##### Table of Contents



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

FORM 10-Q

(Mark One)



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

For the quarterly period ended May 31, 2002

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, Washington |  | 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  [   ]

The net number of shares of the Registrants common stock (the
Registrants only outstanding class of stock) outstanding as of July 8,
2002 was 7,656,410.

1



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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 FLOWS     
|                               |                                                                                               | 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 and Use of Proceeds                                             
|                               | 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 10.21                 



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##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES

INDEX

|                               |  |          |  |                                                                                                           |  |         
|------------------------------ |  | -------- |  | --------------------------------------------------------------------------------------------------------- |  | --------
|                               |  |          |  |                                                                                                           |  | Page No.
|                               |  |          |  |                                                                                                           |  |         
|PART I - FINANCIAL INFORMATION |  |         
|                              
|                               |  | Item 1 - |  | Financial Statements                                                                                      |  |         
|                              
|                               |  |          |  | Condensed Consolidated Balance Sheets
May 31, 2002 and August 31, 2001                                    |  | 3       
|                              
|                               |  |          |  | Condensed Consolidated Statements of Operations
Three and Nine Months Ended May 31, 2002
and May 31, 2001 |  | 4       
|                              
|                               |  |          |  | Condensed Consolidated Statements of Cash Flows
Nine Months Ended May 31, 2002
and May 31, 2001           |  | 5       
|                              
|                               |  |          |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6-9     
|                              
|                               |  | Item 2 - |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                     |  | 10-15   
|                              
|                               |  | Item 3 - |  | Quantitative and Qualitative Disclosures
About Market Risk                                                |  | 16      
|                              
|PART II - OTHER INFORMATION    |  |         
|                              
|                               |  | Item 1 - |  | Legal Proceedings                                                                                         |  | 17      
|                              
|                               |  | Item 2 - |  | Changes in Securities and Use of Proceeds                                                                 |  | 17      
|                              
|                               |  | Item 3 - |  | Defaults Upon Senior Securities                                                                           |  | 17      
|                              
|                               |  | Item 4 - |  | Submission of Matters to a Vote of Security Holders                                                       |  | 17      
|                              
|                               |  | Item 5 - |  | Other Information                                                                                         |  | 17      
|                              
|                               |  | Item 6 - |  | Exhibits and Reports on Form 8-K                                                                          |  | 17-19   
|                              
|SIGNATURES                     |  | 20      

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1: Financial Statements




PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                        |  |                                               |                                            |                 |         |         |         |   |         |         |  | 
|--------------------------------------- |  | --------------------------------------------- | ------------------------------------------ | --------------- | ------- | ------- | ------- | - | ------- | ------- |  | 
|(Dollars in thousands)                  |  | May 31, 2002                                  |                                            | August 31, 2001
|                                        |  |                                               |                                            |                
|ASSETS                                 
|Current assets:                         |  |                                               |                                            |                 |         |         |         |  
|                                        |  | Trade accounts receivable                     |                                            | $               | 27,591  |         |         | $ | 27,304  |        
|                                        |  | Inventories                                   |                                            |                 | 28,180  |         |         |   | 23,564  |        
|                                        |  | Prepaid expenses and other                    |                                            |                 | 5,260   |         |         |   | 6,505   |        
|                                        |  |                                               |                                            |                 |         |         |         |  
|                                        |  |                                               | Total current assets                       |                 |         | 61,031  |         |   |         | 57,373  | 
|Property, plant and equipment, net      |  |                                               | 134,409                                    |                 |         |         | 140,558 |  
|Deferred income taxes                   |  |                                               | 13,235                                     |                 |         |         | 13,214  |  
|Restricted cash value of life insurance |  |                                               | 11,720                                     |                 |         |         | 11,866  |  
|Other assets                            |  |                                               | 5,555                                      |                 |         |         | 5,838   |  
|Goodwill                                |  |                                               | 16,191                                     |                 |         |         | 15,264  |  
|                                        |  |                                               |                                            |                 |         |         |         |  
|                                        |  |                                               | Total assets                               |                 | $       | 242,141 |         |   | $       | 244,113 | 
|                                        |  |                                               |                                            |                 |         |         |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY   
|Current liabilities:                    |  |                                               |                                            |                 |         |         |         |  
|                                        |  | Bank overdraft, net                           |                                            | $               | 582     |         |         | $ | 1,776   |        
|                                        |  | Accounts payable                              |                                            |                 | 14,502  |         |         |   | 13,477  |        
|                                        |  | Accrued liabilities                           |                                            |                 | 10,651  |         |         |   | 8,541   |        
|                                        |  | Current portion of long-term debt             |                                            |                 | 20,895  |         |         |   | 17,658  |        
|                                        |  |                                               |                                            |                 |         |         |         |  
|                                        |  |                                               | Total current liabilities                  |                 |         | 46,630  |         |   |         | 41,452  | 
|Long-term debt                          |  |                                               | 83,191                                     |                 |         |         | 94,969  |  
|Other postretirement benefits           |  |                                               | 11,263                                     |                 |         |         | 11,129  |  
|Deferred income taxes                   |  |                                               | 22,359                                     |                 |         |         | 22,947  |  
|Other liabilities                       |  |                                               | 8,426                                      |                 |         |         | 7,904   |  
|Shareholders equity:                   |  |                                               |                                            |                 |         |         |         |  
|                                        |  | Common stock                                  |                                            |                 | 9,629   |         |         |   | 9,511   |        
|                                        |  | Additional paid-in capital                    |                                            |                 | 25,556  |         |         |   | 24,340  |        
|                                        |  | Retained earnings                             |                                            |                 | 66,963  |         |         |   | 65,526  |        
|                                        |  | Treasury stock                                |                                            |                 | (32,757 | )       |         |   | (32,757 | )      
|                                        |  | Accumulated other comprehensive income (loss) |                                            |                 | 881     |         |         |   | (908    | )      
|                                        |  |                                               |                                            |                 |         |         |         |  
|                                        |  |                                               | Total shareholders equity                 |                 |         | 70,272  |         |   |         | 65,712  | 
|                                        |  |                                               |                                            |                 |         |         |         |  
|                                        |  |                                               | Total liabilities and shareholders equity |                 | $       | 242,141 |         |   | $       | 244,113 | 
|                                        |  |                                               |                                            |                 |         |         |         |  

The accompanying notes are an integral part of these statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |        |  
|------------------------------------------------------------------------------- | ------------------------------------------------- | ---- | ------------ | ------ | ------------ | ---- | --------- | ----- | - | - | --------- | ------ |  | - | --------- | ------ | -
|                                                                                |                                                   |      | Three Months |        | Nine Months 
|                                                                                |                                                   |      | Ended May 31 |        | Ended May 31
|(Dollars in thousands except share and per share data)                          |                                                   | 2002 |              | 2001   |              | 2002 |           | 2001 
|                                                                                |                                                   |      |              |        |              |      |           |      
|Sales                                                                           |                                                   | $    | 59,137       |        |              | $    | 58,785    |       |   | $ | 170,280   |        |  | $ | 166,517   |       
|Cost of sales                                                                   |                                                   |      | 47,870       |        |              |      | 49,261    |       |   |   | 138,750   |        |  |   | 137,022   |       
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Gross margin                                      |      |              | 11,267 |              |      |           | 9,524 |   |   |           | 31,530 |  |   |           | 29,495 |  
|Operating expenses                                                              |                                                   |      | 5,794        |        |              |      | 5,997     |       |   |   | 15,854    |        |  |   | 16,821    |       
|Research and development                                                        |                                                   |      | 1,543        |        |              |      | 1,539     |       |   |   | 4,564     |        |  |   | 4,883     |       
|Restructure costs                                                               |                                                   |      |             |        |              |      | 295       |       |   |   | 1,383     |        |  |   | 295       |       
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Income from operations                            |      |              | 3,930  |              |      |           | 1,693 |   |   |           | 9,729  |  |   |           | 7,496  |  
|Interest expense, net                                                           |                                                   |      | 1,612        |        |              |      | 2,522     |       |   |   | 5,391     |        |  |   | 7,852     |       
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Income (loss) before taxes and
extraordinary item |      |              | 2,318  |              |      |           | (829  | ) |   |           | 4,338  |  |   |           | (356   | )
|Income tax expense (benefit)                                                    |                                                   |      | 898          |        |              |      | (221      | )     |   |   | 1,534     |        |  |   | (51       | )     
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|Income (loss) before extraordinary item                                         |                                                   |      | 1,420        |        |              |      | (608      | )     |   |   | 2,804     |        |  |   | (305      | )     
|Extraordinary loss on early extinguishment
of debt, net of income taxes of $478 |                                                   |      |             |        |              |      |          |       |   |   |          |        |  |   | 888       |       
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|Net income (loss)                                                               |                                                   | $    | 1,420        |        |              | $    | (608      | )     |   | $ | 2,804     |        |  | $ | (1,193    | )     
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|Weighted average common shares and
equivalents outstanding, assuming dilution   |                                                   |      | 7,907,213    |        |              |      | 7,487,429 |       |   |   | 7,748,022 |        |  |   | 7,460,030 |       
|Earnings (loss) per common share:                                               |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Income (loss) before extraordinary item           |      | $            | 0.19   |              |      | $         | (0.08 | ) |   | $         | 0.37   |  |   | $         | (0.04  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Extraordinary loss                                |      | $            |       |              |      | $         |      |   |   | $         |       |  |   | $         | (0.12  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Net income (loss)                                 |      | $            | 0.19   |              |      | $         | (0.08 | ) |   | $         | 0.37   |  |   | $         | (0.16  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|Earnings (loss) per share, assuming dilution:                                   |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Income (loss) before extraordinary item           |      | $            | 0.18   |              |      | $         | (0.08 | ) |   | $         | 0.36   |  |   | $         | (0.04  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Extraordinary loss                                |      | $            |       |              |      | $         |      |   |   | $         |       |  |   | $         | (0.12  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|                                                                                | Net income (loss)                                 |      | $            | 0.18   |              |      | $         | (0.08 | ) |   | $         | 0.36   |  |   | $         | (0.16  | )
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       
|Dividends declared per common share                                             |                                                   | $    | 0.06         |        |              | $    | 0.06      |       |   | $ | 0.18      |        |  | $ | 0.18      |       
|                                                                                |                                                   |      |              |        |              |      |           |       |   |   |           |        |  |   |           |       

The accompanying notes are an integral part of these statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                       |                                                                                                        |                                      |   |                          |        |   |   |         |        |  
|---------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------ | - | ------------------------ | ------ | - | - | ------- | ------ | -
|                       |                                                                                                        |                                      |   | Nine Months Ended May 31
|(Dollars in thousands) |                                                                                                        | 2002                                 |   | 2001                    
|                       |                                                                                                        |                                      |   |                         
|Operating activities:  |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Net income (loss)                                                                                      |                                      | $ | 2,804                    |        |   | $ | (1,193  | )     
|                       | Adjustments to reconcile net income (loss)
to net cash from operations:                                |                                      |   |                          |        |   |   |         |       
|                       |                                                                                                        | Loss on early extinguishment of debt |   |                          |       |   |   |         | 888    |  
|                       |                                                                                                        | Depreciation and amortization        |   |                          | 13,337 |   |   |         | 13,456 |  
|                       |                                                                                                        | Deferred income taxes                |   |                          | (684   | ) |   |         | 223    |  
|                       | Change in operating assets and liabilities,
excluding impact of Penford Australia Limited
acquisition: |                                      |   |                          |        |   |   |         |       
|                       |                                                                                                        | Trade receivables                    |   |                          | 1,134  |   |   |         | (2,300 | )
|                       |                                                                                                        | Inventories                          |   |                          | (3,718 | ) |   |         | (1,307 | )
|                       |                                                                                                        | Accounts payable, prepaids and other |   |                          | 3,386  |   |   |         | (4,029 | )
|                       |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Net cash from operating activities                                                                     |                                      |   | 16,259                   |        |   |   | 5,738   |       
|Investing activities:  |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Investment in property, plant and equipment                                                            |                                      |   | (4,855                   | )      |   |   | (10,085 | )     
|                       | Acquisition of Penford Australia Limited                                                               |                                      |   |                         |        |   |   | (55,953 | )     
|                       | Other                                                                                                  |                                      |   | 501                      |        |   |   | 354     |       
|                       |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Net cash used by investing activities                                                                  |                                      |   | (4,354                   | )      |   |   | (65,684 | )     
|Financing activities:  |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Proceeds from revolving line of credit                                                                 |                                      |   | 11,538                   |        |   |   | 60,863  |       
|                       | Payments on revolving line of credit                                                                   |                                      |   | (10,559                  | )      |   |   | (54,087 | )     
|                       | Proceeds from long-term debt                                                                           |                                      |   |                         |        |   |   | 106,509 |       
|                       | Payments on long-term debt                                                                             |                                      |   | (11,354                  | )      |   |   | (52,110 | )     
|                       | Payment of fees for early extinguishment of debt                                                       |                                      |   |                         |        |   |   | (1,366  | )     
|                       | Exercise of stock options                                                                              |                                      |   | 918                      |        |   |   | 791     |       
|                       | Payment of dividends                                                                                   |                                      |   | (1,361                   | )      |   |   | (1,339  | )     
|                       |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Net cash provided (used) by financing activities                                                       |                                      |   | (10,818                  | )      |   |   | 59,261  |       
|                       | Effect of exchange rate changes on cash and cash
equivalents                                           |                                      |   | 107                      |        |   |   | 154     |       
|                       |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Net increase (decrease) in cash and equivalents                                                        |                                      |   | 1,194                    |        |   |   | (531    | )     
|                       | Bank overdrafts at beginning of period                                                                 |                                      |   | (1,776                   | )      |   |   | (313    | )     
|                       |                                                                                                        |                                      |   |                          |        |   |   |        
|                       | Bank overdrafts at end of period                                                                       |                                      | $ | (582                     | )      |   | $ | (844    | )     
|                       |                                                                                                        |                                      |   |                          |        |   |   |        

The accompanying notes are an integral part of these 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.                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Penfords revenues and operating results may vary from quarter to
quarter. The Company experiences seasonality with its Penford Australia
operations in that it has lower sales volumes and gross margins in
Australia and New Zealands summer months, which corresponds to the
second fiscal quarter.                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|2. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments
that, in the opinion of management, are necessary to present fairly the
financial information set forth therein. Certain information and note
disclosures normally included in complete financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for interim financial
reporting. Results of operations for the three- and nine-month periods
ended May 31, 2002 are not necessarily indicative of future financial
results.
|  
|   |  | Investors should read these interim financial statements in conjunction
with Managements Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and
notes thereto for the fiscal year ended August 31, 2001 included in the
Penford Corporation and Subsidiaries annual report on Form 10-K, SEC
File No. 0-11488.                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Certain prior year amounts have been reclassified to conform with the
current year presentation, which had no effect on previously reported net
income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|3. |  | Recent Accounting Developments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Effective September 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  | SFAS No. 142 established new standards related to how acquired
goodwill and other intangible assets are to be recorded upon their
acquisition as well as how they are to be accounted for after they have
been initially recognized in the financial statements. Effective with
the adoption of this standard, Penford is no longer amortizing goodwill.
The Company completed a transitional impairment test for its goodwill and
determined there was no impairment to be recorded at September 1, 2001.
Penford used a fair value approach, using primarily discounted cash
flows, to complete the transitional impairment test. On a prospective
basis, the Company is required to test its goodwill for impairment on an
annual basis, or more frequently if certain indicators arise, based upon
a fair value approach. The first annual impairment test performed as of
June 1, 2002, determined there was no impairment.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys goodwill of $16.2 million and $15.3 million at May 31, 2002
and August 31, 2001, respectively, represents the excess of acquisition
costs over the fair value of the net assets of Penford Australia. The
increase in the carrying value of goodwill since August 31, 2001 reflects
the impact of exchange rate fluctuations between the Australian and U.S.
dollars on the translation of this asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The following table provides a reconciliation of previously reported
income (loss) before extraordinary item and earnings (loss) per share to
adjusted amounts assuming that SFAS No. 142 had been applied as of
September 1, 2000:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                 |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |       |  
|------------------------------------------------ | ------------------------------------------------ | ---- | ------------------ | ---- | ----------------- | ---- | ---- | ----- | - | - | ----- | ---- |  | - | ---- | ----- | -
|                                                 |                                                  |      | Three Months Ended |      | Nine Months Ended
|                                                 |                                                  |      | May 31             |      | May 31           
|(Dollars in thousands except per share data)     |                                                  | 2002 |                    | 2001 |                   | 2002 |      | 2001 
|                                                 |                                                  |      |                    |      |                   |      |      |      
|Reported income (loss) before extraordinary item |                                                  | $    | 1,420              |      |                   | $    | (608 | )     |   | $ | 2,804 |      |  | $ | (305 | )    
|Add: Goodwill amortization                       |                                                  |      |                   |      |                   |      | 191  |       |   |   |      |      |  |   | 527  |      
|                                                 |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |      
|Adjusted income (loss) before extraordinary item |                                                  | $    | 1,420              |      |                   | $    | (417 | )     |   | $ | 2,804 |      |  | $ | 222  |      
|                                                 |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |      
|Earnings (loss) per common share, diluted:       |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |      
|                                                 | Reported income (loss) before
extraordinary item |      | $                  | 0.18 |                   |      | $    | (0.08 | ) |   | $     | 0.36 |  |   | $    | (0.04 | )
|                                                 | Goodwill amortization                            |      |                    |     |                   |      |      | 0.03  |   |   |       |     |  |   |      | 0.07  |  
|                                                 |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |      
|                                                 | Adjusted income (loss) before
extraordinary item |      | $                  | 0.18 |                   |      | $    | (0.05 | ) |   | $     | 0.36 |  |   | $    | 0.03  |  
|                                                 |                                                  |      |                    |      |                   |      |      |       |   |   |       |      |  |   |      |      



| |  | The impact of the non-amortization of goodwill on net income (loss) and
earnings (loss) per share is the same as in the above table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other things, this statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt
which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria in APB Opinion No.
30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, will now be used to
classify those gains and losses. Penford will be required to adopt the
provisions of this statement related to the rescission of FASB Statement
No. 4 no later than September 1, 2002. Penford is
currently assessing the impact of this statement on its results of
operations, financial position and cash flows.

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|4. |  | Inventories                                
|-- |  | -------------------------------------------
|  
|   |  | The components of inventory are as follows:

|                       |  |              |        |                 |  |   |        | 
|---------------------- |  | ------------ | ------ | --------------- |  | - | ------ | 
|(Dollars in thousands) |  | May 31, 2002 |        | August 31, 2001
|                       |  |              |        |                
|Raw materials          |  | $            | 13,603 |                 |  | $ | 9,164  | 
|Work in progress       |  |              | 608    |                 |  |   | 610    | 
|Finished goods         |  |              | 13,969 |                 |  |   | 13,790 | 
|                       |  |              |        |                 |  |   |        | 
|Total inventories      |  | $            | 28,180 |                 |  | $ | 23,564 | 
|                       |  |              |        |                 |  |   |        | 



|5. |  | Other Comprehensive Income (Loss)                                  
|-- |  | -------------------------------------------------------------------
|  
|   |  | The components of other comprehensive income (loss) are as follows:

|                                                                                               |  |                    |       |                   |  |      |      |      |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                               |  | Three Months Ended |       | Nine Months Ended
|                                                                                               |  | May 31             |       | May 31           
|(Dollars in thousands)                                                                         |  | 2002               |       | 2001              |  | 2002 |      | 2001
|                                                                                               |  |                    |       |                   |  |      |      |     
|Net income (loss)                                                                              |  | $                  | 1,420 |                   |  | $    | (608 | )    |  | $ | 2,804 |   |  | $ | (1,193 | )
|Change in unrealized gains (losses) on derivative
instruments that qualify as cash flow hedges |  |                    | (3    | )                 |  |      | 409  |      |  |   | (34   | ) |  |   | 408    |  
|Foreign currency translation adjustments                                                       |  |                    | 2,707 |                   |  |      | (256 | )    |  |   | 1,823 |   |  |   | (1,806 | )
|                                                                                               |  |                    |       |                   |  |      |      |      |  |   |       |   |  |   |        |  
|Comprehensive income (loss)                                                                    |  | $                  | 4,124 |                   |  | $    | (455 | )    |  | $ | 4,593 |   |  | $ | (2,591 | )
|                                                                                               |  |                    |       |                   |  |      |      |      |  |   |       |   |  |   |        |  



|6. |  | Segment Reporting                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operates in one business segment: developing, manufacturing,
and marketing of specialty natural-based ingredient systems for various
applications.
|  
|   |  | Information about the Companys operations by geographic area, including
its operations in North America, Australia and New Zealand, is as
follows:           

|                                        |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |         |  
|--------------------------------------- | ----------------------- | ---- | ------------------ | ------ | ----------------- | ---- | ------ | ------ | - | - | ------- | ------- |  | - | ------- | ------- | -
|                                        |                         |      | Three Months Ended |        | Nine Months Ended
|                                        |                         |      | May 31             |        | May 31           
|(Dollars in thousands)                  |                         | 2002 |                    | 2001   |                   | 2002 |        | 2001  
|                                        |                         |      |                    |        |                   |      |        |       
|Sales                                   |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        
|                                        | - North America         |      | $                  | 43,274 |                   |      | $      | 44,053 |   |   | $       | 125,261 |  |   | $       | 127,179 |  
|                                        | - Australia/New Zealand |      |                    | 15,863 |                   |      |        | 14,732 |   |   |         | 45,019  |  |   |         | 39,338  |  
|                                        |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        
|                                        |                         | $    | 59,137             |        |                   | $    | 58,785 |        |   | $ | 170,280 |         |  | $ | 166,517 |        
|                                        |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        
|Income (loss) before extraordinary item |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        
|                                        | - North America         |      | $                  | 1,016  |                   |      | $      | (738   | ) |   | $       | 1,377   |  |   | $       | (812    | )
|                                        | - Australia/New Zealand |      |                    | 404    |                   |      |        | 130    |   |   |         | 1,427   |  |   |         | 507     |  
|                                        |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        
|                                        |                         | $    | 1,420              |        |                   | $    | (608   | )      |   | $ | 2,804   |         |  | $ | (305    | )      
|                                        |                         |      |                    |        |                   |      |        |        |   |   |         |         |  |   |         |        

|                       |                         |              |         |                 |  |   |         |         | 
|---------------------- | ----------------------- | ------------ | ------- | --------------- |  | - | ------- | ------- | 
|(Dollars in thousands) |                         | May 31, 2002 |         | August 31, 2001
|                       |                         |              |         |                
|Total Assets           |                         |              |         |                 |  |   |         |        
|                       | - North America         |              | $       | 166,998         |  |   | $       | 175,038 | 
|                       | - Australia/New Zealand |              |         | 75,143          |  |   |         | 69,075  | 
|                       |                         |              |         |                 |  |   |         |        
|                       |                         | $            | 242,141 |                 |  | $ | 244,113 |        
|                       |                         |              |         |                 |  |   |         |        

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|7. |  | Earnings (Loss) Per Common Share Before Extraordinary Item                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following table presents the computation of basic and diluted
earnings (loss) per share before extraordinary item:

|                                                                              |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           |  
|----------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | -
|                                                                              |  | Three Months Ended |           | Nine Months Ended
|                                                                              |  | May 31             |           | May 31           
|                                                                              |  | 2002               |           | 2001              |  | 2002 |           | 2001
|                                                                              |  |                    |           |                   |  |      |           |     
|Income (loss) before extraordinary item (in thousands)                        |  | $                  | 1,420     |                   |  | $    | (608      | )    |  | $ | 2,804     |  |  | $ | (305      | )
|                                                                              |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           |  
|Weighted average common
shares outstanding                                    |  |                    | 7,626,851 |                   |  |      | 7,487,429 |      |  |   | 7,571,369 |  |  |   | 7,460,030 |  
|Net effect of dilutive
stock options                                          |  |                    | 280,362   |                   |  |      |          |      |  |   | 176,653   |  |  |   |          |  
|                                                                              |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           |  
|Weighted average common shares
outstanding, assuming dilution                 |  |                    | 7,907,213 |                   |  |      | 7,487,429 |      |  |   | 7,748,022 |  |  |   | 7,460,030 |  
|                                                                              |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           |  
|Earnings (loss) per common share before
extraordinary item                    |  | $                  | 0.19      |                   |  | $    | (0.08     | )    |  | $ | 0.37      |  |  | $ | (0.04     | )
|Earnings (loss) per common share before
extraordinary item, assuming dilution |  | $                  | 0.18      |                   |  | $    | (0.08     | )    |  | $ | 0.36      |  |  | $ | (0.04     | )



|   |  | 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 in the three months and nine
months 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.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Restructure Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | On January 4, 2002, Penford announced a strategic restructuring of its
business operations. As part of the restructuring, Penford will
relocate its corporate headquarters from Bellevue, Washington to Denver,
Colorado, and terminate the employees based in Bellevue. The Company
anticipates the relocation to be completed by late fall 2002.                                                                                                                                              
|  
|   |  | In connection with this restructuring, the Company recorded a charge of
$1.4 million, consisting of employee termination costs, lease
termination costs and other costs associated with the closure of the
Bellevue office.                                                                                                                                                                                                                                                                     

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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report contains forward-looking statements concerning Penfords
performance and financial results, including sales increases resulting from
continued stabilization in the North American paper industry, anticipated
increases in specialty food starches sales resulting from continued acceptance
and penetration of protein binder and coating products, improvements in gross
margin percentages resulting from increases in sales volumes and improvement in
product mix, expected levels of operating and research and development
expenses, including expected increases in and funding of operating expenses for
a strategic restructuring and transition, the level of anticipated interest
rates, including the possibility of entering into interest rate agreements to
limit exposure to higher interest rates, the expected level of our effective
tax rate, the expectation that we will reduce our debt, the anticipated level
of capital investment, and the expectation that we will continue to pay a
quarterly dividend. There are a variety of factors that 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 our 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 Penford operates. Accordingly, there can be no
assurance that future activities or results will be as anticipated.

Forward-looking statements are based on our estimates and opinions on the date
the statements are made. We assume no obligation to update any forward-looking
statements if circumstances or estimates or opinions should change.

Additional information that could affect Penfords financial results is
included in our 2001 Annual Report to Shareholders and our Form 10-K for the
fiscal year ended August 31, 2001 on file with the Securities and Exchange
Commission.

Restructuring Announcement

On January 4, 2002, we announced a strategic restructuring of our business
operations to strengthen our position as a market leader in delivering
technically differentiated, specialty ingredients to the food, paper and
textile industries. The restructuring comes as a result of the rapid growth of
our North American food ingredients business, the addition of Penford Australia
Limited in September, 2000 and the changing landscape of the North American
paper industry. We are relocating our corporate headquarters from Bellevue,
Washington to Denver, Colorado, a location more central to customers and
operations, as well as the base of our fast-growing food ingredients business.
We anticipate completing the restructuring late this fall.

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On January 4, 2002 our board of directors appointed Thomas D. Malkoski to serve
as our new CEO, as Jeffrey T. Cook, the current president and CEO, is not
relocating to Denver for personal reasons. Cook will remain president until an
effective transition is completed and also will continue as a member of our
board of directors.

Malkoski brings extensive branded foods and specialty food ingredients
experience to Penford Corporation. He also has significant knowledge in
running complex organizations the size of Penford. Malkoski spent the last
four years as president and CEO of North American operations for Griffith
Laboratories, a specialty food ingredients business. Prior to that, he worked
for Chiquita Brands International, successfully managing its Asian and South
Pacific operations for several years. Malkoski began his career with Procter
and Gamble in 1980 where he progressed to major product category management
responsibilities.

On June 27, 2002 we announced that Steven O. Cordier will join the company as
chief financial officer and corporate vice president. Cordier brings an
accomplished career of over 22 years in specialty ingredient food and
industrial businesses to Penford, with extensive experience in a variety of
financial, investor relations and strategic planning roles.

In connection with the strategic restructuring, during the second quarter ended
February 28, 2002 we recorded a charge of $1.4 million, consisting of employee
termination costs, lease termination costs, and other costs associated with the
closure of the Bellevue office.

In addition to these costs, we have incurred and will continue to incur
incremental general and administrative costs during the transition period that
do not meet the generally accepted accounting definition of restructure costs.
These costs include recruiting and relocation fees for the new chief executive
officer, chief financial officer and other members of the corporate staff, and
overlap of key personnel during the transition, as well as the costs associated
with establishing the new office in the Denver area. We expect that
incremental general and administrative expenses will be approximately $0.2 -
$0.3 million per quarter through late fall 2002.

Results of Operations

Three months ended May 31, 2002 compared to three months ended May 31, 2001

In the three months ended May 31, 2002, sales increased $0.4 million, or 1%, to
$59.1 million compared to the corresponding prior-year period. The increase
from $58.8 million in the prior year is attributed to improvements in both our
North American industrial ingredients and Australian operations. Revenue to
North American paper customers grew $0.7 million, the first year over year
quarterly revenue growth in two and a half years due to slightly stronger
product demand, which follows the economic trends of the North American paper
industry. We expect continued stabilization as most economic indicators point
to further recovery in paper demand in coming fiscal quarters. Reported sales
for our Australian operations also rose by $1.1 million, or 8%, over last
years third quarter primarily due to a higher U.S.-Australian dollar exchange
rate. We expect continued modest improvement in Australia, although changes in
the exchange rate may impact this trend. Partially offsetting these increases
were lower sales volumes of specialty starch-based ingredients systems to the
North American food industry. Sales of these products dropped $1.5 million, or
13%, over last years third quarter, mainly the result of softer demand for
coatings systems. A contributing factor in this comparison is that the prior
year period also

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included significant pipeline filling for a new large coating customer. We
expect our new initiatives in the coatings and protein product categories to
provide a platform for revenue growth over the coming fiscal quarters.

Gross margin was $11.3 million, or 19% of sales, for the three months ended May
31, 2002, compared to $9.5 million, or 16% of sales, for the corresponding
prior-year period. The increase in gross margin was caused primarily by the
decline in natural gas prices, one of our significant production cost
components. Higher operating rates and market penetration of new, value-adding
products for our customers also contributed to this improvement. It was offset
somewhat, however, by the negative impact of lower sales volumes to our North
American food customers, as well as higher grain costs and some unfavorable
product mix shifts in Australia. As we expect to improve our sales mix and to
see some higher sales volumes, we expect to see some further improvement in our
gross margin percentage over the coming fiscal quarters.

Operating expenses for the three months ended May 31, 2002 were $5.8 million
compared to $6.0 million for the same period last year. However, last years
expenses included a charge of $0.5 million for transaction costs related to
terminated joint venture discussions and $0.2 million of goodwill amortization
that was eliminated with our adoption of SFAS No. 142, Goodwill and Other
Intangible Assets (see Recent Accounting Developments). After taking those
items into consideration, last years ongoing expense level was $5.3 million,
which has increased $0.5 million to the current level of $5.8 million.
Included in this quarters operating expenses are $0.3 million of incremental
costs related to the strategic restructuring, which do not meet the generally
accepted accounting definition of restructure charge. We have also experienced
other increases in benefit costs, commercial insurance and marketing costs,
offset by workforce reductions implemented at the end of last year. While most
factors will continue in near-term fiscal quarters, we expect some further
increase in marketing expenses as we continue to invest in the development of
new markets for our specialty food ingredients customers. However, we do not
expect a significant change in the relationship of operating expenses to sales.

Research and development expenses in the three months ended May 31, 2002
remained consistent with the corresponding prior-year period. We expect to
continue our ongoing investment in research and development at levels similar
to that of the third quarter and as required to support new market initiatives.

During the three months ended May 31, 2001 we announced a workforce reduction
in our Australian operations, which resulted in a pre-tax charge of $0.3
million.

Interest expense decreased $0.9 million, or 36%, to $1.6 million for the three
months ended May 31, 2002, compared to $2.5 million in the same period last
year. Lower average debt balances and the decline in market interest rates
drove the improvement. We expect interest expense will decline as we reduce
our debt through scheduled repayments on term loans and repayments on our
revolving credit arrangements. However, interest expense also will be impacted
by any further changes in market interest rates, as our credit facilities have
variable interest rates. We may enter into interest rate agreements to limit
our exposure to higher interest rates.

The effective tax rate for the three months ended May 31, 2002 was higher than
the corresponding period in the prior year. Based on an ongoing review of our
projected full year tax liability, the effective tax rate applied this quarter
was increased principally for state

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taxes. The effective rate for the three months ended May 31, 2002 brings our
tax provision for the nine month period to our expected effective tax rate of
35%. We expect our tax rate to remain consistent with the nine-month rate in
coming fiscal quarters, however, it may be impacted by the offsetting effects
of taxable income and losses incurred in different U.S. and foreign
jurisdictions.

Net income was $1.4 million, or $0.18 per common share, assuming dilution, for
the three months ended May 31, 2002, compared to a net loss of $0.6 million, or
$0.08 per common share, assuming dilution, for the corresponding period a year
ago.

Nine months ended May 31, 2002 compared to nine months ended May 31, 2001

Sales for the nine months ended May 31, 2002 increased 2% to $170.3 million
compared to the corresponding prior-year period. The increase from $166.5
million in the prior year is attributed to the acquisition of Penford Australia
in September 2000 and higher sales volumes to our customers in the food
industry. These increases were offset by the decline in sales volumes to our
North American paper customers.

Gross margin for the nine months ended May 31, 2002 was $31.5 million, or 19%
of sales, compared to $29.5 million, or 18% of sales, for the corresponding
prior-year period. For the year-to-date period, the increase in gross margin
was caused primarily by the decline in natural gas prices. This benefit was
partially affected, however, by the negative impact of lower sales volumes of
products to our paper customers.

Operating expenses for the nine months ended May 31, 2002 were $15.9 million.
This compares to $16.8 million for the corresponding period in the prior year,
a decline of 6%, attributable to the reasons described in the quarterly
comparison. Research and development expenses decreased $0.3 million, or 7% in
the nine months ended May 31, 2002 compared to prior year period, also due to
targeted workforce reductions implemented at the end of last year.

Last quarter we recorded a $1.4 million pre-tax charge related to our strategic
restructuring. This is presented on the same line as the restructuring charge
of $0.3 million recorded last year for a work force reduction in our Australian
operations.

Interest expense declined $2.5 million, or 31%, to $5.4 million for the nine
months ended May 31, 2002, compared to $7.9 million in the same period last
year for the reasons described in the quarterly comparison.

The effective tax rate for the nine months ended May 31, 2002 was higher than
the corresponding period in the prior year for the reasons explained in the
three-month analysis.

During the nine months ended May 31, 2001, we prepaid our private placement
debt facilities in connection with a comprehensive refinancing to fund the
acquisition of Penford Australia. The early repayment of the private placement
facilities required prepayment fees, which 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.

Net income for the nine months ended May 31, 2002 was $2.8 million, or $0.36
per common share, assuming dilution, compared to a loss before extraordinary
item of $0.3 million, or $0.04 per common share, assuming dilution, for the
same period last year. Excluding the

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restructuring charge, net income for the nine months ended May 31, 2002 was
$3.6 million, or $0.47 per common share, assuming dilution. Including the
extraordinary loss, the net loss for the nine months ended May 31, 2001 was
$1.2 million, or $0.16 per common share, assuming dilution.

Liquidity and Capital Resources

At May 31, 2002, Penford had working capital of $14.4 million and $104.1
million outstanding under its credit facilities, which are comprised of term
loans, revolving credit and overnight borrowing facilities. We expect to
generate sufficient cash flow from operations to reduce our outstanding debt
and do not expect to increase borrowings in the normal course of operations for
the remainder of this fiscal year and next except for seasonal borrowings
related to grain purchasing for our Australian operations, generally in our
third fiscal quarter.

Cash flow from operations for the nine months ended May 31, 2002 was $16.3
million compared to $5.7 million in the corresponding period of the prior year.
The increase in operating cash flows is due primarily to favorable changes in
working capital and improved profitability. In addition to normal operating
expenses, we will use cash generated from operations to fund the payment of
$1.4 million of accrued strategic restructuring costs over the next two years.

We invested $4.9 million in property, plant and equipment during the nine
months ended May 31, 2002, compared to $10.1 million in the same period last
year. Capital expenditures in fiscal 2002 were primarily for improvements at
the Companys production facility in Cedar Rapids, Iowa, including an
investment in food-grade production capability this quarter that allows us to
leverage existing assets and improve asset utilization. We expect that in the
near term, our capital investment will increase to levels similar to 2001.
This will consists of continued upgrades and operational efficiency
improvements at our Cedar Rapids facility, as well as at our other North
American, Australian and New Zealand production facilities. We may make
further commitments for significant new capital projects as we improve the
amount of 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. We expect our capital investments to be $8-9 million this
fiscal year.

On September 29, 2000, we acquired operations in Australia and New Zealand for
$56.0 million, which was financed through additional borrowings.

We made term loan payments totaling $11.4 million during the nine months ended
May 31, 2002. Annual payments required under the term loans are approximately
$15 million. In addition, we are required to make payments on our grain
purchasing facility as we use the grain in production in Australia, which is
expected to be approximately $6 million.

Under the financial covenants of our credit agreements, we are required over
the next two fiscal quarters to improve our leverage ratio (the ratio of our
debt balance to the trailing four quarters of earnings before interest, taxes,
depreciation and amortization). Although we have significantly improved
earnings and reduced our borrowings over the past year, we have limited ability
to borrow on available capacity under our credit lines until we have improved
our leverage ratio, unless we request and our lenders agree to modify the
covenant requirement. However, as mentioned previously, we do not expect to
increase our borrowings, other than seasonal borrowing related to grain
purchasing for our Australian

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operations in the third quarter of next year. We anticipate that we will have
sufficient borrowing capacity and availability on our credit lines to fund
those seasonal grain purchases.

In the prior year, our financing activities revolved primarily around
refinancing and additional borrowings for the acquisition of Penford Australia.

Penford has paid a quarterly cash dividend since 1992. The quarterly dividend
rate paid since April 2000 has remained at $0.06 per share. We paid $0.9
million in dividends to our shareholders during the first nine months of this
fiscal year, approximately the same as the first nine months of last year.
Although our Board of Directors reviews the dividend policy on a periodic
basis, we anticipate that we will continue to pay quarterly dividends in the
foreseeable future.

The Board of Directors has authorized a stock repurchase program for the
purchase of up to 500,000 shares of our outstanding common stock. Repurchases
under the program to date have totaled 281,300 shares for $4.3 million in prior
years. We have not purchased any of our common stock during fiscal 2001 or to
date in fiscal 2002.

Recent Accounting Developments

Effective September 1, 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 established new standards related to how acquired goodwill and other
intangible assets are to be recorded upon their acquisition as well as how they
are to be accounted for after they have been initially recognized in the
financial statements. Effective with the adoption of this standard, Penford is
no longer amortizing goodwill. We completed a transitional impairment test for
our goodwill and determined there was no impairment to be recorded at September
1, 2001. Penford used a fair value approach, using primarily discounted cash
flows, to complete the transitional impairment test. On a prospective basis,
we are required to test our goodwill for impairment on an annual basis, or more
frequently if certain indicators arise, based upon a fair value approach. The
first annual impairment test performed as of June 1, 2002, determined there was
no impairment.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other things, this statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
will now be used to classify those gains and losses. We will be required to
adopt the provisions of this statement related to the rescission of FASB
Statement No. 4 no later than September 1, 2002. We are currently assessing
the impact of this statement on our results of operations, financial position
and cash flows.

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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 our market risk sensitive instruments is
the potential loss from adverse changes in interest rates, foreign currency
exchange rates, and commodities prices.

We are unaware of any material changes to the market risk disclosures referred
to in our annual report on Form 10-K for the year ended August 31, 2001, other
than a 8% decline in the outstanding balance of long-term debt, which reduces
our potential interest rate exposure.

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PART II  OTHER INFORMATION




Item 1 Legal Proceedings



| |  | A complaint was filed in late November 1999 against Penford in the United
States District Court for the District of Idaho. The complaint sought civil
penalties for alleged violations of the Clean Air Act and compensatory
damages for alleged trespass, nuisance and personal injury claims. The
Clean Air Act claims were dismissed with prejudice by the federal courts
Summary Judgment order dated July 24, 2001. Personal injury claims were
dismissed with prejudice on summary judgment in May of 2002. Remaining
property damage claims were resolved by mutual agreement.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 2 Changes in Securities and Use of Proceeds



| |  | 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
|--- |  | --------

|       |  |                                                                                                                                                                                                                                                               
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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)
|      
|(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)                                                                                    
|      
|(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)*                                                                                                                                                   
|       
|(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)*                                                                                                                                                           
|       
|(10.4)  |  | Change of Control Agreements between Penford Corporation and
Messrs. Horn, Keeley, Kunerth, and Malkoski (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)*                                                                            
|       
|(10.5)  |  | 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)*                                                                                                                                                               
|       
|(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)*                                                                                                                                                                                         
|       
|(10.7)  |  | Penford Corporation Stock Option Plan for Non-Employee
Directors (filed as an exhibit to Registrants Form 10-Q for the
quarter ended May 31, 1996)*                                                                                                                                                                        
|       
|(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)                                                                                                                                                      
|       
|(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)                                                                                                                                                        
|       
|(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)*                                                                                                                                              
|       
|(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)                                                                                                                                                  
|       
|(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)                                                                                                                                                
|       
|(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)
|       
|(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)                                                                                                           
|       
|(10.15) |  | Syndicated Facility Agreement dated as of November 15, 2000
among Penford Australia Limited, a wholly owned subsidiary of                                                                                                                                                                                                   

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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | 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)                                                                                                                                                                                      
|       
|(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)                                                                                                   
|       
|(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 (filed as an exhibit to
Registrants Form 10-Q for the quarter ended May 31, 2001) 
|       
|(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 (filed as an exhibit to
Registrants Form 10-Q for the quarter ended May 31, 2001)
|       
|(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 (filed as an exhibit to
Registrants Form 10-Q for the quarter ended May 31, 2001)  
|       
|(10.20) |  | Transition Agreement dated as of January 17, 2002 between
Registrant and Jeffrey T. Cook (filed as an exhibit to
Registrants Form 10-Q for the quarter ended February 28, 2002)*                                                                                                                                                                                                   
|       
|(10.21) |  | Third Amendment dated as of April 29, 2002 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                                                                                    



|* |  | Denotes management contract or compensatory plan or arrangements
|- |  | ----------------------------------------------------------------



|(b) |  | There were no filings on Form 8-K in the quarter ended May 31, 2002.
|--- |  | --------------------------------------------------------------------

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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 12,
2002 |  | /s/ Jacqueline L. Davidson                                                 
|Date          |  | Jacqueline L. Davidson
Vice President of Finance
(Chief Accounting Officer)

20