998            1997            1998           1997
                                                      ----            ----            ----           ----
<S>                                                  <C>          <C>               <C>           <C>     
         Total revenues                              $ 7,878      $ 7,196           $ 21,424      $ 19,824
         Pre-tax loss                                 (3,615)        (945)            (7,908)       (2,782)
</TABLE>


         Identifiable assets:

<TABLE>
<CAPTION>
                                                                          May 31, 1998          August 31,1997
                                                                          ------------          --------------
<S>                                                                       <C>                   <C>     
              Current assets, net                                           $ 10,690              $ 10,688
              Property, plant and equipment, net                              23,459                22,274
              Other assets                                                     2,114                 1,928
              Cumulative translation adjustment                                1,042                 1,069
                                                                            --------              --------
                                                                            $ 37,305              $ 35,959
                                                                            ========              ========
</TABLE>

                                       7
<PAGE>   8

3.        INCOME TAXES

         The effective tax rate for the quarter and for the nine months ended
         May 31, 1998 was 35%. The effective rate is higher than the federal
         statutory rate of 34% due primarily to the effects of state income
         taxes. The effective tax rate for the three and nine months ended May
         31, 1997 was 34% and 33%, respectively. The effective rate was lower
         than the federal statutory rate in 1997 due primarily to the effect of
         income tax refunds received.

4.        EARNINGS PER COMMON SHARE

         The Company adopted Statement of Financial Accounting Standards (SFAS)
         No. 128, "Earnings per Share" in the second quarter of fiscal 1998. The
         Statement replaced the previously reported primary and fully diluted
         earnings per share with basic and diluted earnings per share. 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. All earnings per share amounts have been presented
         and where necessary, have been restated to conform with the
         requirements of SFAS No. 128.

         The following table presents the computation of basic and diluted
         earnings per share under SFAS No. 128 (dollars in thousands, except per
         share data):


<TABLE>
<CAPTION>
                                                 Three Months Ended                         Nine Months Ended
                                                        May 31                                     May 31
                                         ------------------------------------       --------------------------------
                                              1998                  1997                 1998              1997
                                         --------------        --------------       --------------        ----------
<S>                                      <C>                   <C>                  <C>                   <C>       
Income from continuing operations        $        1,214        $        2,435       $        5,533        $    6,311
                                         ==============        ==============       ==============        ==========

Net income (loss)                        $       (4,552)       $        1,812       $       (3,040)       $    4,475
                                         ==============        ==============       ==============        ==========

Weighted average common
    shares outstanding                        7,314,759             7,008,432            7,291,809         6,914,396
Net effect of dilutive
    stock options                               230,848                25,103              242,192           106,834
                                         --------------        --------------       --------------        ----------
Weighted average common shares
    outstanding assuming dilution             7,545,607             7,033,535            7,534,001         7,021,230
                                         ==============        ==============       ==============        ==========

Continuing operations:
Earnings per common share                $         0.17        $         0.35       $         0.76        $     0.91
                                         ==============        ==============       ==============        ==========
Earnings per common share,
    assuming dilution                    $         0.16        $         0.35       $         0.74        $     0.90
                                         ==============        ==============       ==============        ==========

Net income (loss):
Earnings (loss) per common share         $        (0.62)       $         0.26       $        (0.42)       $     0.65
                                         ==============        ==============       ==============        ==========
Earnings (loss) per common share,
    assuming dilution                    $        (0.60)       $         0.26       $        (0.40)       $     0.64
                                         ==============        ==============       ==============        ==========

</TABLE>


                                       8
<PAGE>   9

5.        SUBSEQUENT EVENT

         In connection with the spin-off of PPC, on July 2, 1998, the company
         completed an unsecured $75.0 million revolving credit agreement with
         three banks which will expire on June 30, 2003. Borrowing rates
         available to the Company under the agreement are based on the LIBO rate
         or prime rate depending on the selection of borrowing options. The
         agreement replaces an unsecured revolving credit agreement with four
         banks which at May 31, 1998, had $25.3 million of borrowings
         outstanding. It also replaces a $10.0 million uncommitted line of
         credit of which there was $5.2 million outstanding at quarter end.
         Total outstanding debt of the Company subsequent to the completion of
         the new revolving credit facility is approximately the same as
         immediately prior to its execution.

         The new credit facility includes certain restrictions including
         limitations on indebtedness, minimum net worth, and a minimum fixed
         charge coverage ratio which are similar to restrictions on the
         previously existing debt. In connection with the spin-off, the Company
         has also guaranteed a new unsecured $15.0 million revolving credit
         facility established for Penwest Pharmaceuticals Co. The PPC agreement
         has a term of 26 months and cannot be utilized until the spin-off is
         completed.



                                       9
<PAGE>   10

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


DISCONTINUED OPERATIONS :  SPIN-OFF OF PENWEST PHARMACEUTICALS CO.


During the third quarter of fiscal 1998, the Company announced the approval of a
plan to effect a tax-free spin-off to its shareholders of its wholly-owned
pharmaceuticals subsidiary, Penwest Pharmaceuticals Co. ("PPC"). The spin-off
represents the culmination of the plan announced in the first quarter by the
Company to foster the growth potential of its pharmaceutical business and
separately, its specialty paper chemicals and food ingredients businesses.

 The original plan was for PPC to complete an initial public offering ("IPO") of
up to 20% of its common stock, followed by a tax-free spin-off. The IPO was
postponed on December 18, 1998 due to market conditions for new issues in
general as well as for health care and technology stocks in particular. The
Company subsequently concluded that its objectives could best be achieved
through the tax-free spin-off of PPC to Penford shareholders, rather than wait
for improvement in the IPO market for healthcare/pharmaceuticals companies. As a
result of the announced spin-off, PPC has been reported as a discontinued
operation in the financial statements.

Penwest Pharmaceuticals Co. operations generated a pre-tax loss in the third
quarter of $3.6 million compared to a loss of $945,000 in the same quarter of
fiscal 1997. Corresponding pre-tax losses of PPC for the nine month periods
ended May 31, 1998 and 1997 were $7.9 million and $2.8 million, respectively.
The increased loss in the third quarter of 1998 is due primarily to the
write-off of certain costs incurred in connection with the previously planned
IPO aggregating $1.7 million, and higher research and development expenses
related to PPC's controlled release drug delivery technology. The increased
year-to-date loss is attributed to higher operating costs including research and
development costs, expenses associated with building the infrastructure to
support anticipated growth, the write off of the previously planned IPO costs,
and the absence of royalty and licensing fee income in 1998.

One time charges totaling $7.0 million ($4.5 million after-tax or $0.60 per
share) were recorded and included as a component of discontinued operations
reflecting the costs of separating the two businesses including direct costs
such as professional fees and investment banking fees and other costs of
establishing PPC as a separate public company which approximated $3.3 million,
the write-off of certain costs incurred in connection with the previously
planned IPO of PPC referred to above, and estimated future operating losses of
approximately $2.0 million through the planned spin-off date, currently
anticipated to be by the end of the fiscal year, August 31, 1998. Additional
restructuring costs of $1.9 million were charged to continuing operations
reflecting other costs associated with implementing the spin-off including
adjustments to the corporate infrastructure and other facilities charges.



                                       10
<PAGE>   11

RESULTS OF CONTINUING OPERATIONS

Income from continuing operations for the quarter ended May 31, 1998 was $1.2
million, or $0.16 per share assuming dilution, compared to income from
continuing operations of $2.4 million, or $0.35 per share assuming dilution, for
the corresponding period a year ago. Income from continuing operations for the
nine months ended May 31, 1998 was $5.5 million, or $0.74 per share assuming
dilution, compared to $6.3 million, or $0.90 per share assuming dilution, in the
corresponding period in fiscal 1997. The three and nine month periods in fiscal
1998 include $1.9 million ($1.3 million after-tax, or $0.17 per share assuming
dilution) of charges related to costs associated with implementing the spin-off
of PPC including adjustments to the corporate office infrastructure and other
facilities charges. The first nine months of fiscal 1997 included other income
of $1.2 million ($800,000 after tax, or $0.11 per share assuming dilution) from
a gain on the sale of Southern California air emission credits.

Net loss for the quarter ended May 31, 1998 was $4.6 million, or $0.60 per share
assuming dilution, compared to net income of $1.8 million, or $0.26 per share
assuming dilution, for the corresponding period a year ago. Net loss for the
nine months ended May 31, 1998 was $3.0 million, or $0.40 per share assuming
dilution, compared to net income of $4.5 million, or $0.64 per share assuming
dilution, in the corresponding period in fiscal 1997.

Company sales from continuing operations decreased in the third quarter and
first nine months of fiscal 1998 to $40.3 million and $122.8 million,
respectively, representing decreases of 5.8% and 4.0% from the corresponding
periods in the prior year. For the year-to-date period, the change in sales was
primarily due to the effects in the prior year of high corn costs, a key
component in the pricing of Penford's paper chemical products. Corn prices have
moderated and returned to historical levels in the current fiscal year. In
addition to the impact of corn costs, the quarterly change in sales is
attributed to sales volumes in the prior year that were at near record levels as
customers replenished inventories that were reduced during the period of higher
corn costs. To a lesser extent, sales volumes in the third quarter of fiscal
1998 were negatively impacted by the economic downturn in Asia.

Gross margin in the third quarter improved to 28.1% from 27.6% in the
corresponding quarter a year earlier. Gross margin for the nine months ended May
31, 1998 increased to 27.8% from 24.3% in the same period last year. The
increases in gross margin percentage result primarily from lower corn prices and
operational efficiency initiatives. Increased sales volumes of higher margin,
value-added specialty food grade starches also contributed to the margin
improvement.

Operating expenses from continuing operations for the third quarter decreased by
$619,000, or 9.3%, compared to the prior year period. For the nine months ended
May 31, 1998, operating expenses increased $518,000, or 2.8%. The decrease in
the third quarter reflects the results of cost containment efforts and
reductions in corporate office expenses associated with the anticipated spin-off
of PPC. The year-to-date increase in 



                                       11
<PAGE>   12

operating expense is primarily due to increased sales and marketing efforts
principally related to Penford Products Co.

As discussed above, in connection with the planned spin-off of PPC,
restructuring costs totaling $1.9 million were charged to continuing operations
in the third quarter, and other costs associated with implementing the spin-off.
These costs included approximately equal amounts for adjustments to the
corporate office infrastructure for personnel costs and termination benefits,
and other facilities charges.

Net interest expense for the third quarter and first nine months of fiscal 1998
were $1.5 million and $4.4 million, respectively, compared to $1.4 million and
$4.0 million in the corresponding periods a year ago. The increases are a result
of higher capitalized interest in the prior year on several large projects in
Cedar Rapids, Iowa and Richland, Washington, and to a lesser extent, higher debt
levels in the current year.

The effective tax rate for the third quarter and first nine months of fiscal
1998 was 35.0%, compared to 34.0% and 33.2%, respectively, in the corresponding
periods a year ago. The increase in the effective tax rate in fiscal 1998 is due
to the effects of higher state income taxes and tax refunds received in the
previous year.

LIQUIDITY

At May 31, 1998, Penford had working capital of $17.4 million, excluding $4.8
million of accrued liabilities associated with discontinued operations, an
unsecured credit agreement of $35.0 million under which there was $25.3 million
outstanding, and several uncommitted lines of credit aggregating $15.0 million
under which there was $10.2 million outstanding. The Company used operating cash
flow and debt to finance capital expenditures and spin-off expenditures during
the third quarter and first nine months of fiscal 1998.

In connection with the spin-off of PPC, on July 2, 1998, the company entered
into an unsecured $75.0 million revolving credit agreement with three banks
which will expire on June 30, 2003. Borrowing rates available to the Company
under the agreement are based on the LIBO rate or prime rate depending on the
selection of borrowing options. The agreement replaces the previously existing
unsecured revolving credit agreement which at May 31, 1998, had $25.3 million of
borrowings outstanding with four banks. It also replaces a $10.0 uncommitted
line of credit of which there was $5.2 million outstanding at quarter end. Total
outstanding debt of the Company subsequent to the completion of the new
revolving credit facility is approximately the same as immediately prior to its
execution.

Cash flow from continuing operations for the nine months ended May 31, 1998 was
$10.0 million compared to $15.3 million in the corresponding period of the prior
year. The change in operating cash flow is due to fluctuations in the components
of working capital and lower net income in the current year, primarily due to
restructure costs associated with implementing the spin-off of PPC.



                                       12
<PAGE>   13

The Company paid a $0.05 per share dividend on December 5, 1997, March 6, 1998
and June 3, 1998.

CAPITAL RESOURCES

Additions to property, plant and equipment during the nine months ended May 31,
1998 were $8.2 million. Third quarter additions of approximately $2.5 million
were primarily for various improvements to the Penford Products Co.
manufacturing facility in Cedar Rapids, Iowa and additional manufacturing
equipment installed at the Penford Food Ingredients facility in Plover,
Wisconsin. Capital expenditures for the Company's specialty paper chemicals and
food ingredients businesses for the fiscal 1998 year are expected to be
approximately $11.0 to $15.0 million.


RECENT DEVELOPMENT

On June 22, 1998, Penford Corporation's wholly-owned subsidiary, PPC, filed a
registration statement on Form 10 under the Securities Exchange Act of 1934 to
register the shares of common stock to be issued upon the distribution by the
Company of all the shares of common stock of PPC to the holders of Penford
Corporation's common stock. The registration statement on Form 10 and related
Information Statement describes the transaction in detail and contains
information about PPC, including financial statements and other financial
information.

YEAR 2000

The Company has undergone a review of its information systems, including
consideration of issues associated with the Year 2000. In connection with the
review, and as part of the Company's ongoing capital program, a series of
technology related expenditures were planned some of which are currently being
implemented. Management believes the expenditures will among other things,
satisfy the significant Year 2000 issues. Other Year 2000 expenditures are not
expected to be material.

FORWARD-LOOKING STATEMENTS

The above discussion contains forward-looking statements concerning the
completion of the spin-off of Penwest Pharmaceuticals Co. (PPC), the estimated
losses of PPC through the spin-off date, the costs of the spin-off reflected in
the amount of the one-time charge incurred by Penford Corporation, estimated
capital expenditures, estimated expenses related to year 2000 issues, and the
anticipated results of the Company. There are a variety of factors which could
cause actual events to differ materially from those projected in the
forward-looking statements, including without limitation; (i) the risk that the
spin-off may be delayed or not completed as the result of future developments in
Penford Corporation's or PPC's business or conditions in the securities markets,
failure to obtain financing for PPC or necessary government rulings or approvals
or third party consents or agreements or other developments; (ii) the risk that
additional charges may be required or results may be affected by greater than
expected spin-off costs or losses at PPC prior to the spin-off date,
unanticipated costs and expenses or other events affecting 



                                       13
<PAGE>   14

Penford Corporation's or PPC's business, and (iii) the risk that results may be
effected by construction delays, cost overruns, technical difficulties,
nonperformance by contractors or changes in capital improvement project
requirements or specifications; technical difficulties or cost overruns in the
Company's Year 2000 compliance program; competition; the possibility of
interruption of business activities due to accidents, strikes, weather or other
factors; product development risk; patents and intellectual property matters;
dependence on collaborators; regulatory and manufacturing issues; 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; 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.

Additional information which could affect the Company's financial results is
included in the Company's 1997 Annual Report to Shareholders and its Form 10-K
for the fiscal year ended August 31, 1997 on file with the Securities and
Exchange Commission. The Company assumes no obligation to update any
forward-looking statements should circumstances change.



Item 3        QUANTITATIVE AND QUALITATIVE DISCLOSURES
                                ABOUT MARKET RISK

Not applicable


                                       14
<PAGE>   15

                           PART II - OTHER INFORMATION

Item 1        Legal Proceedings
              The Registrant is unaware of any material developments in the
              legal proceedings referred to in the Registrant's Report on Form
              10-K for the year ended August 31, 1997.

              In November, 1997, the Company was notified by the Idaho Falls
              Police Department that a nearby resident had complained about
              health problems allegedly caused by starch emissions from the
              Company's Idaho Falls facility. Subsequently, the Idaho Department
              of Environmental Quality contacted the Company with regard to
              possible violations of the Company's air quality permit limits. In
              December, 1997, a group of nearby residents filed a Notice of
              Intent to Bring Suit with the Idaho Department of Environmental
              Quality and the U.S. Environmental Protection Agency pursuant to
              the Clean Air Act, the Comprehensive Environmental Response, the
              Compensation and Liability Act, and the Emergency Planning and
              Community Right-to-Know Act. The Company is investigating these
              issues; however, the Company is unable at this time to determine
              whether any claim or action will be commenced or to estimate the
              Company's potential exposure, if any.

Item 2        Changes in Securities
              Not applicable

Item 3        Defaults Upon Senior Securities
              Not applicable

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

Item 5        Other Information
              Not applicable

Item 6        Exhibits and Reports on Form 8-K.

     (a)       Exhibits:

                (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)

                (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)

                (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)

                (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)



                                       15
<PAGE>   16

                (10.1)  Senior Note Agreement among Penford Corporation as
                        Borrower and Mutual of Omaha and Affiliates as lenders,
                        dated November 1, 1992 (filed as an Exhibit to
                        Registrant's Form 10-Q for the quarter ended February
                        28, 1993)

                (10.2)  Loan Agreement among Penford Corporation as Borrower and
                        Seattle-First National Bank as Lender, dated December 1,
                        1989 (Registrant agrees to furnish a copy of this
                        instrument to the Commission on request)

                (10.3)  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)

                (10.4)  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)

                (10.5)  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)

                (10.6)  Change of Control Agreements with Messrs. Hamachek,
                        Cook, Widmaier, Talley, Horn, Rydzewski and Belsheim (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)

                (10.7)  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)

                (10.8)  Note Agreement dated as of October 1, 1994 among Penford
                        Corporation, Principal Mutual Life Insurance Company and
                        TMG Life Insurance Company (filed as an Exhibit to
                        Registrant's Form 10-Q for the quarter ended February
                        28, 1995)

                (10.9)  Penford Corporation 1994 Stock Option Plan as amended
                        and restated as of January 21, 1997 (filed on Form S-8
                        dated March 17, 1997)

                (10.10) Credit Agreement dated as of December 22, 1995 among
                        Penford Corporation, and its subsidiaries, Bank of
                        America National Trust and Savings Association, ABN-AMRO
                        Bank, N.V., The Bank of Nova Scotia, and Seattle-First
                        National Bank (filed as an exhibit to Registrant's Form
                        10-Q for the quarter ended February 29, 1996)

                (10.11) Amendment to Credit Agreement dated as of May 7, 1997
                        among Penford Corporation and its subsidiaries, Bank of
                        America National Trust and Savings Association, ABN-AMRO
                        Bank N.V., the Bank of Nova Scotia and Seattle-First
                        National Bank (filed as an exhibit to the Registrant's
                        Form 10-Q for the quarter ended May 31, 1997)

                (10.12) Second Amendment to Credit Agreement dated as of
                        November 28, 1997 among Penford Corporation and its
                        subsidiaries, Bank of America National Trust and Savings
                        Association, ABN-AMRO Bank, N.V., The Bank of Nova
                        Scotia, and Seattle-First National Bank 



                                       16
<PAGE>   17

                        (filed as an exhibit to the Registrant's Form 10-Q for
                        the quarter ended November 30, 1997)

                (10.13) 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)

                (10.14) Separation Agreement dated as of November 10, 1997
                        between Registrant and Penwest Pharmaceuticals Co.
                        (filed as an exhibit to Registrant's Form 10-K for
                        fiscal year ended August 31, 1997)


                27      Financial Data Schedules

     (b)       A Form 8-K was filed on May 20, 1998 reporting under Item 5,
               Registrant's announcement of a plan to affect a tax-free spin-off
               to its shareholders of the Company's pharmaceuticals subsidiary,
               Penwest Pharmaceuticals Co. Filed as an exhibit was a copy of a
               press release dated May 19, 1998 relating to the planned
               spin-off.




                                       17
<PAGE>   18

                                   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 9, 1998                          /s/ TOD R. HAMACHEK
------------                          ------------------------------------------
     Date                             Tod R. Hamachek
                                      President and
                                      Chief Executive Officer (Principal
                                      Executive Officer)




July 9, 1998                          /s/ JEFFREY T. COOK
------------                          ------------------------------------------
     Date                             Jeffrey T. Cook
                                      Vice President, Finance and
                                      Chief Financial Officer (Principal
                                      Financial Officer)





                                       18