10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended August 31, 2007
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number 0-11488

Penford Corporation

(Exact name of registrant as specified in its charter)

Washington	91-1221360
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7094 S. Revere Parkway Centennial, Colorado	80112-3932 (Zip Code)
(Address of principal Executive Offices)

Registrant’s telephone number, including area code:

(303) 649-1900

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1.00 par value	The Nasdaq Stock Market, LLC
Common Stock Purchase Rights	The Nasdaq Stock Market, LLC

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

None

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.  Yes þ  No o

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer  o     Accelerated filer  þ     Non-accelerated filer  o

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of February 28, 2007, the last business day of the Registrant’s second quarter of fiscal 2007, was approximately $179.3 million based upon the last sale price reported for such date on The Nasdaq Stock Market LLC. For purposes of making this calculation, Registrant has assumed that all the outstanding shares were held by non-affiliates, except for shares held by Registrant’s directors and officers and by each person who owns 10% or more of the outstanding Common Stock. However, this does not necessarily mean that there are not other persons who may be deemed to be affiliates of the Registrant.

The number of shares of the Registrant’s Common Stock (the Registrant’s only outstanding class of stock) outstanding as of November 1, 2007 was 9,218,923.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement relating to the 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

PENFORD CORPORATION

FISCAL YEAR 2007 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business		2
	Item 1A	Risk Factors		8
	Item 1B	Unresolved Staff Comments		14
	Item 2.	Properties		14
	Item 3.	Legal Proceedings		15
	Item 4.	Submission of Matters to a Vote of Security Holders		15
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities		16
	Item 6.	Selected Financial Data		18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		30
	Item 8.	Financial Statements and Supplementary Data		32
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		65
	Item 9A.	Controls and Procedures		65
	Item 9B.	Other Information		65
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		65
	Item 11.	Executive Compensation		66
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		66
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		66
	Item 14.	Principal Accountant Fees and Services		67
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		67
Signatures				68
Deferred Compensation Plan, Amended and Restated
Form of 2006 Long-Term Incentive Plan Restricted Stock Award Notice and Agreement
Non-Employee Director Compensation Term Sheet
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO and CFO Pursuant to Section 906

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PART I

Forward-looking Statements

The statements contained in this Annual Report on Form 10-K (“Annual Report”) that are not historical facts, including, but not limited, to statements found in the Notes to Consolidated Financial Statements and in Item 1 — Business and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as “believes,” “may,” “will,” “looks,” “should,” “could,” “anticipates,” “expects,” or comparable terminology or by discussions of strategies or trends.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such forward-looking statements, and the Company does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Annual Report, including those referenced below, and those described from time to time in other filings with the Securities and Exchange Commission which include, but are not limited to:

•  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 and availability;

•  expectations regarding the construction cost of the ethanol facility and the timing of ethanol production;

•  changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company’s products including unfavorable shifts in product mix;

•  unanticipated costs, expenses or third-party claims;

•  the risk that results may be affected by construction delays, cost overruns, technical difficulties, nonperformance by contractors or changes in capital improvement project requirements or specifications;

•  interest rate, chemical and energy cost volatility;

•  foreign currency exchange rate fluctuations;

•  changes in assumptions used for determining employee benefit expense and obligations; or

•  other unforeseen developments in the industries in which Penford operates.

Item 1:   Business

Description of Business

Penford Corporation (which, together with its subsidiary companies, is referred to herein as “Penford” or the “Company”) is a North American and Australian developer, manufacturer and marketer of specialty natural-based ingredient systems for many industrial and food applications. The Company’s strategically-located manufacturing facilities in the United States, Australia and New Zealand provide it with broad geographic coverage of its target markets. Penford is a Washington corporation originally incorporated in September 1983. The Company commenced operations as a publicly-traded company on March 1, 1984.

Penford operates in three business segments, each utilizing its carbohydrate chemistry expertise to develop starch-based ingredients for value-added applications in several markets that improve the quality and performance

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of customers’ products, including papermaking and food products. The first two, industrial ingredients and food ingredients, are broad categories of end-market users, primarily served by the Company’s United States operations. The third segment consists of geographically separate operations in Australia and New Zealand. The Australian and New Zealand operations are engaged primarily in the food ingredients business. Financial information about Penford’s segments and geographic areas is included in Note 15 to the Consolidated Financial Statements.

The Company has extensive research and development capabilities, which are used in understanding the complex chemistry of carbohydrate-based materials and in developing applications to address customer needs.

Penford’s three business segments are:

•  Industrial Ingredients — North America, which in fiscal 2007 generated approximately 54% of Penford’s revenue, is a supplier of chemically modified specialty starches to the paper and packaging industries. Through a commitment to research and development, Industrial Ingredients develops customized product applications that help its customers realize improved manufacturing efficiencies and advancements in product performance. Industrial Ingredients has specialty processing capabilities for a variety of modified starches. Specialty products for industrial applications are designed to improve the strength and performance of customers’ products and efficiencies in the manufacture of coated and uncoated paper and paper packaging products. These starches are principally ethylated (chemically modified with ethylene oxide), oxidized (treated with sodium hypochlorite) and cationic (carrying a positive electrical charge). Ethylated and oxidized starches are used in coatings and as binders, providing strength and printability to fine white, magazine and catalog paper. Cationic and other liquid starches are generally used in the paper-forming process in paper production, providing strong bonding of paper fibers and other ingredients. Industrial Ingredients’ products are a cost-effective alternative to synthetic, petroleum-based ingredients.

•  Food Ingredients — North America, which in fiscal 2007 generated approximately 17% of Penford’s revenue, is a developer and manufacturer of specialty starches and dextrins to the food manufacturing and food service industries. Its expertise is in leveraging the inherent characteristics from potato, corn, tapioca and rice to help improve its customers’ product performance. Food Ingredients is the only North American manufacturer of modified food-grade potato starch. Food Ingredients’ specialty starches produced for food applications are used in coatings to provide crispness, improved taste and texture, and increased product life for products such as french fries sold in quick-service restaurants. Food-grade starch products are also used as moisture binders to reduce fat levels, modify texture and improve color and consistency in a variety of foods such as canned products, sauces, whole and processed meats, dry powdered mixes and other food and bakery products.

•  Australia/New Zealand Operations generated approximately 29% of Penford’s revenue in fiscal 2007 and the Company believes it is the sole domestic producer of value-added modified maize starches and various starch derived products for the food, paper and mining industries in Australia and New Zealand. The Australia/New Zealand segment develops, manufactures and markets ingredient systems, including specialty starches and sweeteners for food and industrial applications. In both Australia and New Zealand, modified starch competition is generally from imports as there is only one other domestic producer. This segment’s flexible manufacturing capabilities allow the Company to manufacture products to customer specifications and to quickly respond to customers’ changing needs.

In June 2006, the Company announced plans to invest $42 million for up to 40 million gallons of ethanol production capacity per year at its Cedar Rapids, Iowa facility. In October 2006, Penford refinanced its credit facility and obtained a $45 million capital expansion loan commitment maturing December 2012 to finance construction of the ethanol plant. The designed capacity has been expanded to 45 million gallons with construction cost estimates maintained at $1.00 to $1.05 per gallon. Contracts valued at $40 million have been awarded for this project as of the end of October 2007. Penford has much of the infrastructure within the Cedar Rapids plant to manufacture ethanol cost effectively, with sufficient grain handling, separation processes, utilities and logistic capabilities. The factory is centrally located near rail and ground transport arteries and the ethanol facility will occupy available space within the existing site footprint. Once complete, this enhancement of the Company’s bio-refining capabilities will give management the ability to select from multiple output choices to capitalize on changing industry conditions and selling opportunities. This increased flexibility will allow the Company to direct production towards the most

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attractive mix of strategic and financial opportunities. Additionally, by improving production capacity and adding fermentation capability, Penford expects to be better positioned to participate in emerging bio-processing trends and technologies that represent potential platforms for future growth.

Raw Materials

Corn:  Penford’s North American corn wet milling plant is located in Cedar Rapids, Iowa, the middle of the U.S. corn belt. Accordingly, the plant has truck-delivered corn available throughout the year from a number of suppliers at prices consistent with those available in the major U.S. grain markets.

Penford Australia’s corn wet milling facilities in Lane Cove, Australia, and Auckland, New Zealand are sourced through truck-delivered corn at contracted prices with regional independent farmers and merchants. The corn sourced in Australia and New Zealand is normally contracted prior to harvest (March — June). Corn used in Australia is purchased and stored for use in both the current and following year. The corn sourced in New Zealand is purchased in advance for future delivery. Corn is also purchased from Australia as necessary to supplement the corn sourced and processed in New Zealand.

Potato Starch:  The Company’s facilities in Idaho Falls, Idaho; Richland, Washington; and Plover, Wisconsin use starch recovered as by-products from potato processors as the primary raw material to manufacture modified potato starches. The Company enters into contracts typically having durations of one to five years with potato processors in the United States, Canada and Mexico to acquire potato-based raw materials.

Wheat Products:  Penford Australia’s Tamworth facility uses wheat flour as the primary raw material for the production of its wheat products, including wheat starch, wheat gluten and glucose syrup. The Company is currently negotiating with various suppliers for the supply of wheat flour subsequent to the expiration of its current supply contract at the end of calendar 2007.

Chemicals:  The primary chemicals used in the manufacturing processes are readily available commodity chemicals. The prices for these chemicals are subject to price fluctuations due to market conditions.

Natural Gas:  The primary energy source for most of Penford’s plants is natural gas. Penford contracts its natural gas supply with regional suppliers, generally under short-term supply agreements, and at times uses futures contracts to hedge the price of natural gas in North America.

Corn, potato starch, wheat flour, chemicals and natural gas are not currently subject to availability constraints, although drought conditions in Australia have periodically affected the prices of corn and wheat in that area and strong demand has substantially increased the prices of natural gas, chemicals and agricultural raw materials. Current forecasts for wheat production in Australia indicate that the existing drought will affect the future price for that raw material. Penford’s current potato starch requirements constitute a material portion of the available North American supply. Penford estimates that it purchases approximately 50-55% of the recovered potato starch in North America. It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development could result in capacity constraints.

Over half of the Company’s manufacturing costs consists of the costs of corn, potato starch, wheat flour, chemicals and natural gas. The remaining portion consists of the costs of labor, distribution, depreciation and maintenance of manufacturing plant and equipment, and other utilities. The prices of raw materials may fluctuate, and increases in prices may affect Penford’s business adversely. To mitigate this risk, Penford hedges a portion of corn and gas purchases with futures and options contracts in the U.S. and enters into short-term supply agreements for other production requirements in all locations.

Research and Development

Penford’s research and development efforts cover a range of projects including technical service work focused on specific customer support projects which require coordination with customers’ research efforts to develop innovative solutions to specific customer requirements. These projects are supplemented with longer-term, new product development and commercialization initiatives. Research and development expenses were $6.8 million, $6.2 million and $5.8 million for fiscal years ended August 31, 2007, 2006 and 2005, respectively.

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At the end of fiscal 2007, Penford had 39 scientists, including seven with PhD’s with expert knowledge of carbohydrate characteristics and chemistry.

Patents, Trademarks and Tradenames

Penford owns a number of patents, trademarks and tradenames.

Penford has approximately 200 current patents and pending patent applications, most of which are related to technologies in french fry coatings, coatings for the paper industry and animal and human nutrition. Penford’s issued patents expire at various times between 2008 and 2025. The annual cost to renew all of the Company’s patents is approximately $0.2 million. However, most of Penford’s products are currently made with technology that is broadly available to companies that have the same level of scientific expertise and production capabilities as Penford.

Specialty starch ingredient brand names for industrial applications include, among others, Penford^® Gums, Pensize^® binders, Penflex^® sizing agent, Topcat^® cationic additive and the Apollo^® starch series. Product brand names for food ingredient applications include PenBind^®, PenCling^®, PenPlus^®, CanTab^®, MAPS^tm, Mazaca^tm and Fieldcleer^tm.

Quarterly Fluctuations

Penford’s revenues and operating results vary from quarter to quarter. In particular, the Company experiences seasonality in its Australian operations. The Company has lower sales volumes and gross margins in Australia and New Zealand’s summer months, which occur during Penford’s second fiscal quarter. This seasonal decline is caused by the closure of some customers’ plants for public holidays and maintenance during this period. Decreased consumption of some foods which use the Company’s products, such as packaged bread, also contributes to this seasonal trend. Sales volumes of the Food Ingredients — North America products used in french fry coatings are also generally lower during Penford’s second fiscal quarter due to decreased consumption of french fries during the post-holiday season. The cost of natural gas in North America is generally higher in the winter months than the summer months.

Working Capital

The Company’s growth is funded through a combination of cash flows from operations and short- and long-term borrowings. See the discussion in Liquidity and Capital Resources under Management’s Discussion and Analysis of Financial Condition and the Results of Operations in Item 7.

Penford generally carries a one- to 45-day supply of materials required for production, depending on the lead time for specific items. Penford manufactures finished goods to customer orders or anticipated demand. The Company is therefore able to carry less than a 30-day supply of most products. Terms for trade receivables and trade payables are standard for the industry and region and generally do not exceed 30-day terms except for trade receivables for export sales.

Environmental Matters

Penford’s operations are governed by various federal, state, local and foreign environmental laws and regulations. In the United States, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the EPA Oil Pollution Control Act, the Occupational Safety and Health Administration’s hazardous materials regulations, the Toxic Substances Control Act, the Comprehensive Environmental Response Compensation and Liability Act, and the Superfund Amendments and Reauthorization Act. In Australia, Penford is subject to the environmental requirements of the Protection of the Environment Operations Act, the Dangerous Goods Act, the Ozone Protection Act, the Environmentally Hazardous Chemicals Act, and the Contaminated Land Management Act. In New Zealand, the Company is subject to the Resource Management Act, the Dangerous Goods Act, the Hazardous Substances and New Organisms Act and the Ozone Protection Act.

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Permits are required by the various environmental agencies which regulate the Company’s operations. Penford believes that it has obtained all necessary material environmental permits required for its operations. Penford believes that its operations are in compliance with applicable environmental laws and regulations in all material aspects of its business. Penford estimates that annual compliance costs, excluding operational costs for emission control devices, wastewater treatment or disposal fees, are approximately $1.8 million.

Penford has adopted and implemented a comprehensive corporate-wide environmental management program. The program is managed by the Corporate Director of Environmental, Health and Safety and is designed to structure the conduct of Penford’s business in a safe and fiscally responsible manner that protects and preserves the health and safety of employees, the communities surrounding the Company’s plants, and the environment. The Company continuously monitors environmental legislation and regulations that may affect Penford’s operations.

During fiscal 2007, there have been no material effects on the Company’s operations that resulted from compliance with environmental regulations. No unusual expenditures for environmental facilities and programs are anticipated in fiscal 2008.

Principal Customers

Penford sells to a variety of customers and has several relatively large customers in each business segment. None of the Company’s customers constituted 10% of sales in fiscal years 2006 and 2005. However, for fiscal 2007, the Company’s largest customer, Domtar, Inc., represented approximately 12% of the Company’s consolidated net sales. Domtar, Inc. is a customer of the Company’s Industrial Ingredients — North America business.

Competition

In its primary markets, Penford competes directly with approximately five other companies that manufacture specialty starches for the papermaking industry and approximately six other companies that manufacture specialty food ingredients. Penford competes indirectly with a larger number of companies that provide synthetic and natural-based ingredients to industrial and food customers. Some of these competitors are larger companies, and have greater financial and technical resources than Penford. Application expertise, quality and service are the major competitive advantages for Penford.

Employees

At August 31, 2007, Penford had 596 total employees. In North America, Penford had 357 employees, of which approximately 40% are members of a trade union. The collective bargaining agreement covering the Cedar Rapids- based manufacturing workforce expires in August 2012. Penford Australia had 239 employees, of which 69% are members of trade unions in Australia and New Zealand. The union contracts for the Tamworth, Australia, and the New Zealand facilities have expiration dates of September 2008 and February 2008, respectively. The Lane Cove, Australia, union agreement expires in December 2007 and is currently being negotiated. There is no assurance that the Company will successfully renegotiate this agreement before expiration or at all.

Sales and Distribution

Sales are generated using a combination of direct sales and distributor agreements. In many cases, Penford supports its sales efforts with technical and advisory assistance to customers. Penford generally ships its products upon receipt of purchase orders from its customers and, consequently, backlog is not significant.

Customers for industrial corn-based starch ingredients purchase products through fixed-price contracts or formula-priced contracts for periods covering three months to two years or on a spot basis. In fiscal 2007, approximately 63% of these sales were under fixed-price contracts, and the remaining 37% of the sales were under formula-priced contracts or sold on a spot basis.

Since Penford’s customers are generally other manufacturers and processors, most of the Company’s products are distributed via rail or truck to customer facilities in bulk, except in Australia and New Zealand where most dry product is packaged in 25kg bags.

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Foreign Operations and Export Sales

Penford expanded into foreign markets with its acquisition of Penford Australia in September 2000. Penford Australia is the primary producer of corn starch products in Australia and New Zealand. Penford Australia manufactures products used to enhance the quality and performance of packaged food products, generally through providing the texture and viscosity required by its customers for products such as sauces and gravies. Penford Australia’s starch products are also used in industrial applications including mining, paper, corrugating and building materials. The Company’s operations in Australia and New Zealand include three manufacturing facilities for processing specialty corn starches and wheat-related products. Competition is mainly from imported products, except in wheat flour based starches where there is one other producer in Australia. Export sales from Penford’s businesses in the U.S. and Australia/New Zealand accounted for approximately 15%, 13% and 16% of total sales in fiscal 2007, 2006 and 2005, respectively. See Note 15 to the Consolidated Financial Statements in Item 8 for sales, depreciation and amortization, income and loss from operations, net capital expenditures and total assets by geographic segment, which information is incorporated by reference.

Available Information

Penford’s Internet address is www.penx.com. The Company makes available, free of charge, through its Internet site, the Company’s annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Directors and Officers Forms 3, 4 and 5; and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission (“SEC”). The information found on Penford’s web site shall not be considered to be part of this or any other report or other filing filed with or furnished to the SEC. The SEC also maintains an Internet site which contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s Internet address is www.sec.gov.

In addition, the Company makes available, through the Investor Relations section of its Internet site, the Company’s Code of Business Conduct and Ethics and the written charters of the Audit, Governance and Executive Compensation and Development Committees.

Executive Officers of the Registrant

Name	Age		Title
Thomas D. Malkoski		51	President and Chief Executive Officer
Steven O. Cordier		51	Senior Vice President, Chief Financial Officer and Assistant Secretary
Russell A. Allwell		43	Managing Director, Penford Australia and Penford New Zealand
Timothy M. Kortemeyer		41	Vice President and President, Penford Products Co.
Wallace H. Kunerth		59	Vice President and Chief Science Officer
Christopher L. Lawlor		57	Vice President — Human Resources, General Counsel and Secretary
John R. Randall		63	Vice President and President, Penford Food Ingredients

Mr. Malkoski joined Penford Corporation as Chief Executive Officer and was appointed to the Board of Directors in January 2002. He was named President of Penford Corporation in January 2003. From 1997 to 2001, he served as President and Chief Executive Officer of Griffith Laboratories, North America, a formulator, manufacturer and marketer of ingredient systems to the food industry. Previously, he served in various senior management positions, including as Vice President/Managing Director of the Asia Pacific and South Pacific regions for Chiquita Brands International, an international marketer and distributor of bananas and other fresh produce. Mr. Malkoski began his career at the Procter and Gamble Company, a marketer of consumer brands, progressing through major product category management responsibilities.

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Mr. Cordier is Penford’s Senior Vice President, Chief Financial Officer and Assistant Secretary. He joined Penford in July 2002 as Vice President and Chief Financial Officer, and was promoted to Senior Vice President in November 2004. From September 2005 to April 2006, Mr. Cordier served as the interim Managing Director of Penford’s Australian and New Zealand operations. He came to Penford from Sensient Technologies Corporation, a manufacturer of specialty products for the food, beverage, pharmaceutical and technology industries, where he held a variety of senior financial management positions.

Mr. Allwell joined Penford as Managing Director of its Australian and New Zealand operations in April 2006. Prior to joining Penford, Mr. Allwell had been the General Manager Retail Sales for George Weston Foods, a manufacturer of baked goods and other foods, since 2003. From 1996 to 2003, Mr. Allwell served in various senior management roles with Berri Ltd., a beverage manufacturer, including as Director of Strategy from 2000 to 2003, as Marketing Director from 1997 to 2003, and as General Manager — New Ventures from 1996 to 1997. Prior to that, Mr. Allwell served in various management, sales and marketing positions with Simplot Australia, Kraft Foods, Calbecks Ltd. and Humes ARC Ltd.

Mr. Kortemeyer has served as Vice President of Penford Corporation since October 2005 and President of Penford Products Co., Penford’s industrial ingredients business, since June 2006. He served as General Manager of Penford Products from August 2005 to June 2006. Mr. Kortemeyer joined Penford in 1999 and served as a Team Leader in the manufacturing operations of Penford Products until 2001. From 2001 until 2003, he was an Operations Manager and Quality Assurance Manager. From July 2003 to November 2004, Mr. Kortemeyer served as the business unit manager of the Company’s co-products business, and from November 2004 until August 2005, as the director of the Company’s specialty starches product lines, responsible for sales, marketing and business development.

Dr. Kunerth has served as Penford’s Vice President and Chief Science Officer since 2000. From 1997 to 2000, he served in food applications research management positions in the Consumer and Nutrition Sector at Monsanto Company, a provider of hydrocolloids, high intensity sweeteners, agricultural products and integrated solutions for industrial, food and agricultural customers. Before Monsanto, he was the Vice President of Technology at Penford’s food ingredients business from 1993 to 1997.

Mr. Lawlor joined Penford in April 2005 as Vice President-Human Resources, General Counsel and Secretary. From 2002 to April 2005, Mr. Lawlor served as Vice President-Human Resources for Sensient Technologies Corporation, a manufacturer of specialty chemicals and food products. From 2000 to 2002, he was Assistant General Counsel for Sensient. Mr. Lawlor was Vice President-Administration, General Counsel and Secretary for Kelley Company, Inc., a manufacturer of material handling and safety equipment from 1997 to 2000. Prior to joining Kelley Company, Mr. Lawlor was employed as an attorney at a manufacturer of paper and packaging products and in private practice with two national law firms.

Mr. Randall is Vice President of Penford Corporation and President of Penford Food Ingredients. He joined Penford in February 2003 as Vice President and General Manager of Penford Food Ingredients and was promoted to President of the Food Ingredients division in June 2006. Prior to joining Penford, Mr. Randall was Vice President, Research & Development/Quality Assurance of Griffith Laboratories, USA, a specialty foods ingredients business, from 1998 to 2003. From 1993 to 1998, Mr. Randall served in various research and development positions with KFC Corporation, a quick-service restaurant business, most recently as Vice President, New Product Development. Prior to 1993, Mr. Randall served in research and development leadership positions at Romanoff International, Inc., a manufacturer and marketer of gourmet specialty food products, and at Kraft/General Foods.

Item 1A:   Risk Factors

Factors that May Affect Business and Future Results.

The availability and cost of agricultural products Penford purchases are vulnerable to weather and other factors beyond its control. The Company’s ability to pass through cost increases for these products is limited by worldwide competition and other factors.

In fiscal 2007, approximately 33% of Penford’s manufacturing costs were the costs of corn, wheat flour and potato starch. Weather conditions, plantings, government programs and policies, and energy costs and global

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supply, among other things, have historically caused volatility in the supply and prices of these agricultural products. For example, in 2006 and 2007, growing regions in Australia experienced significant droughts, reducing crop yields and increasing acquisition costs for grain raw materials. Due to local and/or international competition, particularly in the Australia/New Zealand operations, the Company may not be able to pass through the increases in the cost of agricultural raw materials to its customers. To manage price volatility in the commodity markets, the Company may purchase inventory in advance or enter into exchange traded futures or options contracts. Despite these hedging activities, the Company may not be successful in limiting its exposure to market fluctuations in the cost of agricultural raw materials. Increases in the cost of corn, wheat flour and potato starch due to weather conditions or other factors beyond Penford’s control and that cannot be passed through to customers will reduce Penford’s future profitability.

Increases in energy and chemical costs may reduce Penford’s profitability.

Energy and chemicals comprised approximately 12% and 11%, respectively, of the cost of manufacturing the Company’s products in fiscal 2007. Penford uses natural gas extensively in its Industrial Ingredients business to dry starch products, and, to a lesser extent, in the other business segments. The Company uses chemicals in all of the businesses to modify starch for specific product applications and customer requirements. The prices of these inputs to the manufacturing process fluctuate based on anticipated changes in supply and demand, weather and the prices of alternative fuels, including petroleum. The Company may use short-term purchase contracts or exchange traded futures or option contracts to reduce the price volatility of natural gas; however, these strategies are not available for the chemicals the Company purchases. If the Company is unable to pass on increases in energy and chemical costs to its customers, margins and profitability would be adversely affected.

The loss of a major customer could have an adverse effect on Penford’s results of operations.

In fiscal 2006 and 2005, none of the Company’s customers constituted more than 10% of sales. However, in fiscal 2007, the Company’s largest customer, Domtar, Inc., represented approximately 12% of consolidated net sales and sales to the top ten customers represented 44% of consolidated net sales. Generally, the Company does not have multi-year sales agreements with its customers. Instead, many customers place orders on an as-needed basis and generally can change their suppliers without penalty. If Penford lost one or more major customers, or if one or more major customers significantly reduced its orders, sales and results of operations would be adversely affected.

The Company is substantially dependent on its manufacturing facilities; any operational disruption could result in a reduction of the Company’s sales volumes and could cause it to incur substantial losses.

Penford’s revenues are and will continue to be derived from the sale of starch-based ingredients that the Company’s manufactures at its facilities. The Company’s operations may be subject to significant interruption if any of its facilities experiences a major accident or is damaged by severe weather or other natural disasters. In addition, the Company’s operations may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in the industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The Company’s insurance may not be adequate to fully cover the potential operational hazards described above or that it will be able to renew this insurance on commercially reasonable terms or at all.

The agreements governing the Company’s debt contain various covenants that limit its ability to take certain actions and also require the Company to meet financial maintenance tests, and Penford’s failure to comply with any of the debt covenants could have a material adverse effect on the Company’s business, financial condition and results of operations.

The agreements governing Penford’s outstanding debt contain a number of significant covenants that, among other things, limit its ability to:

•  incur additional debt or liens;

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•  consolidate or merge with any person or transfer or sell all or substantially all of its assets;

•  make investments or acquisitions;

•  pay dividends or make certain other restricted payments;

•  enter into transactions with affiliates; and

•  create dividend or other payment restrictions with respect to subsidiaries.

In addition, the Company’s revolving credit facility requires it to comply with specific financial ratios and tests, under which it is required to achieve specific financial and operating results. Events beyond the Company’s control may affect its ability to comply with these provisions. A breach of any of these covenants would result in a default under the Company’s revolving credit facility. In the event of any default that is not cured or waived, the Company’s lenders could elect to declare all amounts borrowed under the revolving credit facility, together with accrued interest thereon, due and payable, which could permit acceleration of other debt. If any of the Company’s debt is accelerated, there is no assurance that the Company would have sufficient assets to repay that debt or that it would be able to refinance that debt on commercially reasonable terms or at all.

Changes in interest rates may affect Penford’s profitability.

Although the Company has fixed the interest rates on a significant portion of its outstanding debt through interest rate swaps, as of August 31, 2007, approximately $37.5 million of its outstanding debt, including amounts outstanding under the Australian grain inventory financing facility, was subject to variable interest rates which move in direct relation to the United States or Australian London InterBank Offered Rate (“LIBOR”), the Australian bank bill rate (“BBSY”), or the prime rate in the United States, depending on the selection of borrowing options. Any significant changes in these interest rates would materially affect the Company’s profitability by increasing or decreasing its borrowing costs.

Unanticipated changes in tax rates or exposure to additional income tax liabilities could affect Penford’s profitability.

The Company is subject to income taxes in the United States, Australia and New Zealand. The Company’s effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws. The carrying value of deferred tax assets, which are predominantly in the United States, is dependent on the Company’s ability to generate future taxable income in the United States. The amount of income taxes paid is subject to interpretation of applicable tax laws in the jurisdictions in which the Company operates. Although the Company believes it has complied with all applicable income tax laws, there is no assurance that a tax authority will not have a different interpretation of the law or that any additional taxes imposed as a result of tax audits will not have an adverse effect on the Company’s results of operations.

Fluctuations in the relative value of the U.S. dollar and foreign currencies may negatively affect Penford’s revenues and profitability.

In the ordinary course of business, the Company is subject to risks associated with changing foreign exchange rates. The value of the U.S. dollar against foreign currencies has been generally in decline in recent years. In fiscal year 2007, approximately 29% of the Company’s revenue was denominated in currencies other than the U.S. dollar. The Company’s revenues and profitability may be adversely affected by fluctuations in exchange rates between the U.S. dollar and other currencies.

The Company may not be able to implement ethanol production as planned or at all. Even if the Company successfully implements ethanol production, its ethanol facility may not be profitable.

The Company’s ability to implement ethanol production as planned is subject to uncertainty. The Company has secured $45 million of financing for this project which it believes is adequate for the project’s completion; however, the Company could face financial risks if this amount of financing is not sufficient to complete the construction of

10

the ethanol facility. Penford may be adversely affected by environmental, health and safety laws, regulations and liabilities in implementing ethanol production, which could increase its costs. Changes in the markets for ethanol, including oversupply in ethanol capacity, and/or legislation and regulations could materially and adversely affect ethanol demand. There is no assurance that sufficient demand for ethanol will develop to permit profitable operation of the ethanol production facility.

Penford’s results of operations could be adversely affected by litigation and other contingencies.

The Company faces risks arising from litigation matters in which various factors or developments can lead to changes in current estimates of liabilities, such as final adverse judgments, significant settlements or changes in applicable law. A future adverse outcome, ruling or unfavorable development could result in future charges that could have a material effect on the Company’s results of operations.

Penford has foreign operations, which exposes it to the risks of doing business abroad.

Approximately 29% of the Company’s revenues are derived from its operations in Australia and New Zealand. These foreign operations subject the Company to a number of risks associated with conducting business outside the United States, including the following:

•  currency fluctuations;

•  transportation delays and interruptions;

•  political, social and economic instability and disruptions;

•  government embargoes or foreign trade restrictions;

•  the imposition of duties, tariffs and other trade barriers;

•  import and export controls;

•  labor unrest and changing regulatory environments;

•  limitations on the Company’s ability to enforce legal rights and remedies; and

•  potentially adverse tax consequences.

Although the Company’s operations have not been materially affected by any such factors to date, no assurance can be given that its operations may not be adversely affected in the future. Any of these events could have an adverse effect on the Company’s operations in the future by reducing the demand for its products, decreasing the prices at which the Company can sell its products or otherwise having an adverse effect on its business, financial condition or results of operations.

Penford depends on its senior management team; the loss of any member could adversely affect its operations.

Penford’s success depends on the management and leadership skills of its senior management team. The loss of any of these individuals, particularly Thomas D. Malkoski, the Company’s President and Chief Executive Officer, or Steven O. Cordier, the Company’s Chief Financial Officer, or the Company’s inability to attract, retain and maintain additional personnel, could prevent it from fully implementing its business strategy. There is no assurance that it will be able to retain its existing senior management personnel or to attract additional qualified personnel when needed.

Penford is subject to stringent environmental and health and safety laws, which may require it to incur substantial compliance and remediation costs, thereby reducing profits.

Penford is subject to many federal, state, local and foreign environmental and health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in its manufacturing processes. Compliance with these laws and regulations is a significant factor in the Company’s business. Penford has incurred and expects to continue to incur significant

11

expenditures to comply with applicable environmental laws and regulations. The Company’s failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.

The Company may be required to incur costs relating to the investigation or remediation of property, including property where it has disposed of its waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Consequently, there is no assurance that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by the Company.

The Company expects to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on the Company’s future earnings and operations. The Company anticipates that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising, for example, out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect the Company’s results of operations, and there is no assurance that they will not have a material adverse effect on its business, financial condition and results of operations.

Penford’s unionized workforce could cause interruptions in the Company’s provision of services.

As of August 31, 2007, approximately 40% of the Company’s 357 North American employees, and 69% of the 239 employees of Penford Australia, were members of trade unions. Although the Company’s relations with unions are stable, there is no assurance that the Company will not experience work disruptions or stoppages in the future, which could have a material adverse effect on its business and results of operations and adversely affect its relationships with its customers. For example, in the fourth quarter of fiscal 2004 and the first quarter of fiscal 2005, Penford experienced a union strike at its Cedar Rapids manufacturing facility. The Company incurred $4.2 million and $4.1 million in additional production costs for 2004 and 2005, respectively, in connection with the strike. Additionally, the Company’s non-union workforce could be disrupted by union organizing activities and similar actions.

Lower investment performance by the Company’s pension plan assets will require it to increase its pension liability and expense, which may also lead to accelerated funding of the Company’s pension obligations and divert funds from other uses.

Lower investment performance by the Company’s pension plan assets could increase its defined benefit pension plan obligations. The Company estimates that minimum funding requirements for its qualified defined benefit pension plans will be approximately $1.6 million in fiscal 2008. However, the Company cannot predict whether changing economic conditions or other factors will lead or require it to make contributions in excess of its current expectations, diverting funds it would otherwise apply to other uses. Additionally, there is no assurance that the Company will have the funds necessary to meet any minimum pension funding requirements.

Risk Factors Relating to Penford’s Common Stock

Penford’s stock price has fluctuated significantly; the trading price of its common stock may fluctuate significantly in the future.

The trading price of the Company’s common stock has fluctuated significantly. In 2007, the stock price ranged from a low of $16.23 on January 5, 2007 to a high of $41.30 on October 11, 2007. The trading price of Penford’s common stock may fluctuate significantly in the future as a result of a number of factors, including:

•  actual and anticipated variations in the Company’s operating results;

•  general economic and market conditions, including changes in demand for the Company’s products;

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•  interest rates;

•  geopolitical conditions throughout the world;

•  perceptions of the strengths and weaknesses of the Company’s industries;

•  the Company’s ability to pay principal and interest on its debt when due;

•  developments in the Company’s relationships with its lenders, customers and/or suppliers;

•  announcements of alliances, mergers or other relationships by or between the Company’s competitors and/or its suppliers and customers; and

•  quarterly variations in the Company’s results of operations due to, among other things, seasonality in demand for products and fluctuations in the cost of raw materials

The stock markets in general have experienced broad fluctuations that have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of the Company’s common stock. Accordingly, Penford’s common stock may trade at prices significantly below an investor’s,cost and investors could lose all or part of their investment in the event that they choose to sell their shares.

Provisions of Washington law and the shareholder rights plan could discourage or prevent a potential takeover.

Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. The Washington Business Corporation Act generally prohibits a “target corporation” from engaging in certain significant business transactions with an “acquiring person,” which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the time of the acquisition. Such prohibited transactions include, among other things, (1) a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; (2) a termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares; and (3) allowing the acquiring person to receive any disproportionate benefit as a shareholder.

After the five year period, a “significant business transaction” may occur if it complies with “fair price” provisions specified in the statute. A corporation may not “opt out” of this statute.

In addition, Penford has adopted a shareholder rights plan, intended to discourage a potential acquisition of the Company that its board of directors believes is undesirable to the Company and its shareholders. The shareholder rights plan expires in June 2008 and the Company’s board of directors currently does not intend to renew the plan. The shareholder rights plan and the provisions under Washington law may have the effect of delaying, deterring or preventing a change of control in the ownership of Penford.

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Item 1B:   Unresolved Staff Comments

Not applicable.

Item 2:   Properties

Penford’s facilities as of August 31, 2007 are as follows:

	Bldg. Area		Land Area		Owned/
	(Sq. Ft.)		(Acres)		Leased	Function of Facility
North America:
Centennial, Colorado		25,200		—	Leased	Corporate headquarters, administrative offices and research laboratories
Cedar Rapids, Iowa		759,000		29	Owned	Manufacture of corn starch products, administration offices and research laboratories
Idaho Falls, Idaho		30,000		4	Owned	Manufacture of potato starch products
Richland, Washington		45,000		—	Owned	Manufacture of potato and tapioca starch products
		9,600		4.9	Leased	Administrative office and warehouse
Plover, Wisconsin		54,000		10	Owned	Manufacture of potato starch Products
Australia/New Zealand:
Lane Cove, New South Wales		75,700		7	Owned	Manufacture of corn starch products, administrative offices and research laboratories
Tamworth, New South Wales		94,600		6	Owned	Manufacture of wheat starch and gluten Products
				477	Owned	Effluent dispersion
Tamworth, New South Wales		—		425	Leased	Agricultural and effluent dispersion
				225	Leased	Agricultural use
Auckland, New Zealand		104,700		5	Owned	Manufacture of corn starch products
		—		3	Leased	Manufacture of corn starch products

Penford’s production facilities are strategically located near sources of raw materials. The Company believes that its facilities are maintained in good condition and that the capacities of its plants are sufficient to meet current production requirements. The Company invests in expansion, improvement and maintenance of property, plant and equipment as required.

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Item 3:   Legal Proceedings

In October 2004, Penford Products Co. (“Penford Products”), a wholly-owned subsidiary of the Company, was sued by Graphic Packaging International, Inc. (“Graphic”) in the Fourth Judicial District Court, Ouachita Parish, Louisiana. Graphic sought monetary damages for, among other things, Penford Products’ alleged breach of an agreement during the 2004 strike affecting its Cedar Rapids, Iowa plant to supply Graphic with certain starch products. Penford Products denied all liability and countersued for damages.

During October 2007, this case was tried before a judge of the above-noted court. As of November 7, 2007, no decision in the matter had been rendered by the judge and the judge had not advised Penford Products of the date upon which his decision would be issued. At trial, Graphic argued that it was entitled to damages of approximately $3.27 million, plus interest. Penford Products argued that it was entitled to damages of approximately $550,000, plus interest.

The Company vigorously defended its position at trial. However, the Company, applying its best judgment of the likely outcome of the litigation, has established a loss contingency against this matter of $2.4 million. Depending upon the eventual outcome of this litigation, the Company may incur additional material charges in excess of the amount it has reserved, or it may incur lower charges, the amounts of which in each case management is unable to predict at this time.

The Company is involved from time to time in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from the Company’s outside legal counsel, the ultimate resolution of these matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.

Item 4:   Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 2007.

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PART II

Item 5:   Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders of Common Stock

Penford’s common stock, $1.00 par value, trades on The Nasdaq Stock Market LLC under the symbol “PENX.” On November 1, 2007, there were 501 shareholders of record. The high and low closing prices of Penford’s common stock during the last two fiscal years are set forth below.

	Fiscal 2007				Fiscal 2006
	High		Low		High		Low
Quarter Ended November 30	$	16.97	$	14.55	$	14.78	$	12.64
Quarter Ended February 28	$	21.88	$	16.23	$	16.48	$	11.80
Quarter Ended May 31	$	21.25	$	18.29	$	18.00	$	13.62
Quarter Ended August 31	$	38.65	$	18.20	$	17.85	$	13.59

Dividends

During each quarter of fiscal year 2007 and 2006, the Board of Directors declared a $0.06 per share cash dividend. On October 30, 2007, the Board of Directors declared a dividend of $0.06 per common share payable on December 7, 2007 to shareholders of record as of November 16, 2007. On a periodic basis, the Board of Directors reviews the Company’s dividend policy which is impacted by Penford’s earnings, financial condition, and cash and capital requirements. Future dividend payments are at the discretion of the Board of Directors. Penford has included the payment of dividends in its planning for fiscal 2008.

Pursuant to its credit agreement, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock in excess of $8 million in any fiscal year or if there exists a Default or Event of Default as defined in the credit agreement. During fiscal years 2007 and 2006, the Company declared dividends on its common stock of $2.2 and $2.1 million, respectively.

Issuer Purchases of Equity Securities

None

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Performance Graph

The following graph compares the Company’s cumulative total shareholder return on its common stock for a five-year period (September 1, 2002 to August 31, 2007) with the cumulative total return of the Nasdaq Market Index and all companies traded on the Nasdaq Stock Market (“Nasdaq”) with a market capitalization of $100 — $200 million, excluding financial institutions. The graph assumes that $100 was invested on September 1, 2002 in the Company’s common stock and in the stated indices. The comparison assumes that all dividends are reinvested. The Company’s performance as reflected in the graph is not indicative of the Company’s future performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Penford Corp., The NASDAQ Composite Index
And A Peer Group

ASSUMES $100 INVESTED ON SEPTEMBER 1, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2007

	2002		2003		2004		2005		2006		2007
PENFORD CORPORATION		100.00		96.64		124.64		107.75		118.07		269.72
NASDAQ MARKET INDEX (U.S.)		100.00		136.85		141.42		164.86		170.90		203.00
NASDAQ MARKET CAP ($100-200M)		100.00		140.18		132.48		131.41		111.01		120.97

*  $100 invested on 8/31/02 in index-including reinvestment of dividends.
Fiscal year ending August 31.

Management does not believe there is either a published index or a group of companies whose overall business is sufficiently similar to the business of Penford to allow a meaningful benchmark against which the Company can be compared. The Company sells products based on specialty carbohydrate chemistry to several distinct markets, making overall comparisons to one of these markets misleading with respect to the Company as a whole. For these reasons, the Company has elected to use non-financial companies traded on Nasdaq with a similar market capitalization as a peer group.

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Item 6:   Selected Financial Data

	Year Ended August 31,
	2007			2006(2)			2005			2004			2003
	(Dollars in thousands, except share and per share data)
Operating Data:
Sales	$	362,364		$	318,419		$	296,763		$	279,386		$	262,467
Cost of sales		298,203			273,476			263,542			241,298			218,784
Gross margin percentage		17.7	%		14.1	%		11.2	%		13.6	%		16.6	%
Net income(3)	$	13,517	(1)	$	4,228		$	2,574	(4)	$	3,702	(5)	$	8,436	(6)
Diluted earnings per share	$	1.46		$	0.47		$	0.29		$	0.42		$	1.03
Dividends per share	$	0.24		$	0.24		$	0.24		$	0.24		$	0.24
Average common shares and equivalents — assuming dilution		9,283,125			9,004,190			8,946,195			8,868,050			8,227,549
Balance Sheet Data (as of August 31):
Total assets	$	288,388		$	250,668		$	249,917		$	252,191		$	250,893
Capital expenditures		34,734			14,905			9,413			15,454			8,772
Long-term debt		63,403			53,171			62,107			75,551			76,696
Total debt		74,677			67,007			66,129			80,326			79,696
Shareholders’ equity		125,676			107,452			100,026			95,719			87,885

(1)	Includes pre-tax charges of $2.4 million related to an estimated loss contingency for litigation. See Note 17 to the Consolidated Financial Statements.
(2)	The Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” effective at the beginning of fiscal 2006. As a result, the results of operations for fiscal 2006 and fiscal 2007 include incremental stock-based compensation cost in excess of what would have been recorded had the Company continued to account for stock-based compensation using the intrinsic value method.
(3)	In the fourth quarter of fiscal 2004 and the first quarter of fiscal 2005, Penford experienced a union strike at its Cedar Rapids, Iowa manufacturing facility. As a result, net income for fiscal 2004 and fiscal 2005 reflects incremental expenses for 2004 and 2005, respectively, due to the strike.
(4)	Includes a pre-tax gain of $1.2 million related to the sale of land in Australia, a $0.7 million pre-tax gain related to the sale of an investment and a $1.1 million pre-tax write off of unamortized deferred loan costs. See Note 12 to the Consolidated Financial Statements. Includes a tax benefit of $2.5 million related to 2001 through 2004 that the Company recognized in 2005 when the Company determined that it was probable that the extraterritorial income exclusion deduction on its U.S. federal income tax returns for those years would be sustained. See Note 13 to the Consolidated Financial Statements.
(5)	Includes pre-tax charges of $1.3 million related to the restructuring of business operations and $0.7 million related to a pre-tax non-operating expense for the write off of unamortized deferred loan costs. See Note 12 to the Consolidated Financial Statements.
(6)	Includes a pre-tax gain of $1.9 million related to the sale of certain assets to National Starch and Chemical Investment Holdings.

Item 7:   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications. The Company develops and manufactures ingredients with starch as a base, providing value-added applications to its customers. Penford’s starch products are

18

manufactured primarily from corn, potatoes, and wheat and are used principally as binders and coatings in paper and food production.

In analyzing business trends, management considers a variety of performance and financial measures, including sales revenue growth, sales volume growth, and gross margins and operating income of the Company’s business segments. Penford manages its business in three segments. The first two, Industrial Ingredients — North America and Food Ingredients — North America, are broad categories of end-market users, served by operations in the United States. The third segment is comprised of the Company’s operations in Australia and New Zealand, which operations are engaged primarily in the food ingredients business. See Item 1 and Note 15 to the Consolidated Financial Statements for additional information regarding the Company’s business segment operations.

Consolidated fiscal 2007 sales grew 13.8% to $362.4 million from $318.4 million in fiscal 2006 due to favorable unit pricing and product mix in all business segments and stronger foreign currency exchange rates in Australia and New Zealand. Gross margin as a percent of sales expanded 360 basis points from 14.1% in fiscal 2006 to 17.7% in fiscal 2007 primarily due to revenue growth and improved manufacturing efficiencies in each of the business units. The industrial business unit contributed $13.9 million of the total $19.2 million gain in gross margin with improvements in unit pricing and product mix, energy unit costs, corn procurement and manufacturing costs.

Operating expenses increased $1.9 million primarily due to increases in employee-related costs, but declined as a percent of sales to 8.7% in fiscal 2007 from 9.3% in fiscal 2006. In addition, the Company recorded a pretax charge in the amount of $2.4 million related to an estimated loss contingency for litigation. See Note 17 to the Consolidated Financial Statements. Interest expense of $5.7 million in fiscal 2007 was $0.2 million less than in fiscal 2006 due to lower debt balances and interest rates. The margin over the applicable benchmark interest rate was reduced in fiscal 2007 due to the improved financial performance of the Company.

The effective tax rate for fiscal 2007, at 31%, is lower than the statutory tax rate of 35% due to the tax benefits from domestic (U.S.) production activities, lower tax rates on foreign earnings, research and development tax incentives in the United States and Australia, and the effects of a tax audit settled in fiscal 2007. See Note 13 to the Consolidated Financial Statements.

The Company, applying its best judgment of the likely outcome of litigation regarding alleged breach of contract claims against Penford Products, has established a loss contingency against this matter of $2.4 million. Depending upon the eventual outcome of this litigation, the Company may incur additional material charges in excess of the amount it has reserved, or it may incur lower charges, the amounts of which in each case management is unable to predict at this time. See Note 17 to the Consolidated Financial Statements.

In June 2006, the Company announced plans to invest $42 million for up to 40 million gallons of ethanol production capacity per year at its Cedar Rapids, Iowa facility. In October 2006, Penford refinanced its credit facility and obtained a $45 million capital expansion loan commitment under its credit facility maturing December 2012 to finance construction of the ethanol plant. The designed capacity has been expanded to 45 million gallons with construction cost estimates maintained at $1.00 to $1.05 per gallon. Contracts valued at $40 million have been awarded for this project as of the end of October 2007. Penford already has much of the infrastructure within the Cedar Rapids plant to manufacture ethanol cost effectively, with sufficient grain handling, separation processes, utilities and logistic capabilities. The factory is centrally located near rail and ground transport arteries and the ethanol facility will occupy available space within the existing site footprint. Once complete, this enhancement of the Company’s bio-refining capabilities will give management the ability to select from multiple output choices to capitalize on changing industry conditions and selling opportunities. This increased flexibility will allow the Company to direct production towards the most attractive mix of returns and margins. Additionally, by improving throughput capacity and adding fermentation capability, Penford is better positioned to participate in emerging bio-processing trends and technologies that may represent future platforms for growth.

Accounting Changes

As of August 31, 2007, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132R” (“SFAS 158”). The recognition provision requires an employer to recognize a plan’s funded status in the statement of financial position

19

and recognize the changes in a plan’s funded status in the statement of comprehensive income in the year in which the changes occur. The effect of adoption on the consolidated balance sheet was a decrease in other assets of $2.5 million, a decrease in current accrued liabilities of $1.2 million, an increase in other liabilities of $4.3 million, a decrease in other postretirement benefits of $1.1 million, a decrease in accumulated other comprehensive income, net of tax, of $2.8 million, and an increase in deferred tax assets of $1.7 million. The adoption of SFAS 158’s recognition provision did not have an effect on the Company’s consolidated results of operations for fiscal 2007, or for any prior year presented, and it will not have an effect on the results of operations in the future. See Note 10 to the Consolidated Financial Statements.

As of September 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), utilizing the modified-prospective transition method under which prior period results were not restated. The consolidated results of operations for fiscal years 2007 and 2006 include incremental stock-based compensation cost in excess of what would have been recorded had the Company continued to account for stock-based compensation using the intrinsic value method. Pretax stock-based compensation expense included in the consolidated results of operations was $1.1 million in each of fiscal years 2007 and 2006. See Note 9 to the Consolidated Financial Statements.

Results of Operations

Fiscal 2007 Compared to Fiscal 2006

Industrial Ingredients — North America

	Year Ended August 31,
	2007			2006
	(Dollars in thousands)
Sales	$	194,957		$	165,850
Cost of sales	$	159,851		$	144,656
Gross margin		18.0	%		12.8	%
Income from operations	$	19,251		$	9,121

Industrial Ingredients’ fiscal 2007 sales of $195.0 million increased $29.1 million, or 18%, over fiscal 2006, primarily driven by unit price increases and the positive effects on revenue of passing through higher corn costs. Combined, these factors added $34 million to fiscal 2007 sales. Offsetting these increases was a 6% decline in volume due to softness in the paper market as customers closed or temporarily shuttered plants.

Gross margin increased $13.9 million, or 66%, over fiscal 2006 to $35.1 million, and, as a percentage of sales, expanded to 18.0% in fiscal 2007 compared to 12.8% in fiscal 2006. Approximately $12 million of the margin growth was due to higher unit pricing and favorable product mix. Improvements in energy unit costs of $0.3 million, favorable corn procurement costs of $3.3 million and reductions in manufacturing overhead of $1.2 million also contributed to increased margin. These favorable effects were partially offset by increased chemical costs of $0.7 million and the margin effect of a volume decline of $2.7 million.

Income from operations increased $10.1 million over fiscal 2006 due to the increase in the gross margin, partially offset by $2.4 million related to an estimated loss contingency for litigation. See Note 17 to the Consolidated Financial Statements. Operating expenses declined to 5.2% of sales in fiscal 2007, compared to 5.5% of sales in fiscal 2006. Research and development expenses remained comparable to fiscal 2006 at 1.7% of sales.

Food Ingredients — North America

	Year Ended August 31,
	2007			2006
	(Dollars in thousands)
Sales	$	62,987		$	57,156
Cost of sales	$	44,036		$	41,954
Gross margin		30.1	%		26.6	%
Income from operations	$	10,684		$	7,819

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Sales at the Food Ingredients — North America business expanded 10.2% over the prior year driven by an 8.8% increase in average unit sales prices. Volumes increased slightly, adding 120 basis points to the revenue increase. Annual sales in the protein end market grew 17% over last year and sales of applications for the pet chew and treats product lines rose from $.05 million in fiscal 2006 to $2.4 million in fiscal 2007.

Gross margin improved by $3.7 million in fiscal 2007, due to higher unit selling prices and favorable product mix, offset by a 14% increase in the average unit cost of raw materials. Fiscal 2007 operating income increased 37% over last year on the expansion in gross margin partially offset by $0.5 million in higher employee-related expenses and increased research and development expenses of $0.1 million.

Australia/New Zealand Operations

	Year Ended August 31,
	2007			2006
	(Dollars in thousands)
Sales	$	105,244		$	96,121
Cost of sales	$	95,141		$	87,575
Gross margin		9.6	%		8.9	%
Income from operations	$	3,269		$	1,735

The Australian business reported a 9.5% increase in sales in fiscal 2007 over fiscal 2006. Favorable foreign currency rates and favorable unit pricing contributed 730 basis points and 140 basis points, respectively, to the revenue increase. Sales volumes increased less than 1% and sales in local currency increased 2%.

Gross margin expanded to 9.6% of sales in fiscal 2007 from 8.9% in fiscal 2006 on lower distribution costs and improved production yields and volumes. Escalating wheat costs of $1.6 million were fully offset by improved product pricing.

Total operating expenses for fiscal 2007 were comparable to fiscal 2006, but declined to 4.9% of sales from 5.6% in fiscal 2006. Research and development expenses increased by $0.2 million and, as a percent of sales, were comparable to fiscal 2006 at 1.6%. Increases in these expenses were due to enhancements to the segment’s commercial and research capabilities. Operating expenses in fiscal 2006 included $0.9 million of employee- severance costs.

Corporate Operating Expenses

Corporate operating expenses increased to $9.6 million in fiscal 2007 from $9.4 million in fiscal 2006. Employee related costs increased by $0.6 million partially offset by declines in legal and professional fees.

Fiscal 2006 Compared to Fiscal 2005

Industrial Ingredients — North America

	Year Ended August 31,
	2006			2005
	(Dollars in thousands)
Sales	$	165,850		$	147,782
Cost of sales	$	144,656		$	136,127
Gross margin		12.8	%		7.9	%
Income (loss) from operations	$	9,121		$	(147	)

Industrial Ingredients fiscal 2006 sales of $165.9 million increased $18.1 million, or 12%, over fiscal 2005, primarily driven by a volume increase of 9%. More favorable pricing and product mix contributed 2% of the sales increase for the year.

Gross margin increased $9.5 million, or 82%, over fiscal 2005 to $21.2 million, and, as a percent of sales, expanded to 12.8% in fiscal 2006 compared to 7.9% in fiscal 2005. Approximately $8.8 million of the margin growth was due to higher unit pricing, favorable product mix and increases in manufacturing volumes.

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Improvements in energy usage of $2.6 million, favorable corn procurement of $2.2 million and recovery from $4.1 million in incremental strike-related costs incurred during fiscal 2005 also contributed to increased margin. These favorable effects were partially offset by increased unit costs of natural gas and chemicals of $3.2 million and $3.3 million, respectively, as well as $1.2 million in higher distribution expenses.

Income from operations for fiscal 2006 increased $9.3 million over fiscal 2005 due to the increase in the gross margin. Operating expenses, which included $0.2 million in severance costs, declined to 5.5% of sales in fiscal 2006, compared to 6.1% of sales in fiscal 2005. Research and development expenses remained comparable to fiscal 2005 at 1.8% of sales.

Food Ingredients — North America

	Year Ended August 31,
	2006			2005
	(Dollars in thousands)
Sales	$	57,156		$	53,661
Cost of sales	$	41,954		$	38,964
Gross margin		26.6	%		27.4	%
Income from operations	$	7,819		$	7,404

Sales at the Food Ingredients — North America business rose 7% in fiscal 2006 over fiscal 2005, driven by an 8% volume increase. Annual sales volumes in the dairy and protein end markets grew 42% over fiscal 2005. Sales of formulations for potato coatings and sweeteners increased 7% and 18%, respectively. Revenues from nutrition (low-carbohydrate) applications declined by $4.6 million in fiscal 2006.

Gross margin as a percent of sales declined by 80 basis points in fiscal 2006 from fiscal 2005, due to the decrease in sales of higher-margin nutrition products and higher chemical and energy costs of $0.7 million. Improved plant utilization from increased production volumes partially offset the unfavorable product mix. Fiscal 2006 operating and research and development expenses increased by $0.1 million and declined to 12.9% of sales compared to 13.6% in fiscal 2005.

Australia/New Zealand Operations

	Year Ended August 31,
	2006			2005
	(Dollars in thousands)
Sales	$	96,121		$	96,231
Cost of sales	$	87,575		$	89,362
Gross margin		8.9	%		7.1	%
Income from operations	$	1,735		$	1,331

The Australian business reported sales of $96.1 million in fiscal 2006 compared to $96.2 million in fiscal 2005. A 3% sales volume increase was offset by unfavorable foreign currency exchange rates. Sales in local currencies increased 1% as volume increases were partially offset by lower unit pricing.

Gross margin expanded to 8.9% of sales in fiscal 2006 from 7.1% in fiscal 2005 as the Tamworth, Australia facility improved its production yields and plant utilization upon completion of a reconfiguration of its manufacturing processes in fiscal 2005. Lower wheat and New Zealand grain costs also contributed $0.6 million to the gross margin improvements.

Operating expenses rose to 5.6% of sales in fiscal 2006 from 4.5% in fiscal 2005 on $0.9 million of employee severance costs incurred during fiscal 2006.

Corporate Operating Expenses

Corporate operating expenses increased to $9.4 million in fiscal 2006 from $7.6 million in fiscal 2005. The Company expensed $0.7 million in stock-based compensation costs for corporate employees during fiscal 2006

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after adoption of SFAS 123R. Legal and professional fees increased $0.4 million and employee costs, including contributions to the Company’s defined contribution plan, increased $0.5 million.

Non-Operating Income (Expense)

Other non-operating income consists of the following:

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Royalty and licensing income	$	1,902		$	1,827		$	1,386
Gain (loss) on sale of assets		(325	)		85			64
Loss on extinguishment of debt		—			—			(1,051	)
Gain on sale of Tamworth farm		60			78			1,166
Gain on sale of investment		—			—			736
Other		8			(94	)		(92	)
	$	1,645		$	1,896		$	2,209

In fiscal 2003, the Company exclusively licensed to National Starch and Chemical Investment Holdings Corporation (“National Starch”) certain rights to its resistant starch patent portfolio for applications in human nutrition. Under the terms of the licensing agreement, the Company received an initial licensing fee and royalties during the years noted above.

In fiscal 2005, the Company refinanced its secured term and revolving credit facilities and wrote off $1.1 million of unamortized debt issuance costs related to this debt.

In fiscal 2005, Penford sold a parcel of land near its wheat starch plant in Tamworth, New South Wales, Australia, that was used for disposal of effluent from the Tamworth manufacturing process for $1.9 million, and recognized a gain on the sale of $1.2 million. A second parcel of land was sold in fiscal 2006 with leasebacks to the Company. Gain on the sale is being recognized in income proportionally over the terms of the leases.

In fiscal 2005, the Company sold a majority of its investment in a small Australian start-up company and recognized a $0.7 million pre-tax gain on the transaction.

Interest expense

Interest expense was $5.7 million, $5.9 million and $5.6 million in fiscal years 2007, 2006 and 2005, respectively. Interest expense for fiscal 2007 declined $0.2 million from fiscal 2006 with increases in the interest rates offset by a decline in the applicable interest rate margin pursuant to the credit agreement as a result of improved financial performance by the Company and lower average debt balances, excluding ethanol-related debt borrowings. Approximately $14.5 million of debt outstanding at August 31, 2007 was attributable to the construction of the ethanol production plant. Interest costs of $0.4 million related to construction of the ethanol facility were capitalized in fiscal 2007. Interest expense for fiscal 2006 compared to fiscal 2005 rose on higher short-term interest rates on the Company’s revolving line of credit and short-term borrowings.

As of August 31, 2007, all of the Company’s outstanding debt, including amounts outstanding under the Australian grain inventory financing facility, was subject to variable interest rates. As of August 31, 2007, under interest rate swap agreements with several banks, the Company has fixed its interest rates on U.S. dollar denominated term debt of $32.8 million at 4.18% and $4.2 million at 5.08%, plus the applicable margin under the Company’s credit facility.

Income taxes

The effective tax rates for fiscal years 2007, 2006 and 2005 were 31%, 20% and 209%, respectively. The effective tax rate for fiscal 2007 varied from the U.S. federal statutory rate of 35% primarily due to Australian and U.S. tax incentives related to research and development, the favorable tax effect of domestic (U.S.) production

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activities, and the effect of a tax settlement. The tax benefits previously available to the Company related to the extraterritorial income exclusion expired in December 2006. In May 2007, the Company settled the outstanding Internal Revenue Service (“IRS”) audits of the Company’s U.S. federal income tax returns for the fiscal years ended August 31, 2001 and 2002. Under the settlement, the Company received a cash refund of $0.3 million. In addition, in connection with the settlement of these audits in the third quarter of fiscal 2007, the Company reversed a current tax liability in the amount of $0.7 million, which represented its estimate of the probable loss on certain tax positions being examined.

In December 2006, the Tax Relief Healthcare Act of 2006 was enacted in the United States, which retroactively reinstated and extended the research and development tax credit from January 1, 2006 through December 31, 2007. The Company recorded the tax effect of $0.2 million of U.S. research and development tax credits in 2007 related to fiscal 2006.

The effective tax rate for fiscal 2006 is lower than the statutory tax rate due to the tax benefits of the extraterritorial income exclusion (“EIE”) deduction, lower tax rates on foreign earnings and research and development tax credits.

The tax benefit recognized for fiscal 2005 of $4.9 million included a $2.5 million tax benefit relating to the Company’s incremental EIE deduction on its U.S. federal income tax returns for fiscal years 2001 through 2004. In fiscal 2005, the Company determined that it was probable that the EIE deduction would be sustained under audit by the IRS. See Note 13 to the Consolidated Financial Statements. Other factors affecting the effective tax rate for 2005 were the benefits resulting from the 2005 EIE deduction, research and development tax credits, and lower foreign tax rates.

Liquidity and Capital Resources

The Company’s primary sources of short- and long-term liquidity are cash flow from operations and its five-year revolving line of credit which expires in 2011. The Company expects to generate sufficient cash flow from operations and to have sufficient borrowing capacity and ability to fund its cash requirements during fiscal 2008.

Operating Activities

At August 31, 2007, Penford had working capital of $39.0 million, and $67.3 million outstanding under its credit facility. Cash flow from operations was $22.5 million, $11.4 million and $21.1 million in fiscal years 2007, 2006 and 2005, respectively. The increase in cash flow in fiscal 2007 compared to fiscal 2006 was due to the growth in earnings in fiscal 2007. The decrease in cash flow from operations in fiscal 2006 compared to fiscal 2005 is due to a change in the Company’s financing of Australian grain purchases from vendor financing to bank financing. See “Financing Activities” below for a discussion of the grain facility in Australia.

Penford maintains two defined benefit pension plans in the United States. Rising discount rates have decreased the Company’s underfunded plan status (plan assets compared to benefit obligations). Based on the current underfunded status of the plans and the actuarial assumptions being used for fiscal 2008, Penford estimates that it will be required to make minimum contributions to the pension plans of $1.6 million during fiscal 2008.

Investing Activities

Capital expenditures were $34.7 million, $14.9 million and $9.4 million in fiscal years 2007, 2006 and 2005, respectively. Capital expenditures in fiscal years 2007 and 2006 include $19.3 million and $0.7 million, respectively, for the ethanol production facility. Penford expects capital expenditures, including $27 million in expenditures for the Company’s ethanol production facility, to be approximately $47 million in fiscal 2008.

Financing Activities

On October 5, 2006, Penford entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A.; LaSalle Bank National Association; Cooperative Centrale Raiffeisen-Boorleenbank B.A., “Rabobank Nederland” (New York Branch); U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited.

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The 2007 Agreement refinanced the Company’s previous $105 million secured term and revolving credit facilities. Under the 2007 Agreement, the Company can borrow $40 million in term loans and $60 million under a revolving line of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. In addition, the 2007 Agreement provided the Company with $45 million in capital expansion funds which are being used by the Company to finance the construction of its planned ethanol production facility in Cedar Rapids, Iowa. The capital expansion funds may be borrowed as term loans from time to time prior to October 5, 2008.

The final maturity date for the term and revolving loans under the 2007 Agreement is December 31, 2011. Beginning on December 31, 2006, the Company must repay the term loans in twenty equal quarterly installments of $1 million, with the remaining amount due at final maturity. The final maturity date for the capital expansion loans is December 31, 2012. Beginning on December 31, 2008, the Company must repay the capital expansion loans in equal quarterly installments of $1.25 million through September 30, 2009 and $2.5 million thereafter, with the remaining amount due at final maturity. Interest rates under the 2007 Agreement are based on either LIBOR in Australia or the United States, or the prime rate, depending on the selection of available borrowing options under the 2007 Agreement.

The 2007 Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2007 Agreement), shall not exceed a maximum, which varies between 3.00 and 4.50 through the term of the 2007 Agreement. In addition, the Company must maintain a minimum tangible net worth of $65 million, and a Fixed Charge Coverage Ratio, as defined in the 2007 Agreement, of not more than 1.50 in fiscal 2007, 1.25 in fiscal 2008 and 1.50 in fiscal 2009 and thereafter. Annual capital expenditures, exclusive of capital expenditures incurred in connection with the Company’s ethanol production facility, are limited to $20 million, unless the Company can maintain a Total Funded Debt Ratio below 2.00 for each fiscal quarter during any fiscal year, which would result in the annual capital expenditure limit to increase to $25 million for such fiscal year.

The Company’s obligations under the 2007 Agreement are secured by substantially all of the Company’s U.S. assets and a majority of the shares of Penford Holdings Pty. Ltd. (Australia). The Company was in compliance with the covenants in the 2007 Agreement as of August 31, 2007 and expects to be in compliance during fiscal 2008. Pursuant to the terms of the 2007 Agreement, Penford’s additional borrowing ability as of August 31, 2007 was $30.5 million under the capital expansion facility and $44.2 million under the revolving line of credit.

The Company’s short-term borrowings consist of an Australian grain inventory financing facility. In fiscal 2006, the Company’s Australian subsidiary entered into a variable-rate revolving grain inventory financing facility with an Australian bank for a maximum of $32.7 million U.S. dollars at the exchange rate at August 31, 2007. This facility expires on March 15, 2008 and carries an effective interest rate equal to BBSY plus approximately 2%. Payments on this facility are due as the grain financed is withdrawn from storage. The amount outstanding under this arrangement, which is classified as a current liability on the balance sheet, was $7.2 million at August 31, 2007.

Dividends

In fiscal 2007, Penford paid dividends on its common stock of $2.2 million at a quarterly rate of $0.06 per share. On October 30, 2007, the Board of Directors declared a dividend of $0.06 per common share payable on December 7, 2007 to shareholders of record as of November 16, 2007. On a periodic basis, the Board of Directors reviews the Company’s dividend policy which is affected by the Company’s earnings, financial condition and cash and capital requirements. Future dividend payments are at the discretion of the Board of Directors. Penford has included the continuation of quarterly dividends in its planning for fiscal 2008.

Pursuant to the 2007 Agreement, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock in excess of $8 million in any fiscal year or if there exists a Default or Event of Default as defined in the 2007 Agreement.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The process of preparing financial statements requires management to

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make estimates, judgments and assumptions that affect the Company’s financial position and results of operations. These estimates, judgments and assumptions are based on the Company’s historical experience and management’s knowledge and understanding of the current facts and circumstances. Management believes that its estimates, judgments and assumptions are reasonable based upon information available at the time this report was prepared. To the extent there are material differences between estimates, judgments and assumptions and the actual results, the financial statements will be affected.

Management has reviewed the accounting policies and related disclosures with the Audit Committee of the Board of Directors. The accounting policies that management believes are the most important to the financial statements and that require the most difficult, subjective and complex judgments include the following:

•  Evaluation of the allowance for doubtful accounts receivable

•  Hedging activities

•  Benefit plans

•  Valuation of goodwill

•  Self-insurance program

•  Income taxes

•  Stock-based compensation

A description of each of these follows:

Evaluation of the Allowance for Doubtful Accounts Receivable

Management makes judgments about the Company’s ability to collect outstanding receivables and provides allowances for the portion of receivables that the Company may not be able to collect. Penford estimates the allowance for uncollectible accounts based on historical experience, known troubled accounts, industry trends, economic conditions, how recently payments have been received, and ongoing credit evaluations of its customers. If the estimates do not reflect the Company’s future ability to collect outstanding invoices, Penford may experience losses in excess of the reserves established. At August 31, 2007, the allowance for doubtful accounts receivable was $0.8 million.

Hedging Activities

Penford uses derivative instruments, primarily futures contracts, to reduce exposure to price fluctuations of commodities used in the manufacturing processes in the United States. Penford has elected to designate these activities as hedges. This election allows the Company to defer gains and losses on those derivative instruments until the underlying commodity is used in the production process. To reduce exposure to variable short-term interest rates, Penford uses interest rate swap agreements.

The requirements for the designation of hedges are very complex, and require judgments and analyses to qualify as hedges as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”). These judgments and analyses include an assessment that the derivative instruments used are effective hedges of the underlying risks. If the Company were to fail to meet the requirements of SFAS No. 133, or if these derivative instruments are not designated as hedges, the Company would be required to mark these contracts to market at each reporting date. Penford had deferred gains (losses), net of tax, of $(0.6) million and $0.5 million at August 31, 2007 and 2006, respectively, which are reflected in accumulated other comprehensive income in both years. See Note 1 and 2 to the Consolidated Financial Statements.

Benefit Plans

Penford has defined benefit plans for its U.S. employees providing retirement benefits and coverage for retiree health care. Qualified third-party actuaries assist management in determining the expense and funded status of these

26

employee benefit plans. Management makes several estimates and assumptions in order to measure the expense and funded status, including interest rates used to discount certain liabilities, rates of return on plan assets, rates of compensation increases, employee turnover rates, anticipated mortality rates, and increases in the cost of medical care. The Company makes judgments about these assumptions based on historical investment results and experience as well as available historical market data and trends. However, if these assumptions are wrong, it could materially affect the amounts reported in the Company’s future results of operations. Disclosure about these estimates and assumptions are included in Note 10 to the Consolidated Financial Statements. See “Defined Benefit Plans” below.

Valuation of Goodwill

Penford is required to assess, on an annual basis, whether the value of goodwill reported on the balance sheet has been impaired, or more often if conditions exist that indicate that there might be an impairment. These assessments require extensive and subjective judgments to assess the fair value of goodwill. While the Company engages qualified valuation experts to assist in this process, their work is based on the Company’s estimates of future operating results and allocation of goodwill to the business units. If future operating results differ materially from the estimates, the value of goodwill could be adversely impacted. See Note 4 to the Consolidated Financial Statements.

Self-insurance Program

The Company maintains a self-insurance program covering portions of workers’ compensation and group health liability costs. The amounts in excess of the self-insured levels are fully insured by third-party insurers. Liabilities associated with these risks are estimated in part by considering historical claims experience, severity factors and other actuarial assumptions. Projections of future losses are inherently uncertain because of the random nature of insurance claims occurrences and changes that could occur in actuarial assumptions. The financial results of the Company could be significantly affected if future claims and assumptions differ from those used in determining these liabilities.

Income Taxes

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The Company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as Australian and New Zealand, taxing jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the Company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

In evaluating the exposures connected with the various tax filing positions, the Company establishes an accrual, when, despite management’s belief that the Company’s tax return positions are supportable, management believes that certain positions may be successfully challenged and a loss is probable. When facts and circumstances change, these accruals are adjusted. Beginning in fiscal 2008, the Company will be required to adopt Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which will change the accounting for tax positions. See discussion in Note 1 to the Consolidated Financial Statements.

Stock-Based Compensation

Beginning September 1, 2005, the Company recognizes stock-based compensation in accordance with SFAS No. 123R. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the share-based awards at the date of grant requires judgment, including estimating stock price volatility, forfeiture rates, the risk-free interest rate, dividends and expected option life. See Note 9 to the Consolidated Financial Statements.

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If circumstances change, and the Company uses different assumptions for volatility, interest, dividends and option life in estimating the fair value of stock-based awards granted in future periods, stock-based compensation expense may differ significantly from the expense recorded in the current period. SFAS No. 123R requires forfeitures to be estimated at the date of grant and revised in subsequent periods if actual forfeitures differ from those estimated. Therefore, if actual forfeiture rates differ significantly from those estimated, the Company’s results of operations could be materially impacted.

Contractual Obligations

As more fully described in Notes 5 and 8 to the Consolidated Financial Statements, the Company is a party to various debt and lease agreements at August 31, 2007 that contractually commit the Company to pay certain amounts in the future. The purchase obligations at August 31, 2007 represent an estimate of all open purchase orders and contractual obligations through the Company’s normal course of business for commitments to purchase goods and services for production and inventory needs, such as raw materials, supplies, manufacturing arrangements, capital expenditures and maintenance. The majority of terms allow the Company or suppliers the option to cancel or adjust the requirements based on business needs.

The following table summarizes such contractual commitments at August 31, 2007 (in thousands):

	2008		2009-2010		2011-2012		2013 & After		Total
Long-term Debt and Capital Lease Obligations	$	4,056	$	20,597	$	42,806	$	—	$	67,459
Short-term Borrowings		7,218		—		—		—		7,218
Postretirement medical(1)		596		1,353		1,495		4,649		8,093
Operating Lease Obligations		6,602		10,957		5,262		4,408		27,229
Purchase Obligations		101,574		2,642		—		—		104,216
	$	120,046	$	35,549	$	49,563	$	9,057	$	214,215

(1) Estimated contributions to the unfunded postretirement medical plan made in amounts needed to fund benefit payments for participants through fiscal 2017 based on actuarial assumptions.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Defined Benefit Pension and Postretirement Benefit Plans

Penford maintains defined benefit pension plans and defined benefit postretirement health care plans in the United States.

The most significant assumptions used to determine benefit expense and benefit obligations are the discount rate and the expected return on assets assumption. See Note 10 to the Consolidated Financial Statements for the assumptions used by Penford.

The discount rate used by the Company in determining benefit expense and benefit obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments. Benefit obligations and expense increase as the discount rate is reduced. The discount rates to determine net periodic expense used in 2005 (6.25%), 2006 (5.50%) and 2007 (6.15%) reflect the changes in bond yields over the past several years. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.1 million and other postretirement benefit expense by $0.01 million. During fiscal 2007, bond yields rose and Penford has increased the discount rate for calculating its benefit obligations at August 31, 2007, as well as net periodic expense for fiscal 2008, to 6.51%.

The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. Pension

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expense increases as the expected return on plan assets decreases. In developing the expected rate of return, the Company considers long-term historical market rates of return as well as actual returns on the Company’s plan assets, and adjusts this information to reflect expected capital market trends. Penford also considers forward looking return expectations by asset class, the contribution of active management and management fees paid by the plans. The plan assets are held in qualified trusts and anticipated rates of return are not reduced for income taxes. The expected long-term return on assets assumption used to calculate net periodic pension expense was 8.0% for fiscal 2007. A 50 basis points decrease (increase) in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.2 million based on plan assets at August 31, 2007. The expected return on plan assets used in calculating fiscal 2008 pension expense is 8%.

Unrecognized net loss amounts reflect the difference between expected and actual returns on pension plan assets as well as the effects of changes in actuarial assumptions. Unrecognized net losses in excess of certain thresholds are amortized into net periodic pension and postretirement benefit expense over the average remaining service life of active employees. As of August 31, 2007, unrecognized losses from all sources are $3.7 million for the pension plans and $0.6 million for the postretirement health care plan. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $0.05 million in fiscal 2008. Amortization of unrecognized net losses is not expected to affect the net postretirement health care expense in fiscal 2008.

Penford recognized pension expense of $1.7 million, $2.4 million and $1.9 million in fiscal years 2007, 2006 and 2005, respectively. Penford expects pension expense to be approximately $1.6 million in fiscal 2008. The Company contributed $1.0 million, $3.3 million and $3.6 million to the pension plans in fiscal years 2007, 2006 and 2005, respectively. Penford estimates that it will be required to make minimum contributions to the pension plans of $1.6 million during fiscal 2008.

The Company recognized benefit expense for its postretirement health care plan of $1.0 million, $1.2 million and $1.0 million in fiscal years 2007, 2006 and 2005, respectively. Penford expects to recognize approximately $1.0 million in postretirement health care benefit expense in fiscal 2008. The Company contributed $0.6 million, $0.7 million, and $0.5 million in fiscal years 2007, 2006 and 2005 to the postretirement health care plans and estimates that it will contribute $0.6 million in fiscal 2008.

Future changes in plan asset returns, assumed discount rates and various assumptions related to the participants in the defined benefit plans will affect future benefit expense and liabilities. The Company cannot predict what these changes will be.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF Issue No. 06-2 is effective for years beginning after December 15, 2006. The Company is evaluating the impact that the adoption of EITF Issue No. 06-2 will have on its consolidated financial statements and currently does not believe the adoption will have a material impact on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in income taxes recognized by prescribing a recognition threshold that a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, interim period accounting and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact that the adoption of FIN 48 will have on its consolidated financial statements and currently does not believe the adoption will have a material impact on its consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after

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November 15, 2007 (fiscal 2009). The Company is currently evaluating the impact that the adoption of SFAS 157 may have on its consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB No. 115” (“SFAS 159”). SFAS 159 allows companies the option to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009). The Company is currently evaluating the impact that the adoption of SFAS 159 may have on its consolidated financial statements.

Item 7A:   Quantitative and Qualitative Disclosures About Market Risk

Market Risk Sensitive Instruments and Positions

Penford is exposed to market risks that are inherent in the financial instruments that are used in the normal course of business. Penford may use various hedge instruments to manage or reduce market risk, but the Company does not use derivative financial instrument transactions for speculative purposes. The primary market risks are discussed below.

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates to its variable-rate borrowings. As of August 31, 2007, all of the Company’s outstanding debt, including amounts outstanding under the Australian grain inventory financing facility, is subject to variable interest rates, which are generally set for one or three months. Under interest rate swap agreements with several banks, the Company has fixed its interest rates on U.S. dollar denominated term debt of $32.8 million at 4.18% and $4.2 million at 5.08%, plus the applicable margin under the Company’s credit facility. The market risk associated with a 100 basis point adverse change in interest rates at August 31, 2007 is approximately $0.4 million.

Foreign Currency Exchange Rates

The Company has U.S.-Australian and Australian-New Zealand dollar currency exchange rate risks due to revenues and costs denominated in Australian and New Zealand dollars with the Company’s foreign operation, Penford Australia. Currently, cash generated by Penford Australia’s operations is used for capital investment in Australia and payment of debt denominated in Australian dollars. At August 31, 2007, approximately 21% of total debt was denominated in Australian dollars.

The Company has not maintained any derivative instruments to mitigate the U.S.-Australian dollar currency exchange translation exposure. This position is reviewed periodically, and based on the Company’s review, may result in the incorporation of derivative instruments in the Company’s hedging strategy. The currency exchange rate risk between Penford’s Australian and New Zealand operations is not significant. For the year ended August 31, 2007, a 10% change in the foreign currency exchange rates compared with the U.S. dollar would have affected fiscal 2007 reported net income by approximately $0.2 million.

From time to time, Penford enters into foreign exchange forward contracts to manage exposure to receivables and payables denominated in currencies different from the functional currencies of the selling entities. As of August 31, 2007 and 2006, Penford did not have any foreign exchange forward contracts outstanding. At August 31, 2007, the Company had U.S. dollar denominated trade receivables of $1.9 million at Penford Australia.

Commodities

The availability and price of corn, Penford’s most significant raw material, is subject to fluctuations due to unpredictable factors such as weather, plantings, domestic and foreign governmental farm programs and policies, changes in global demand and the worldwide production of corn. To reduce the price risk caused by market fluctuations, Penford generally follows a policy of using exchange-traded futures and options contracts to hedge exposure to corn price fluctuations in North America. These futures and options contracts are designated as hedges. The changes in market value of these contracts have historically been, and are expected to continue to be, highly

30

effective in offsetting the price changes in corn. A majority of the Company’s sales contracts for corn-based industrial starch ingredients contain a pricing methodology which allows the Company to pass-through the majority of the changes in the commodity price of net corn.

Penford’s net corn position in the U.S. consists primarily of inventories, purchase contracts and exchange-traded futures and options contracts that hedge Penford’s exposure to commodity price fluctuations. The fair value of the position is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2007 and 2006, the fair value of the Company’s net corn position was approximately $1.0 million and $0.02 million, respectively. The market risk associated with a 10% adverse change in corn prices at August 31, 2007 and 2006 is estimated at $104,000 and $2,000, respectively.

Over the past years, prices for natural gas have increased over historic levels. Prices for natural gas fluctuate due to anticipated changes in supply and demand and movement of prices of related or alternative fuels. To reduce the price risk caused by sudden market fluctuations, Penford generally enters into short-term purchase contracts or uses exchange-traded futures and options contracts to hedge exposure to natural gas price fluctuations. These futures and options contracts are designated as hedges. The changes in market value of these contracts have historically been, and are expected to continue to be, closely correlated with the price changes in natural gas.

Penford’s exchange traded futures and options contracts hedge production requirements. The fair value of these contracts is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2007 and 2006, the fair value of the natural gas exchange-traded futures and options contracts was a loss of approximately $1.9 million and a loss of approximately $0.3 million, respectively. The market risk associated with a 10% adverse change in natural gas prices at August 31, 2007 and 2006 is estimated at $188,000 and $27,000, respectively.

31

Item 8:   Financial Statements and Supplementary Data

TABLE OF CONTENTS

	Page
Consolidated Balance Sheets		33
Consolidated Statements of Operations		34
Consolidated Statements of Comprehensive Income		34
Consolidated Statements of Cash Flows		35
Consolidated Statements of Shareholders’ Equity		36
Notes to Consolidated Financial Statements		37
Reports of Independent Registered Public Accounting Firm		63

32

Consolidated Balance Sheets

	August 31,
	2007			2006
	(Dollars in thousands)
ASSETS
Current assets:
Cash	$	—		$	939
Trade accounts receivable, net		54,333			44,593
Inventories		39,537			34,953
Prepaid expenses		5,025			4,649
Other		6,384			4,782
Total current assets		105,279			89,916
Property, plant and equipment, net		146,663			124,829
Restricted cash value of life insurance		10,366			10,278
Other assets		1,725			989
Other intangible assets, net		878			2,785
Goodwill, net		23,477			21,871
Total assets	$	288,388		$	250,668
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Cash overdraft, net	$	5,468		$	961
Current portion of long-term debt and capital lease obligations		4,056			4,295
Short-term borrowings		7,218			9,541
Accounts payable		32,410			31,686
Accrued liabilities		17,094			11,360
Total current liabilities		66,246			57,843
Long-term debt and capital lease obligations		63,403			53,171
Other postretirement benefits		12,814			13,606
Deferred income taxes		3,140			5,924
Other liabilities		17,109			12,672
Total liabilities		162,712			143,216
Commitments and contingencies (Notes 8 and 17)
Shareholders’ equity:
Preferred stock, par value $1.00 per share, authorized 1,000,000 shares, none issued		—			—
Common stock, par value $1.00 per share, authorized 29,000,000 shares, issued 11,098,739 shares in 2007 and 10,909,153 shares , including treasury shares		11,099			10,909
Additional paid-in capital		43,902			39,427
Retained earnings		89,486			78,131
Treasury stock, at cost, 1,981,016 shares		(32,757	)		(32,757	)
Accumulated other comprehensive income		13,946			11,742
Total shareholders’ equity		125,676			107,452
Total liabilities and shareholders’ equity	$	288,388		$	250,668

The accompanying notes are an integral part of these statements.

33

Consolidated Statements of Operations

	Year Ended August 31,
	2007		2006		2005
	(Dollars in thousands, except per share data)
Sales	$	362,364	$	318,419	$	296,763
Cost of sales		298,203		273,476		263,542
Gross margin		64,161		44,943		33,221
Operating expenses		31,391		29,477		26,413
Research and development expenses		6,812		6,198		5,796
Other costs		2,400		—		—
Income from operations		23,558		9,268		1,012
Interest expense		5,711		5,902		5,574
Other non-operating income, net		1,645		1,896		2,209
Income (loss) before income taxes		19,492		5,262		(2,353	)
Income tax expense (benefit)		5,975		1,034		(4,927	)
Net income	$	13,517	$	4,228	$	2,574
Weighted average common shares and equivalents outstanding, assuming dilution		9,283,125		9,004,190		8,946,195
Earnings per common share:
Basic	$	1.50	$	0.48	$	0.29
Diluted	$	1.46	$	0.47	$	0.29
Dividends declared per common share	$	0.24	$	0.24	$	0.24

Consolidated Statements of Comprehensive Income

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Net income	$	13,517		$	4,228		$	2,574
Other comprehensive income (loss):
Change in fair value of derivatives, net of tax benefit (expense) of $1,619, $(271) and $156		(2,641	)		492			(303	)
Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax benefit (expense) of $950, $(152) and $350		1,550			(294	)		679
Foreign currency translation adjustments		4,690			536			3,271
(Increase) decrease in post retirement liabilities, net of applicable income tax benefit (expense) of $(864), $(1,530) and $365		1,409			2,842			(677	)
Other comprehensive income		5,008			3,576			2,970
Total comprehensive income	$	18,525		$	7,804		$	5,544

The accompanying notes are an integral part of these statements.

34

Consolidated Statements of Cash Flows

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Operating activities:
Net income	$	13,517		$	4,228		$	2,574
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization		15,696			15,583			17,025
Stock-based compensation		1,092			1,150			91
Loss (gain) on sale of assets		325			(85	)		(64	)
Loss on early extinguishment of debt		—			—			1,051
Gain on sale of investment		—			—			(736	)
Gain on sale of land		(60	)		(78	)		(1,166	)
Deferred income tax benefit		(1,771	)		(293	)		(5,410	)
Loss (gain) on derivative transactions		(946	)		40			(300	)
Excess tax benefit from stock-based compensation		(1,001	)		(102	)		—
Other		95			38			(67	)
Change in operating assets and liabilities:
Trade receivables		(8,537	)		(4,836	)		(122	)
Inventories		(3,136	)		(692	)		(1,177	)
Prepaid expenses		(339	)		449			(914	)
Accounts payable and accrued liabilities		3,148			(4,944	)		12,102
Taxes payable		3,334			(215	)		(2,594	)
Other		1,112			1,142			763
Net cash flow from operating activities		22,529			11,385			21,056
Investing activities:
Acquisitions of property, plant and equipment, net		(34,734	)		(14,905	)		(9,413	)
Proceeds from investments		—			—			3,525
Proceeds from sale of land		—			612			1,870
Other		(44	)		(80	)		(150	)
Net cash used by investing activities		(34,778	)		(14,373	)		(4,168	)
Financing activities:
Proceeds from short-term borrowings		4,625			13,916			—
Payments on short-term borrowings		(7,548	)		(4,744	)		—
Proceeds from revolving line of credit		54,454			22,920			57,830
Payments on revolving line of credit		(45,255	)		(27,907	)		(48,177	)
Proceeds from long-term debt		4,200			—			22,396
Payments on long-term debt		(4,249	)		(3,980	)		(47,867	)
Exercise of stock options		2,572			508			682
Payment of loan fees		(836	)		(224	)		(905	)
Excess tax benefit from stock-based compensation		1,001			102			—
Increase in cash overdraft.		4,507			184			776
Payment of dividends		(2,163	)		(2,132	)		(2,117	)
Other		(59	)		(32	)		(8	)
Net cash from (used by) financing activities		11,249			(1,389	)		(17,390	)
Effect of exchange rate changes on cash and cash equivalents		61			(51	)		(46	)
Net decrease in cash and cash equivalents		(939	)		(4,428	)		(548	)
Cash and cash equivalents, beginning of year		939			5,367			5,915
Cash and cash equivalents, end of year	$	—		$	939		$	5,367
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	5,645		$	5,240		$	4,754
Income taxes, net	$	5,257		$	1,342		$	563
Noncash investing and financing activities:
Capital lease obligations incurred for certain equipment leases	$	72		$	102		$	85

The accompanying notes are an integral part of these statements.

35

Consolidated Statements of Shareholders’ Equity

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Common stock
Balance, beginning of year	$	10,909		$	10,849		$	10,784
Exercise of stock options		190			51			65
Issuance of restricted stock, net		—			9			—
Balance, end of year		11,099			10,909			10,849
Additional paid-in capital
Balance, beginning of year		39,427			37,728			36,911
Exercise of stock options		2,382			457			617
Tax benefit of stock option exercises		1,001			101			109
Stock based compensation		1,050			1,150			91
Issuance of restricted stock, net		42			(9	)		—
Balance, end of year		43,902			39,427			37,728
Retained earnings
Balance, beginning of year		78,131			76,040			75,585
Net income		13,517			4,228			2,574
Dividends declared		(2,162	)		(2,137	)		(2,119	)
Balance, end of year		89,486			78,131			76,040
Treasury stock		(32,757	)		(32,757	)		(32,757	)
Accumulated other comprehensive income (loss):
Balance, beginning of year		11,742			8,166			5,196
Change in fair value of derivatives, net of tax		(2,641	)		492			(303	)
Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax		1,550			(294	)		679
Foreign currency translation adjustments		4,690			536			3,271
(Increase) decrease in postretirement liabilities, net of tax		1,409			2,842			(677	)
Adoption of SFAS No. 158 recognition provision, net of tax		(2,804	)		—			—
Balance, end of year		13,946			11,742			8,166
Total shareholders’ equity	$	125,676		$	107,452		$	100,026

The accompanying notes are an integral part of these statements.

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Business

Penford Corporation (“Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for industrial and food ingredient applications. The Company operates manufacturing facilities in the United States, Australia and New Zealand. Penford’s products provide convenient and cost-effective solutions derived from renewable sources. 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 in developing applications to address customer needs. In addition, the Company has specialty processing capabilities for a variety of modified starches.

Penford manages its business in three segments. The first two, Industrial Ingredients and Food Ingredients are broad categories of end-market users, primarily served by the U.S. operations. The third segment is the geographically separate operations in Australia and New Zealand. The Australian and New Zealand operations are engaged primarily in the food ingredients business.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Penford and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for doubtful accounts, accruals, the determination of assumptions for pension and postretirement employee benefit costs, and the useful lives of property and equipment. Actual results may differ from previously estimated amounts.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and temporary investments with maturities of less than three months when purchased. Amounts are reported in the balance sheets at cost, which approximates fair value.

Allowance for Doubtful Accounts and Concentration of Credit Risk

The allowance for doubtful accounts reflects the Company’s best estimate of probable losses in the accounts receivable balances. Penford estimates the allowance for uncollectible accounts based on historical experience, known troubled accounts, industry trends, economic conditions, how recently payments have been received, and ongoing credit evaluations of its customers. Activity in the allowance for doubtful accounts for fiscal 2007, 2006 and 2005 is as follows (dollars in thousands):

	Balance		Charged to
	Beginning of		Costs and		Deductions			Balance
	Year		Expenses		and Other			End of Year
Year ended August 31:
2007	$	851	$	379	$	475		$	755
2006	$	401	$	359	$	(91	)	$	851
2005	$	364	$	196	$	159		$	401

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In fiscal 2006, the increase in the allowance for doubtful accounts reflects an additional reserve of approximately $0.5 million for a bankrupt customer in the industrial ingredients segment.

In fiscal 2007, approximately $0.5 million was wrote-off from allowance for doubtful accounts related to an uncollectible receivable of bankrupt customer in the industrial ingredients segment.

Approximately half of the Company’s sales in fiscal 2007, 2006 and 2005 were made to customers who operate in the North American paper industry. This industry has suffered an economic downturn, which has resulted in the closure of a number of smaller mills.

Financial Instruments

The carrying value of financial instruments including cash and cash equivalents, receivables, payables and accrued liabilities approximates fair value because of their short maturities. The Company’s bank debt re-prices with changes in market interest rates and, accordingly, the carrying amount of such debt approximates fair value.

Inventories

Inventory is stated at the lower of cost or market. Inventory is valued using the first-in, first-out (“FIFO”) method, which approximates actual cost. Capitalized costs include materials, labor and manufacturing overhead related to the purchase and production of inventories.

Goodwill and Other Intangible Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if there is an indication of impairment.

Patents are amortized using the straight-line method over their estimated period of benefit. At August 31, 2007, the weighted average remaining amortization period for patents is seven years. Penford has no intangible assets with indefinite lives.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred. The Company uses the straight-line method to compute depreciation expense assuming average useful lives of three to forty years for financial reporting purposes. Depreciation of $15,376,000, $15,527,000 and $16,326,000 was recorded in fiscal years 2007, 2006 and 2005, respectively. For income tax purposes, the Company generally uses accelerated depreciation methods.

Interest is capitalized on major construction projects while in progress. In fiscal 2007, the Company capitalized $0.4 million in interest costs related to the ethanol facility construction. No interest was capitalized in fiscal 2006 and 2005.

Income Taxes

The provision for income taxes includes federal, state, and foreign taxes currently payable and deferred income taxes arising from temporary differences between financial and income tax reporting methods. Deferred taxes are recorded using the liability method in recognition of these temporary differences. Deferred taxes are not recognized on temporary differences from undistributed earnings of foreign subsidiaries, as these earnings are deemed to be permanently reinvested.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

Revenue from sales of products and shipping and handling revenue are recognized at the time goods are shipped, and title transfers to the customer. Costs associated with shipping and handling are included in cost of sales.

Research and Development

Research and development costs are expensed as incurred, except for costs of patents, which are capitalized and amortized over the lives of the patents. Research and development costs expensed were $6.8 million, $6.2 million and $5.8 million in fiscal 2007, 2006 and 2005, respectively. Patent costs of $48,000, $134,000 and $19,000 were capitalized in fiscal years 2007, 2006 and 2005, respectively.

Foreign Currency

Assets and liabilities of subsidiaries whose functional currency is deemed to be other than the U.S. dollar are translated at year end rates of exchange. Resulting translation adjustments are accumulated in the currency translation adjustments component of other comprehensive income. Income statement amounts are translated at average exchange rates prevailing during the year. For fiscal years 2007 and 2006, the net foreign currency transaction gain (loss) recognized in earnings was not material.

Derivatives

Penford uses derivative instruments to manage the exposures associated with commodity prices, interest rates and energy costs. The derivative instruments are marked-to-market and any resulting unrealized gains and losses, representing the fair value of the derivative instruments, are recorded in other current assets or accounts payable in the consolidated balance sheets. The fair value of derivative instruments included in other current assets at August 31, 2007 was $(0.6) million.

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting loss or gain on the hedged firm commitments are recognized in current earnings as a component of cost of goods sold. At August 31, 2007, derivative instruments designated as fair value hedges are not material. For derivative instruments designated as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income, net of applicable income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes the gain or loss on the derivative instrument as a component of cost of goods sold in the period when the finished goods produced from the hedged item are sold or, for interest rate swaps, as a component of interest expense in the period the forecasted transaction is reported in earnings. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in market value would be recognized in current earnings as a component of cost of good sold or interest expense. There was no ineffectiveness related to the Company’s hedging activities related to interest rate swaps. At August 31, 2007, the amount in other comprehensive income related to derivative transactions which the Company expects to recognize in earnings in fiscal 2008 is not material.

Significant Customer and Export Sales

The Company has several relatively large customers in each business segment. None of the Company’s customers constituted 10% of sales in fiscal 2006 and 2005. However, for fiscal 2007, the Company’s largest customer, Domtar, Inc., represented approximately 12% of the Company’s consolidated net sales. Domtar, Inc. is a customer of the Company’s Industrial Ingredients — North America business. Export sales accounted for approximately 15%, 13% and 16% of consolidated sales in fiscal 2007, 2006 and 2005, respectively.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

Beginning September 1, 2005, the Company began to recognize stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment.” The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. See Note 9 for further detail.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF Issue No. 06-2 is effective for years beginning after December 15, 2006. The Company is evaluating the impact that the adoption of EITF Issue No. 06-2 will have on its consolidated financial statements and currently does not believe adoption will have a material impact on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in income taxes recognized by prescribing a recognition threshold that a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, interim period accounting and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact that the adoption of FIN 48 will have on its consolidated financial statements and currently does not believe adoption will have a material impact on its consolidated financial statements

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009). The Company is currently evaluating the impact that the adoption of SFAS 157 may have on its consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB No. 115” (“SFAS 159”). SFAS 159 allows companies the option to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009). The Company is currently evaluating the impact that the adoption of SFAS 159 may have on its consolidated financial statements.

Note 2 — Inventories

Components of inventory are as follows:

	August 31,
	2007		2006
	(Dollars in thousands)
Raw materials	$	17,438	$	18,531
Work in progress		720		449
Finished goods		21,379		15,973
Total inventories	$	39,537	$	34,953

To reduce the price volatility of corn used in fulfilling some of its starch sales contracts, Penford, from time to time, uses readily marketable exchange-traded futures as well as forward cash corn purchases. The exchange-traded

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

futures are not purchased or sold for trading or speculative purposes and are designated as hedges. As of August 31, 2007, Penford had purchased corn positions of 6.4 million bushels, of which 6.1 million bushels represented equivalent firm priced starch sales contract volume, resulting in an open position of 0.3 million bushels. The changes in market value of such contracts have historically been, and are expected to continue to be, effective in offsetting the price changes of the hedged commodity. Penford also at times uses exchange-traded futures to hedge corn inventories. Hedges are designated as cash flow hedges at the time the transaction is established and are recognized in earnings in the time period for which the hedge was established. Hedged transactions are within 12 months of the time the hedge is established. The amount of ineffectiveness related to the Company’s hedging activities was not material.

Note 3 — Property and equipment

Components of property and equipment are as follows:

	August 31,
	2007			2006
	(Dollars in thousands)
Land	$	17,694		$	16,659
Plant and equipment		338,496			322,169
Construction in progress		27,433			7,078
		383,623			345,906
Accumulated depreciation		(236,960	)		(221,077	)
Net property and equipment	$	146,663		$	124,829

The above table includes approximately $0.2 million and $0.1 million of equipment under capital leases for fiscal years 2007 and 2006, respectively. Changes in Australian and New Zealand currency exchange rates have increased net property, plant and equipment in fiscal 2007 by approximately $2.9 million.

For fiscal 2007, the Company had $19.3 million of capital expenditures related to construction of the ethanol facility. As of August 31, 2007, the Company had a total of $20.0 million in capital expenditures related to the ethanol facility which includes $0.4 million in related capitalized interest costs.

Note 4 — Goodwill and other intangible assets

Goodwill represents the excess of acquisition costs over the fair value of the net assets of Penford Australia, which was acquired on September 29, 2000. The Company evaluates annually, or more frequently if certain indicators are present, the carrying value of its goodwill under provisions of SFAS No. 142.

In accordance with this standard, Penford does not amortize goodwill. The Company completed the annual update as of June 1, 2007 and determined there was no impairment to the recorded value of goodwill. In order to identify potential impairments, Penford compared the fair value of each of its reporting units with its carrying amount, including goodwill. Penford then compared the implied fair value of its reporting units’ goodwill with the carrying amount of that goodwill. The implied fair value of the reporting units was determined using primarily discounted cash flows. This testing was performed on Penford’s Food Ingredients — North America and the Australia/New Zealand operations reporting units, which are the same as two of the Company’s business segments. Since there was no indication of impairment, Penford was not required to complete the second step of the process which would measure the amount of any impairment. On a prospective basis, the Company is required to continue to test its goodwill for impairment on an annual basis, or more frequently if certain indicators arise.

The Company’s goodwill of $23.5 million and $21.9 million at August 31, 2007 and 2006, 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, 2006 reflects the impact of exchange rate fluctuations between the Australian and U.S. dollar on the translation of this asset.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Penford’s intangible assets consist of patents which are being amortized over the weighted average remaining amortization period of seven years as of August 31, 2007. There is no residual value associated with patents. The carrying amount and accumulated amortization of intangible assets are as follows (dollars in thousands):

	August 31,				August 31,
	2007				2006
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Intangible assets:
Patents	$	2,239	$	1,361	$	2,162	$	1,217
Intangible pension asset(1)		—		—		1,840		—
	$	2,239	$	1,361	$	4,002	$	1,217

(1) Not covered by the scope of SFAS No. 142

Amortization expense related to intangible assets was $0.1 million in each of fiscal years 2007, 2006 and 2005. The estimated aggregate annual amortization expense for patents is approximately $0.1 million for each of the next five fiscal years, 2008 through 2012.

Note 5 — Debt

	August 31,
	2007		2006
	(Dollars in thousands)
Secured credit agreements — revolving loans, 7.37% weighted average interest rate at August 31, 2007	$	15,800	$	11,188
Secured credit agreements — term loans, 6.97% weighted average interest rate at August 31, 2007		37,000		46,133
Secured credit agreements — capital expansion loans, 6.82% weighted average interest rate at August 31, 2007		14,500		—
Grain inventory financing facility — revolving loan, 8.19% weighted average interest rate at August 31, 2007		7,218		9,541
Capital lease obligations		159		145
		74,677		67,007
Less: current portion and short-term borrowings		11,274		13,836
Long-term debt	$	63,403	$	53,171

On October 5, 2006, Penford entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A.; LaSalle Bank National Association; Cooperative Centrale Raiffeisen-Boorleenbank B.A., “Rabobank Nederland” (New York Branch); U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited.

The 2007 Agreement refinances the Company’s previous $105 million secured term and revolving credit facilities. Under the 2007 Agreement, the Company may borrow $40 million in term loans and $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. In addition, the 2007 Agreement provides the Company with $45 million in new capital expansion funds which may be used by the Company to finance the construction of its planned ethanol production facility in Cedar Rapids, Iowa. The capital expansion funds may be borrowed as term loans from time to time prior to October 5, 2008.

The final maturity date for the term and revolving loans under the 2007 Agreement is December 31, 2011. Beginning on December 31, 2006, the Company must repay the term loans in twenty equal quarterly installments of $1 million, with the remaining amount due at final maturity. The final maturity date for the capital expansion loans

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is December 31, 2012. Beginning on December 31, 2008, the Company must repay the capital expansion loans in equal quarterly installments of $1.25 million through September 30, 2009 and $2.5 million thereafter, with the remaining amount due at final maturity. Interest rates under the 2007 Agreement are based on either the London Interbank Offering Rates (“LIBOR”) in Australia or the United States, or the prime rate, depending on the selection of available borrowing options under the 2007 Agreement.

The Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2007 Agreement) shall not exceed 3.25 through November 30, 2006. Subsequent to November 30, 2006, the maximum Total Funded Debt Ratio varies between 3.00 and 4.50. In addition, the Company must maintain a minimum tangible net worth of $65 million, and a Fixed Charge Coverage Ratio, as defined in the 2007 Agreement, of not more than 1.50 in fiscal 2007, 1.25 in fiscal 2008 and 1.50 in fiscal 2009 and thereafter. Annual capital expenditures, exclusive of capital expenditures incurred in connection with the Company’s ethanol production facility, are limited to $20 million, unless the Company can maintain a Total Funded Debt Ratio below 2.00 for each fiscal quarter during any fiscal year, which would result in the annual capital expenditure limit to increase to $25 million for such fiscal year. The Company’s obligations under the 2007 Agreement are secured by substantially all of the Company’s U.S. assets.

At August 31, 2007, the Company had $15.8 million and $37.0 million outstanding, respectively, under the revolving credit and term loan portions of its credit facility. In addition, the Company has borrowed $14.5 million of the $45 million in capital expansion loans available under the credit facility for the construction of the ethanol facility. Pursuant to the terms of the 2007 Agreement, Penford’s additional borrowing ability as of August 31, 2007 was $30.5 million under the capital expansion facility and $44.2 million under the revolving credit facility. The Company was in compliance with the covenants in the Agreement as of August 31, 2007 and expects to be in compliance during fiscal 2008.

The Company’s short-term borrowings consist of an Australian revolving line of credit. On March 1, 2006, the Company’s Australian subsidiary entered into a variable-rate revolving grain inventory financing facility with an Australian bank for a maximum of $32.7 million U.S. dollars at the exchange rate at August 31, 2007. This facility expires on March 15, 2008 and carries an effective interest rate equal to the Australian one-month bank bill rate (“BBSY”) plus approximately 2%. Payments on this facility are due as the grain financed is withdrawn from storage. The amount outstanding under this arrangement, which is classified as a current liability on the balance sheet, was $7.2 million at August 31, 2007.

As of August 31, 2007, all of the Company’s outstanding debt, including amounts outstanding under the Australian grain inventory financing facility, is subject to variable interest rates. Under interest rate swap agreements with several banks, the Company has fixed its interest rates on U.S. dollar denominated term debt of $32.8 million at 4.18% and $4.2 million at 5.08%, plus the applicable margin under the 2007 Agreement.

As of August 31, 2007, Penford borrowed $37.0 million in term loans and $30.3 million under its revolving lines of credit, of which $8.1 million U.S. dollar equivalent was denominated in Australian dollars. The maturities of debt existing at August 31, 2007 for the fiscal years beginning with fiscal 2008 are as follows (dollars in thousands):

2008	$	11,274
2009		7,821
2010		12,776
2011		6,006
2012		36,800
	$	74,677

Included in the Company’s long-term debt at August 31, 2007 is $159,000 of capital lease obligations, of which $56,000 is considered current portion of long-term debt. See Note 8.

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6 — Stockholders’ Equity

Common Stock

	Year Ended August 31,
	2007		2006		2005
Common shares outstanding
Balance, beginning of year		10,909,153		10,849,487		10,784,200
Exercise of stock options		189,586		50,972		65,287
Issuance of restricted stock, net		—		8,694		—
Balance, end of year		11,098,739		10,909,153		10,849,487

Common Stock Purchase Rights

On June 16, 1988, Penford distributed a dividend of one right (“Right”) for each outstanding share of Penford common stock. The Rights will become exercisable if a purchaser acquires 15% of Penford’s common stock or makes an offer to acquire common stock. In the event that a purchaser acquires 15% of the common stock of Penford, each Right shall entitle the holder, other than the acquirer, to purchase one share of common stock of Penford at a price of $100. In the event that Penford is acquired in a merger or transfers 50% or more of its assets or earnings to any one entity, each Right entitles the holder to purchase common stock of the surviving or purchasing company having a market value of twice the exercise price of the Right. The Rights may be redeemed by Penford at a price of $0.01 per Right and expire on June 16, 2008.

Note 7 — Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows:

	August 31,
	2007			2006
	(Dollars in thousands)
Net unrealized gain (loss) on derivatives, net of tax	$	(611	)	$	480
Foreign currency translation adjustments		18,083			13,393
Minimum pension liability, net of tax		(722	)		(2,131	)
Impact of adoption of SFAS No. 158, net of tax		(2,804	)		NA
	$	13,946		$	11,742

The earnings associated with the Company’s investment in Penford Australia are considered to be permanently invested and no provision for U.S. income taxes on the related translation adjustment has been provided.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8 — Leases

Certain of the Company’s property, plant and equipment is leased under operating leases generally ranging from one to twenty years with renewal options. Rental expense under operating leases was $6.6 million, $6.3 million and $5.4 million in fiscal years 2007, 2006 and 2005, respectively. Future minimum lease payments for fiscal years beginning with fiscal year 2008 for noncancelable operating and capital leases having initial lease terms of more than one year are as follows (dollars in thousands):

	Capital			Operating
	Leases			Leases
2008	$	69		$	6,602
2009		77			6,138
2010		28			4,819
2011		6			2,983
2012		—			2,279
Thereafter		—			4,408
Total minimum lease payments		180		$	27,229
Less: amounts representing interest		(21	)
Net minimum lease payments	$	159

Note 9 — Stock-based Compensation Plans

Penford maintains the 2006 Long-Term Incentive Plan (the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. Prior to the 2006 Incentive Plan, the Company awarded stock options to employees and officers through the Penford Corporation 1994 Stock Option Plan (the “1994 Plan”) and to members of its Board under the Stock Option Plan for Non-Employee Directors (the “Directors’ Plan”). The 1994 Plan was suspended when the 2006 Plan became effective in the second quarter of fiscal 2006. The Directors’ Plan expired in August 2005. As of August 31, 2007, the aggregate number of shares of the Company’s common stock that are available to be issued as awards under the 2006 Incentive Plan is 736,976. In addition, any shares previously granted under the 1994 Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan.

Non-qualified stock options granted under the 1994 Plan generally vest ratably over four years and expire ten years from the date of grant. Non-qualified stock options granted under the 2006 Incentive Plan generally vest ratably over four years and expire seven years from the date of grant. Non-qualified options granted under the Directors’ Plan were granted at 75% of the fair market value of the Company’s common stock on the date of grant. Options granted under the Directors’ Plan vested six months after the grant date and expire at the earlier of ten years after the date of grant or three years after the date the non-employee director ceases to be a member of the Board.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

General Option Information

A summary of the stock option activity for the three years ended are as follows:

						Weighted		Weighted
						Average		Average		Aggregate
	Number of			Option Price		Exercise		Remaining Term		Intrinsic
	Shares			Range		Price		(In Years)		Value
Outstanding Balance, August 31, 2004		972,663		$	5.77 - 17.69	$	13.31
Granted		224,235			12.75 - 16.34		15.69
Exercised		(62,378	)		5.77 - 14.50		10.45
Cancelled		(26,985	)		12.75 - 14.50		12.99
Outstanding Balance, August 31, 2005		1,107,535			6.02 - 17.69		13.96
Granted		248,500			13.32 - 16.03		14.81
Exercised		(50,972	)		6.02 - 13.92		15.35
Cancelled		(134,000	)		12.79 - 17.69		16.75
Outstanding Balance, August 31, 2006		1,171,063			6.18 - 17.69		13.98
Granted		75,000			16.25 - 19.77		16.72
Exercised		(189,586	)		6.18 - 17.69		13.57
Cancelled		(22,500	)		12.14 - 16.34		14.10
Outstanding Balance, August 31, 2007		1,033,977			7.59 - 19.77		14.25		5.62	$	21,760,168
Options Exercisable at August 31,
2005		689,735			6.02 - 17.69		13.57
2006		721,938			6.18 - 17.69		13.38
2007		696,352		$	7.59 - 17.69	$	13.60		5.12	$	15,108,798

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $35.30 as of August 31, 2007 that would have been received by the option holders had all option holders exercised on that date. The intrinsic value of options exercised during fiscal years 2007, 2006 and 2005 was $2,761,400, $274,700 and $327,400, respectively.

The following table summarizes information concerning outstanding and exercisable options as of August 31, 2007:

	Options Outstanding
			Wtd. Avg.				Options Exercisable
			Remaining		Wtd. Avg.				Wtd. Avg.
	Number of		Contractual		Exercise		Number of		Exercise
Range of Exercise Prices	Options		Life (Years)		Price		Options		Price
$ 7.59 - 13.00		397,307		4.83	$	12.01		397,307	$	12.01
13.01 - 16.00		341,170		6.20		14.71		157,795		14.55
16.01 - 19.77		295,500		6.03		16.75		141,250		17.02
		1,033,977						696,352

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adoption of SFAS No. 123R

On September 1, 2005, the Company adopted SFAS No. 123R which requires the measurement and recognition of compensation cost for all share-based payment awards made to employees and directors based on estimated fair values.

Prior to the adoption of SFAS No. 123R, the Company accounted for its stock-based employee compensation related to stock options under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and the disclosure alternative prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Accordingly, the Company presented pro forma information for the periods prior to the adoption of SFAS No. 123R and no compensation cost was recognized for the stock-based compensation plans other than the grant date intrinsic value for the options granted under the Directors’ Plan and restricted stock awards prior to September 1, 2005.

The Company elected to use the modified prospective transition method for adopting SFAS No. 123R which requires the recognition of stock-based compensation cost on a prospective basis; therefore, prior period financial statements have not been restated. Under this method, the provisions of SFAS No. 123R are applied to all awards granted after the adoption date and to awards not yet vested with unrecognized expense at the adoption date based on the estimated fair value at grant date as determined under the original provisions of SFAS No. 123. Pursuant to the requirements of SFAS No. 123R, the Company will continue to present the pro forma information for periods prior to the adoption date.

Valuation and Expense Under SFAS No. 123R

The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company’s expected volatility is based on the historical volatility of the Company’s stock price over the most recent period commensurate with the expected term of the stock option award. The estimated expected option life is based primarily on historical employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the Company’s stock options awards and the selected dividend yield assumption was determined in view of the Company’s historical and estimated dividend payout. The Company has no reason to believe that the expected volatility of its stock price or its option exercise patterns would differ significantly from historical volatility or option exercises.

Under the 2006 Incentive Plan, the Company estimated the fair value of stock options using the following assumptions and resulting in the following weighted-average grant date fair values:

	2007			2006			2005
Expected volatility		45	%		51	%		—
Expected life (years)		5.5			5.5			—
Interest rate (percent)		4.5-4.9			4.9-5.1			—
Dividend yield		1.5	%		1.6	%		—
Weighted-average fair values	$	6.88		$	7.18			—

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under the 1994 Plan, the Company estimated the fair value of stock options using the following assumptions and resulting in the following weighted-average grant date fair values:

	2007		2006			2005
Expected volatility		—		52	%		58	%
Expected life (years)		—		5.0			4.1
Interest rate (percent)		—		4.4-4.5			3.7-4.0
Dividend yield		—		1.7	%		1.6	%
Weighted-average fair values		—	$	6.01		$	6.95

There were no stock options granted under the Directors’ Plan in fiscal years 2007 and 2006 and options granted to directors in fiscal 2005 were cancelled in exchange for cash because of changes in the tax laws.

As of August 31, 2007, the Company had $1.1 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 1.5 years.

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. For each of fiscal years 2007 and 2006, the Company recognized $1.1 million in stock-based compensation costs. In fiscal years 2007, 2006 and 2005, the Company recognized $42,000 per year of stock-based compensation cost related to directors’ restricted stock awards. The following table summarizes the stock-based compensation cost under SFAS No. 123R for fiscal years 2007 and 2006 and the effect on the Company’s consolidated statements of operations (in thousands):

	2007		2006
Cost of sales	$	104	$	70
Operating expenses		926		999
Research and development expenses		20		38
Total stock-based compensation expense	$	1,050	$	1,107
Tax benefit		399		410
Total stock-based compensation expense, net of tax	$	651	$	697

See Note 15 for stock-based compensation costs recognized in the financial statements of each business segment.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pro-forma Information under SFAS No. 123 for Periods Prior to Fiscal 2006

If the fair value recognition provisions of SFAS 123 had been applied to stock-based compensation for fiscal 2005, the Company’s pro forma net income and basic and diluted earnings per share would have been as follows:

	2005
	(In thousands, except
	per share data)
Net income, as reported	$	2,574
Add: Stock-based employee compensation expense included in reported net income, net of tax		36
Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(898	)
Net income, pro forma	$	1,712
Earnings per share:
Basic — as reported	$	0.29
Basic — pro forma	$	0.19
Diluted — as reported	$	0.29
Diluted — pro forma	$	0.19

Restricted Stock

Non-employee directors receive restricted stock under the 1993 Non-Employee Director Restricted Stock Plan, which provides that beginning September 1, 1993 and every three years thereafter, each non-employee director shall receive $18,000 worth of common stock of the Company, based on the last reported sale price of the stock on the preceding trading day. One-third of the shares vest on each anniversary of the date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period. On September 1, 2005, 8,694 shares of restricted common stock of the Company were granted to the non-employee directors. As of October 30, 2007, this plan has been terminated and no additional restricted stock will be granted under this plan.

Note 10 — Pensions and Other Postretirement Benefits

Penford maintains two noncontributory defined benefit pension plans that cover substantially all North American employees and retirees.

The Company also maintains a postretirement health care benefit plan covering its North American bargaining unit hourly retirees.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adoption of SFAS No. 158

In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R” (“SFAS No. 158”). SFAS 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in the statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income in shareholders’ equity. In addition, a company is required to measure plan assets and benefit obligations as of the date of its fiscal year-end statement of financial position. The Company currently measures its plan assets and benefit obligations as of the end of its fiscal year. The incremental effects of adopting SFAS No. 158 on the Company’s consolidated balance sheet as of August 31, 2007 are presented in the following table. The adoption of SFAS No. 158 had no effect on the Company’s consolidated results of operations for the fiscal year ended August 31, 2007, or for any prior period presented, and it will not affect the Company’s consolidated results of operation in future periods. Prior to the adoption of SFAS No. 158 on August 31, 2007, the Company recognized an additional minimum pension liability pursuant to the provisions of SFAS Nos. 87 and 106, which is reflected in the “Balance Before SFAS No. 158 Adoption” column in the following table.

			As of August 31,
			2007
			SFAS No. 158
	Balance Before SFAS		Adoption			Balance After SFAS
	No. 158 Adoption		Adjustments			No. 158 Adoption
	(Dollars in thousands)
Intangible Asset	$	2,522	$	(2,522	)	$	—
Current accrued benefit liability		1,776		(1,180	)		596
Non-current accrued benefit liability — pensions		1,316		4,298			5,614
Other postretirement benefits		13,932		(1,118	)		12,814
Accumulated other comprehensive loss, net of tax		722		2,804			3,526
Deferred income tax liability		7,095		1,719			8,814

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Obligations and Funded Status

The following represents information summarizing the Company’s pension and other postretirement benefit plans. A measurement date of August 31, 2007 was used for all plans.

	Year Ended August 31,
	Pension Benefits						Other Benefits
	2007			2006			2007			2006
	(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at September 1	$	36,735		$	39,132		$	13,621		$	15,041
Service cost		1,467			1,673			309			391
Interest cost		2,207			2,102			818			785
Plan participants’ contributions		—			—			151			148
Amendments		873			—			—			—
Actuarial (gain) loss		(387	)		(1,052	)		(1,218	)		(840	)
Change in assumptions		175			(3,312	)		529			(1,104	)
Benefits paid		(1,829	)		(1,808	)		(800	)		(800	)
Benefit obligation at August 31	$	39,241		$	36,735		$	13,410		$	13,621
Change in plan assets:
Fair value of plan assets at September 1	$	30,521		$	26,759		$	—		$	—
Actual return on plan assets		3,945			2,262			—			—
Company contributions		990			3,308			649			652
Plan participants’ contributions		—			—			151			148
Benefits paid		(1,829	)		(1,808	)		(800	)		(800	)
Fair value of the plan assets at August 31	$	33,627		$	30,521		$	—		$	—
Funded status:
Plan assets less than projected benefit obligation	$	(5,614	)	$	(6,214	)	$	(13,410	)	$	(13,621	)
Unrecognized net actuarial loss		NA			5,655			NA			1,234
Unrecognized prior service cost		NA			1,840			NA			(1,219	)
Net asset (liability)	$	(5,614	)	$	1,281		$	(13,410	)	$	(13,606	)
Recognized as:
Intangible asset	$	—		$	1,840		$	—		$	—
Current accrued benefit liability		—			(1,090	)		(596	)		—
Non-current accrued benefit liability		(5,614	)		(2,748	)		(12,814	)		(13,606	)
Other comprehensive income		NA			3,279			NA			—
Net Amount Recognized	$	(5,614	)	$	1,281		$	(13,410	)	$	(13,606	)

Accumulated other comprehensive loss as of August 31, 2007 consists of the following amounts that have not yet been recognized as components of net benefit cost (dollars in thousands):

	Pension Benefits		Other Benefits
Unrecognized prior service cost (credit)	$	2,522	$	(1,067	)
Unrecognized net actuarial loss		3,687		545
Total	$	6,209	$	(522	)

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Selected information related to the Company’s defined benefit pension plans that have benefit obligations in excess of fair value of plan assets is presented below (dollars in thousands):

	August 31,
	2007		2006
Projected benefit obligation	$	39,241	$	36,735
Accumulated benefit obligation	$	36,719	$	34,359
Fair value of plan assets	$	33,627	$	30,521

Effective August 1, 2004, the Company’s postretirement health care benefit plan covering bargaining unit hourly employees was closed to new entrants and to any current employee who did not meet minimum requirements as to age plus years of service.

The defined benefit pension plans for salary and hourly employees were closed to new participants effective January 1, 2005 and August 1, 2004, respectively.

Net Periodic Benefit Cost

	Year Ended August 31,
	Pension Benefits									Other Benefits
	2007			2006			2005			2007			2006			2005
	(Dollars in thousands)
Components of net periodic benefit cost
Service cost	$	1,467		$	1,673		$	1,066		$	309		$	391		$	352
Interest cost		2,207			2,102			2,065			818			785			775
Expected return on plan assets		(2,379	)		(2,150	)		(1,868	)		—			—			—
Amortization of transition obligation		—			—			—			—			—			—
Amortization of prior service cost		191			187			194			(152	)		(152	)		(152	)
Amortization of actuarial loss		190			602			480			—			143			38
Benefit cost	$	1,676		$	2,414		$	1,937		$	975		$	1,167		$	1,013

Assumptions

The Company assesses its benefit plan assumptions on a regular basis. Assumptions used in determining plan information are as follows:

	August 31,
	Pension Benefits									Other Benefits
	2007			2006			2005			2007			2006			2005
Weighted-average assumptions used to calculate net periodic expense:
Discount rate		6.15	%		5.50	%		6.25	%		6.15	%		5.50	%		6.25	%
Expected return on plan assets		8.00	%		8.00	%		8.00	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%
Weighted-average assumptions used to calculate benefit obligations at August 31:
Discount rate		6.51	%		6.15	%		5.50	%		6.51	%		6.15	%		5.50	%
Expected return on plan assets		8.00	%		8.00	%		8.00	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%

The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

developing the expected rate of return, the Company considers long-term historical market rates of return as well as actual returns on the Company’s plan assets, and adjusts this information to reflect expected capital market trends. Penford also considers forward looking return expectations by asset class, the contribution of active management and management fees paid by the plans. The plan assets are held in qualified trusts and anticipated rates of return are not reduced for income taxes. The expected long-term return on assets assumption used to calculate net periodic pension expense was 8.0% for fiscal 2007. A decrease (increase) of 50 basis points in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.2 million based on the assets of the plans at August 31, 2007. The expected return on plan assets to be used in calculating fiscal 2008 pension expense is 8%.

The discount rate used by the Company in determining pension expense and pension obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments. The discount rates to determine net periodic expense used in 2005 (6.25%), 2006 (5.50%) and 2007 (6.15%) reflect the change in bond yields over the last several years. During fiscal 2007, bond yields rose and Penford has increased the discount rate for calculating its benefit obligations at August 31, 2007, as well as net periodic expense for fiscal 2008, to 6.51%. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.1 million and other postretirement benefit expense by $0.01 million.

Unrecognized net loss amounts reflect the difference between expected and actual returns on pension plan assets as well as the effects of changes in actuarial assumptions. Unrecognized net losses in excess of certain thresholds are amortized into net periodic pension and postretirement benefit expense over the average remaining service life of active employees. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $0.05 million in fiscal 2008. Amortization of unrecognized net losses is not expected to impact the net postretirement health care expense in fiscal 2008.

	2007			2006			2005
Assumed health care cost trend rates:
Current health care trend assumption		9.00	%		10.00	%		10.00	%
Ultimate health care trend rate		4.75	%		4.75	%		4.75	%
Year ultimate health care trend is reached		2015			2015			2014

The assumed health care cost trend rate could have a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:

	1-Percentage-		1-Percentage-
	Point		Point
	Increase		Decrease
	(Dollars in thousands)
Effect on total of service and interest cost components in fiscal 2007	$	190	$	(154	)
Effect on postretirement accumulated benefit obligation as of August 31, 2007	$	1,984	$	(1,629	)

Plan Assets

The weighted average asset allocations of the investment portfolio for the pension plans at August 31 are as follows:

	Target			August 31,
	Allocation			2007			2006
U.S. equities		60	%		55	%		55	%
International equities		10	%		15	%		15	%
Fixed income investments		25	%		25	%		25	%
Real estate		5	%		5	%		5	%

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assets of the pension plans are invested in units of common trust funds actively managed by Russell Trust Company, a professional fund investment manager. The investment strategy for the defined benefit pension assets is to maintain a diversified asset allocation in order to minimize the risk of large losses and maximize the long-term risk-adjusted rate of return. No plan assets are invested in Penford shares. There are no plan assets for the Company’s postretirement health care plans.

Contributions and Benefit Payments

The Company’s funding policy for the defined benefit pension plans is to contribute amounts sufficient to meet the statutory funding requirements of the Employee Retirement Income Security Act of 1974. The Company contributed $1.0 million, $3.3 million and $3.6 million in fiscal 2007, 2006 and 2005, respectively. The Company expects to contribute $1.6 million to its defined benefit pension plans during fiscal 2008. Penford funds the benefit payments of its postretirement health care plans on a cash basis; therefore, the Company’s contributions to these plans in fiscal 2008 will approximate the benefit payments below.

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include benefits attributable to estimate future employee service.

			Other
	Pension		Postretirement
	(Dollars in millions)
2008	$	2.0	$	0.6
2009		2.0		0.7
2010		2.0		0.7
2011		2.1		0.7
2012		2.2		0.8
2013-2017	$	12.6	$	4.6

Note 11 — Other Employee Benefits

Savings and Stock Ownership Plan

The Company has a defined contribution savings plan by which eligible North American-based employees can elect a maximum salary deferral of 16%. The plan provides a 100% match on the first 3% of salary contributions and a 50% match on the next 3% per employee. The Company’s matching contributions were $920,000, $882,000 and $750,000 for fiscal years 2007, 2006 and 2005, respectively.

Deferred Compensation Plan

The Company provides its directors and certain employees the opportunity to defer a portion of their salary, bonus and fees. The deferrals earn interest based on Moody’s current Corporate Bond Yield. Deferred compensation interest of $180,000, $184,000 and $188,000 was accrued in fiscal years 2007, 2006 and 2005, respectively.

Supplemental Executive Retirement Plan

The Company sponsors a supplemental executive retirement plan, a non-qualified plan, which covers certain employees. No current executive officers participate in this plan. For fiscal 2007, 2006 and 2005, the net periodic pension expense accrued for this plan was $320,000, $305,000 and $302,000, respectively. The accrued obligation related to the plan was $4.0 million and $3.9 million for fiscal years 2007 and 2006, respectively.

Health Care and Life Insurance Benefits

The Company offers health care and life insurance benefits to most active North American employees. Costs incurred to provide these benefits are charged to expense as incurred. Health care and life insurance expense, net of

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

employee contributions, was $4.4 million, $4.3 million and $4.7 million in fiscal years 2007, 2006 and 2005, respectively.

Superannuation Fund

The Company contributes to superannuation funds on behalf of the employees of Penford Australia. Australian law requires the Company to contribute at least 9% of each employee’s eligible pay. In New Zealand, the Company sponsors a superannuation benefit plan whereby it contributes 7.5% and 5% of eligible pay for salaried and hourly employees, respectively. The Company contributions to superannuation funds were $1.1 million, in each of fiscal years 2007, 2006 and 2005.

Note 12 — Other Non-operating Income

Other non-operating income consists of the following:

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Royalty and licensing income	$	1,902		$	1,827		$	1,386
Gain (loss) on sale of assets		(325	)		85			64
Loss on extinguishment of debt		—			—			(1,051	)
Gain on sale of Tamworth farm		60			78			1,166
Gain on sale of investment		—			—			736
Other		8			(94	)		(92	)
	$	1,645		$	1,896		$	2,209

In fiscal 2003, the Company exclusively licensed to National Starch and Chemical Investment Holdings Corporation (“National Starch”) certain rights to its resistant starch patent portfolio (the “RS Patents”) for applications in human nutrition. Under the terms of the licensing agreement, the Company received an initial licensing fee of $2.25 million ($1.6 million net of transaction expenses) which is being amortized over the life of the royalty agreement. The Company recognized $1.9 million, $1.8 million and $1.4 million in income during fiscal 2007, 2006 and 2005, respectively, related to the licensing fee and royalties. The Company has recognized $8.5 million in royalty income from the inception of the agreement through August 31, 2007.

In the first quarter of fiscal 2007, in connection with the settlement of litigation in which Penford’s Australian subsidiary companies were plaintiffs, Penford received a one-time payment of $625,000 and granted a license to one of the defendants in this litigation under Penford’s RS Patents in certain non-human nutrition applications. In addition, Penford became entitled to receive additional royalties under a license of rights under the RS Patents in human nutrition applications granted to one of the defendants. As part of the settlement agreement, Penford is entitled to receive certain other benefits, including an acceleration and extension of certain royalties under its license with National Starch. The Company is deferring and recognizing license income of $625,000 ratably over the remaining life of the patent license, which is estimated to be seven years.

In 2005, the Company refinanced its secured term and revolving credit facilities and wrote off $1.1 million of unamortized debt issuance costs related to these credit agreements.

In fiscal 2005, Penford sold a parcel of land near its wheat starch plant in Tamworth, New South Wales, Australia, that was used for disposal of effluent from the Tamworth manufacturing process for $1.9 million, and recognized a gain on the sale of $1.2 million.

In fiscal 2006, the Company sold a parcel of land suitable only for agricultural purposes in Tamworth, New South Wales, Australia to a third-party purchaser for $0.7 million. The Company leases back the property from the purchaser under two lease terms and arrangements: i) a small parcel of land will be leased for 25 years beginning August 2006 with annual rent of approximately $0.016 million converted to U.S. dollars at the Australian dollar

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exchange rate at August 31, 2007 and ii) the majority of land sold was leased for one year beginning August 2006 with annual rental of approximately $0.09 million converted to U.S. dollars at the Australian dollar exchange rate at August 31, 2007. The total gain on the sale was $0.3 million. The gain of $0.1 million in excess of the present value of the lease payments was recognized during the second quarter of fiscal 2006. The remaining gain of $0.2 million is being recognized proportionally over the terms of the leases discussed above.

In fiscal 2005, the Company sold a majority of its investment in a small Australian start-up company and recognized a $0.7 million pre-tax gain on the transaction.

Note 13 — Income Taxes

Income (loss) before income taxes is as follows:

	Year Ended August 31,
	2007		2006		2005
	(Dollars in thousands)
Domestic	$	16,335	$	3,502	$	(4,635	)
Foreign		3,157		1,760		2,282
Total	$	19,492	$	5,262	$	(2,353	)

Income tax expense (benefit) consists of the following:

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Current:
Federal	$	4,630		$	68		$	(353	)
State		1,051			709			170
Foreign		2,065			550			666
		7,746			1,327			483
Deferred:
Federal		78			529			(4,579	)
State		(644	)		(536	)		(573	)
Foreign		(1,205	)		(286	)		(258	)
		(1,771	)		(293	)		(5,410	)
Total	$	5,975		$	1,034		$	(4,927	)

	Year Ended August 31,
	2007			2006		2005
	(Dollars in thousands)
Comprehensive tax expense (benefit) allocable to:
Income (loss) before taxes	$	5,975		$	1,034	$	(4,927	)
Comprehensive income (loss)		(195	)		1,649		(871	)
	$	5,780		$	2,683	$	(5,798	)

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the statutory federal tax to the actual provision (benefit) for taxes is as follows:

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Statutory tax rate		35	%		34	%		34	%
Statutory tax on income	$	6,822		$	1,789		$	(800	)
State taxes, net of federal benefit		79			114			(245	)
Domestic production exclusion benefit		(202	)		(14	)		—
Tax credits, including research and development credits		(382	)		(136	)		(247	)
Extraterritorial income exclusion benefit		(5	)		(546	)		(2,970	)
Lower statutory rate on foreign earnings		(66	)		(82	)		(449	)
Other		(271	)		(91	)		(216	)
Total provision (benefit)	$	5,975		$	1,034		$	(4,927	)

The significant components of deferred tax assets and liabilities are as follows:

	August 31,
	2007			2006
	(Dollars in thousands)
Deferred tax assets:
Alternative minimum tax credit	$	—		$	466
Postretirement benefits		8,814			7,957
Provisions for accrued expenses		2,902			1,988
Stock-based compensation		735			389
Other		2,627			1,274
Total deferred tax assets		15,078			12,074
Deferred tax liabilities:
Depreciation		15,502			16,513
Other		434			393
Total deferred tax liabilities		15,936			16,906
Net deferred tax liabilities	$	858		$	4,832
Recognized as:
Other current assets	$	1,985		$	1,092
Other assets		297			—
Long-term deferred income tax liability		(3,140	)		(5,924	)
Total net deferred tax liabilities	$	858		$	4,832

At August 31, 2007, the Company had no federal alternative minimum tax credit or research and development carry forwards.

Deferred taxes are not recognized on temporary differences from undistributed earnings of foreign subsidiaries of approximately $16.9 million, as these earnings are deemed to be permanently reinvested. The amount of unrecognized deferred tax liability associated with these temporary differences is approximately $6.4 million.

The Company has not provided for U.S. federal income and foreign withholding taxes on undistributed earnings from non-U.S. operations as of August 31, 2007 because the Company intends to reinvest such earnings indefinitely outside of the United States.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In August 2005, the Company received a report from the Internal Revenue Service (“IRS”) regarding the audit of the Company’s U.S. federal income tax returns for fiscal years ended August 31, 2001 and 2002. In May 2007, the Company settled the outstanding IRS audits of the Company’s U.S. federal income tax returns for the fiscal years ended August 31, 2001 and 2002. Under the settlement the Company received a cash refund of $0.3 million. In addition, in connection with the settlement of these audits in the third quarter of fiscal 2007, the Company reversed a current tax liability in the amount of $0.7 million, which represented its estimate of the probable loss on certain tax positions being examined.

In December 2006, the Tax Relief Healthcare Act of 2006 was enacted in the U.S., which retroactively reinstated and extended the research and development tax credit from January 1, 2006 through December 31, 2007. The Company recorded the tax effect of $0.2 million of U.S. research and development tax credits in 2007 related to fiscal 2006.

In 2004, the Company filed amended U.S. federal income tax returns for fiscal years ended August 31, 2001 and 2002, increasing the extraterritorial income exclusion (“EIE”) deduction. The methodology that was used to determine the incremental EIE deduction for those years was also utilized for the federal income tax returns for fiscal years ended August 31, 2003, 2004 and 2005. Penford had not recognized the tax benefit associated with the incremental EIE deduction for fiscal years 2001 through 2004 because the Company had concluded that it was not probable, as defined in FASB Statement No. 5, “Accounting for Contingencies,” that the deduction would be sustained. In its tax audits of the fiscal 2001 and 2002 federal income tax returns, the IRS did not challenge the Company’s EIE deduction for those years. Accordingly, in 2005, the Company recognized the incremental tax benefit of this deduction for fiscal years 2001 through 2004. The amount of tax benefit recognized for years prior to 2005 was $2.5 million.

In evaluating the exposures connected with the various tax filing positions, the Company establishes an accrual, when, despite management’s belief that the Company’s tax return positions are supportable, management believes that certain positions may be successfully challenged and a loss is probable. When facts and circumstances change, these accruals are adjusted. Beginning in fiscal 2008, the Company will adopt FIN 48, which will change the accounting for tax positions. See discussion in Note 1.

Note 14 — Earnings Per Common Share

The following table presents the computation of basic and diluted earnings per share:

	Year Ended August 31,
	2007		2006		2005
	(Amounts in thousands, except share and
	per share data)
Net income	$	13,517	$	4,228	$	2,574
Weighted average common shares outstanding		8,986,413		8,899,999		8,826,916
Net effect of dilutive stock options		296,712		104,191		119,279
Weighted average common shares and equivalents outstanding, assuming dilution		9,283,125		9,004,190		8,946,195
Earnings per common share:
Basic	$	1.50	$	0.48	$	0.29
Diluted	$	1.46	$	0.47	$	0.29

Weighted-average stock options omitted from the denominator of the earnings per share calculation because they were antidilutive were 57,159, 536,775 and 346,388 for 2007, 2006 and 2005, respectively.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 15 — Segment Reporting

Financial information for the Company’s three segments is presented below. The first two segments, Industrial Ingredients — North America and Food Ingredients — North America, are broad categories of end-market users served by the Company’s U.S. operations. The Industrial Ingredients segment provides carbohydrate-based starches for industrial applications, primarily in the paper and packaging products industries. The Food Ingredients segment produces specialty starches for food applications. The third segment is the geographically separate operations in Australia and New Zealand. The Australian and New Zealand operations produce specialty starches used primarily in the food ingredients business. See Part 1, Item 1, “Business,” for a description of the products for each segment. A fourth item for “corporate and other” activity has been presented to provide reconciliation to amounts reported in the consolidated financial statements. Corporate and other represents the activities related to the corporate headquarters such as public company reporting, personnel costs of the executive management team, corporate-wide professional services and consolidation entries. The elimination of intercompany sales between Australia/New Zealand operations and Food Ingredients — North America is presented separately since the chief operating decision maker views segment results prior to intercompany eliminations. The accounting policies of the reportable segments are the same as those described in Note 1.

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Sales
• Industrial ingredients — North America	$	194,957		$	165,850		$	147,782
• Food ingredients — North America		62,987			57,156			53,661
• Australia/New Zealand operations		105,244			96,121			96,231
• Corporate and other		(824	)		(708	)		(911	)
	$	362,364		$	318,419		$	296,763
Depreciation and amortization
• Industrial ingredients — North America	$	7,830		$	7,812		$	8,832
• Food ingredients — North America		2,944			3,301			3,311
• Australia/New Zealand operations		4,605			4,199			4,306
• Corporate and other		317			271			576
	$	15,696		$	15,583		$	17,025
Income (loss) from operations
• Industrial ingredients — North America	$	19,251		$	9,121		$	(147	)
• Food ingredients — North America		10,684			7,819			7,404
• Australia/New Zealand operations		3,269			1,735			1,331
• Corporate and other		(9,646	)		(9,407	)		(7,576	)
	$	23,558		$	9,268		$	1,012
Capital expenditures, net
• Industrial ingredients — North America	$	30,492		$	8,858		$	4,211
• Food ingredients — North America		2,477			1,651			1,742
• Australia/New Zealand operations		1,952			4,323			3,319
• Corporate and other		(187	)		73			141
	$	34,734		$	14,905		$	9,413

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	August 31,
	2007		2006
	(Dollars in thousands)
Total assets
• Industrial ingredients — North America	$	133,187	$	98,733
• Food ingredients — North America		33,684		31,714
• Australia/New Zealand operations		108,084		104,491
• Corporate and other		13,433		15,730
	$	288,388	$	250,668
Total goodwill — Australia/New Zealand	$	23,477	$	21,871

Reconciliation of total income from operations for the Company’s segments to income before income taxes as reported in the consolidated financial statements follows:

	Year Ended August 31,
	2007			2006			2005
	(Dollars in thousands)
Income from operations	$	23,558		$	9,268		$	1,012
Other non-operating income		1,645			1,896			2,209
Interest expense		(5,711	)		(5,902	)		(5,574	)
Income (loss) before income taxes	$	19,492		$	5,262		$	(2,353	)

Sales, attributed to the point of origin, are as follows:

	Year Ended August 31,
	2007		2006		2005
	(Dollars in thousands)
Sales
• United States	$	257,120	$	222,298	$	200,532
• Australia/New Zealand		105,244		96,121		96,231
	$	362,364	$	318,419	$	296,763

Sales, attributed to the area to which the product was shipped, are as follows:

	Year Ended August 31,
	2007		2006		2005
	(Dollars in thousands)
United States	$	227,438	$	198,439	$	175,741
Australia/New Zealand		79,647		79,919		74,222
Japan		18,636		18,334		19,343
Canada		12,654		11,718		13,063
Mexico		10,358		5,761		2,268
Other		13,631		4,248		12,126
Non-U.S		134,926		119,980		121,022
Total	$	362,364	$	318,419	$	296,763

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	August 31,
	2007		2006
	(Dollars in thousands)
Long-lived assets, net
•   United States	$	103,942	$	82,556
•   Australia/New Zealand		66,198		64,144
	$	170,140	$	146,700

With the adoption of SFAS No. 123R on September 1, 2005, the Company recognized $1.1 million in stock-based compensation expense for each of fiscal years 2007 and 2006. The following table summarizes the stock-based compensation expense related to stock option awards by segment for fiscal years 2007 and 2006.

	2007		2006
	(Dollars in thousands)
Industrial Ingredients — North America	$	264	$	217
Food Ingredients — North America		170		123
Australia/New Zealand operations		52		49
Corporate		564		718
	$	1,050	$	1,107

Prior to September 1, 2005, the Company presented pro forma information for the periods prior to the adoption of SFAS No. 123R and no compensation expense was recognized for the stock-based compensation plans other than for the Directors’ Plan and restricted stock awards. See Note 9.

Note 16 — Quarterly Financial Data (Unaudited)

	First		Second		Third		Fourth
Fiscal 2007	Quarter		Quarter		Quarter		Quarter		Total
	(Dollars in thousands, except per share data)
Sales	$	85,500	$	85,241	$	95,406	$	96,217	$	362,364
Cost of sales		72,306		72,839		76,838		76,220		298,203
Gross margin		13,194		12,402		18,568		19,997		64,161
Net income		2,573		1,706		4,955		4,283		13,517
Earnings per common share:
Basic	$	0.29	$	0.19	$	0.55	$	0.47	$	1.50
Diluted	$	0.28	$	0.19	$	0.54	$	0.45	$	1.46
Dividends declared	$	0.06	$	0.06	$	0.06	$	0.06	$	0.24

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	First		Second			Third		Fourth
Fiscal 2006	Quarter		Quarter			Quarter		Quarter		Total
	(Dollars in thousands, except per share data)
Sales	$	77,903	$	77,078		$	79,130	$	84,308	$	318,419
Cost of sales		67,503		68,534			67,070		70,369		273,476
Gross margin		10,400		8,544			12,060		13,939		44,943
Net income (loss)		196		(511	)		1,991		2,552		4,228
Earnings (loss) per common share:
Basic	$	0.02	$	(0.06	)	$	0.22	$	0.29	$	0.48
Diluted	$	0.02	$	(0.06	)	$	0.22	$	0.28	$	0.47
Dividends declared	$	0.06	$	0.06		$	0.06	$	0.06	$	0.24

In the fourth quarter of fiscal 2007, the Company recorded a $2.4 million pretax charge for an estimated loss contingency related to litigation. See Note 17.

Note 17 — Legal Proceedings

In October 2004, Penford Products Co. (“Penford Products”), a wholly-owned subsidiary of the Company, was sued by Graphic Packaging International, Inc. (“Graphic”) in the Fourth Judicial District Court, Ouachita Parish, State of Louisiana. Graphic sought monetary damages for, among other things, Penford Products’ alleged breach of an agreement during the 2004 strike affecting its Cedar Rapids, Iowa plant to supply Graphic with certain starch products. Penford Products denied all liability and countersued for damages.

During October 2007, this case was tried before a judge of the above-noted court. As of November 7, 2007, no decision in the matter had been rendered by the judge and the judge had not advised Penford Products of the date upon which his decision would be issued. At trial, Graphic argued that it was entitled to damages in the amount of approximately $3.27 million, plus interest. Penford Products argued that it was entitled to damages of approximately $550,000, plus interest.

The Company vigorously defended its position at trial. However, the Company, applying its best judgment of the likely outcome of the litigation, has established a loss contingency against this matter of $2.4 million. Depending upon the eventual outcome of this litigation, the Company may incur additional material charges in excess of the amount it has reserved, or it may incur lower charges, the amounts of which in each case management is unable to predict at this time.

The Company is involved from time to time in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from the Company’s outside legal counsel, the ultimate resolution of these matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.

62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Penford Corporation

We have audited the accompanying consolidated balance sheets of Penford Corporation as of August 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penford Corporation at August 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 9 to the consolidated financial statements, effective September, 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

As discussed in Notes 1 and 10 to the consolidated financial statements, effective August 31, 2007, the Company changed its method for accounting for postretirement benefit plans in accordance with Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Penford Corporation’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 6, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Denver, Colorado

November 6, 2007

63

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Penford Corporation

We have audited Penford Corporation’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Penford Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Penford Corporation maintained, in all material respects, effective internal control over financial reporting as of August 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Penford Corporation as of August 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2007 of Penford Corporation and our report dated November 6, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Denver, Colorado

November 6, 2007

64

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.   Controls and Procedures.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. Management’s report on internal control over financial reporting and the related report of the Company’s registered independent public accounting firm are included below and at the end of Item 8 above. There were no changes in the Company’s internal control over financial reporting during the quarter ended August 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements; providing reasonable assurance that receipts and expenditures of the Company’s assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of the Company’s internal controls over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of August 31, 2007.

Item 9B.   Other Information.

Not applicable.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

The applicable information set forth under the headings “Election of Directors,” “Information About the Board and Its Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (the “2008 Proxy Statement”), to be filed not later than 120 days after the end of the fiscal year covered by this report, is incorporated herein by reference. Information regarding the Executive Officers of the Registrant is set forth in Part I, Item 1.

The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all employees, consultants and members of the Board of Directors, including the Chief Executive Officer, Chief Financial Officer and Corporate Controller. This Code embodies the commitment of the Company and its subsidiaries to conduct business in accordance with the highest ethical standards and applicable laws, rules and

65

regulations. The Code is available on the Company’s Internet site ate www.penx.com under the Investor Relations section.

Item 11.   Executive Compensation.

The applicable information set forth under the headings “Executive Compensation,” “Director Compensation” and “Information About the Board and Its Committees” in the 2008 Proxy Statement is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The applicable information set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” in the 2008 Proxy Statement is incorporated herein by reference.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information regarding Penford’s equity compensation plans at August 31, 2007. The Company has no equity compensation plans that have not been approved by security holders.

	Number of				Number of Securities
	Securities to be		Weighted-		Remaining Available
	Issued Upon		Average Exercise		for Future Issuance
	Exercise of		Price of		Under Equity
	Outstanding		Outstanding		Compensation Plans
	Options,		Options,		(Excluding Securities
	Warrants and		Warrants and		Reflected in Column
Plan category	Rights		Rights		(a))
Equity compensation plans approved by security holders:
1994 Stock Option Plan(1)		702,500	$	14.11		—
1993 Non-Employee Director Restricted Stock Plan(2)		—		—		10,039
2006 Long-Term Incentive Plan(4)		220,500	$	15.88		736,976
Stock Option Plan for Non-Employee Directors(3)		110,997	$	10.37		—
Total		1,033,977	$	14.25		747,015

(1)	This plan has been terminated and no additional options are available for grant. The options which are subsequently forfeited or not exercised are available for issuance under the 2006 Long-Term Incentive Plan.
(2)	Each Director received a grant of $18,000 of restricted stock every three years. The restricted stock vests one-third on each anniversary of the grant date. As of October 30, 2007, this plan has been terminated and no additional restricted stock will be granted under this plan.
(3)	This plan has been terminated and no additional options will be granted under this plan.
(4)	Shares available for issuance under the 2006 Long-Term Incentive Plan can be granted pursuant to stock options, stock appreciation rights, restricted stock or units or performance based cash awards.

Item 13.   Certain Relationships and Related Transactions, and Director Independence

The applicable information relating to certain relationships and related transactions of the Company is set forth under the heading “Transactions with Related Persons” in the 2008 Proxy Statement and is incorporated herein by reference. Information related to director independence is set forth under the heading of “Information About the Board and Its Committees” in the 2008 Proxy Statement and is incorporated herein by reference.

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Item 14.   Principal Accountant Fees and Services.

The applicable information concerning principal accountant fees and services appears under the heading “Fees Paid to Ernst & Young LLP” in the 2008 Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.   Exhibits and Financial Statement Schedules.

(a)(1) Financial Statements

The consolidated balance sheets as of August 31, 2007 and 2006 and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended August 31, 2007 and the reports of the independent registered public accounting firm are included in Part II, Item 8.

(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not applicable or the information is included in the Consolidated Financial Statements in Part II, Item 8.

(3) Exhibits

See index to Exhibits on page 69.

(b) Exhibits

See Item 15(a)(3), above.

(c) Financial Statement Schedules

None

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 7th day of November 2007.

Penford Corporation

/s/  Thomas D. Malkoski

Thomas D. Malkoski

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on November 7, 2007.

Signature	Title
/s/  Thomas D. Malkoski Thomas D. Malkoski	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/  Steven O. Cordier Steven O. Cordier	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/  Paul H. Hatfield Paul H. Hatfield	Chairman of the Board of Directors
/s/  William E. Buchholz William E. Buchholz	Director
/s/  Jeffrey T. Cook Jeffrey T. Cook	Director
/s/  R. Randolph Devening R. Randolph Devening	Director
/s/  John C. Hunter III John C. Hunter III	Director
/s/  Sally G. Narodick Sally G. Narodick	Director
/s/  James E. Warjone James E. Warjone	Director

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INDEX TO EXHIBITS

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference. Copies of exhibits can be obtained at no cost by writing to Penford Corporation, 7094 S. Revere Parkway, Centennial, Colorado 80112.

Exhibit No.			Item
	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 File No. 000-11488, Form 8-K/A dated September 29, 2000, filed December 12, 2000)
	3	.1	Restated and Amended Articles of Incorporation, as amended (filed as an exhibit to Registrant’s File No. 000-11488, Form 10-K for the fiscal year ended August 31, 2006)
	3	.2	Bylaws of Registrant as amended and restated as of October 28, 2005 (filed as an exhibit to Registrant’s File No. 000-11488, Form 10-K for the fiscal year ended August 31, 2005)
	3	.3	Section 3.2 of the Registrant’s Amended and Restated Bylaws (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K filed November 3, 2005)
	4	.1	Amended and Restated Rights Agreement dated as of April 30, 1997 (filed as an exhibit to Registrant’s File No. 000-11488, Amendment to Registration Statement on Form 8-K/A dated May 5, 1997, filed May 5, 1997)
	10	.1	Penford Corporation Deferred Compensation Plan, amended and restated as of January 1, 2005 *
	10	.2	Form of Change of Control Agreement and Annexes between Penford Corporation and Messrs. Kortemeyer, Cordier, Kunerth, Malkoski and Randall and certain other key employees (a representative copy of these agreements is filed as an exhibit to Registrant’s File No. 000-11488, Form 10-Q for the quarter ended February 28, 2006, filed April 10, 2006)*
	10	.3	Penford Corporation 1993 Non-Employee Director Restricted Stock Plan (filed as an exhibit to Registrant’s File No. 000-11488, Form 10-Q for the quarter ended November 30, 1993)*
	10	.4	Penford Corporation 1994 Stock Option Plan as amended and restated as of January 8, 2002 (filed as an exhibit to Registrant’s File No. 000-11488, Proxy Statement filed with the Commission on January 18, 2002)*
	10	.5	Penford Corporation Stock Option Plan for Non-Employee Directors (filed as a exhibit to Registrant’s File No. 000-11488, Form 10-Q for the quarter ended May 31, 1996, filed July 15, 1996)*
	10	.6	Penford Corporation 2006 Long-Term Incentive Plan (incorporated by reference to Appendix A to Registrant’s File No. 000-11488, Proxy Statement filed December 20, 2005)*
	10	.7	Form of Penford Corporation’s 2006 Long-Term Incentive Plan Stock Option Grant Notice, including the Stock Option Agreement and Notice of Exercise (incorporated by reference to the exhibits to the Registrant’s File No. 000-11488, Current Report on Form 8-K filed February 21, 2006)*
	10	.8	Form of Penford Corporation 2006 Long-Term Incentive Plan Restricted Stock Award Notice and Agreement*
	10	.9	Separation Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated August 31, 1998, filed September 15, 1998)
	10	.10	Amended and Restated Credit Agreement dated August 22, 2005 (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated August 22, 2005, filed August 26, 2005)
	10	.11	First Amendment to Amended and Restated Credit Agreement (filed as an exhibit to Registrant’s File No. 000-11488, Form 10-Q for the quarter ended May 31, 2006, filed July 10, 2006)
	10	.12	Second Amended and Restated Credit Agreement dated as of October 5, 2006 (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated October 5, 2006, filed October 10, 2006)
	10	.13	Director Special Assignments Policy dated August 26, 2005 (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated August 26, 2005, filed September 1, 2005)*
	10	.14	Non-Employee Director Compensation Term Sheet *
	21		Subsidiaries of the Registrant
	23		Consent of Independent Registered Public Accounting Firm
	24		Power of Attorney
	31	.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley act of 2002

* Denotes management contract or compensatory plan or arrangement

69

EX-10.1

Exhibit 10.1

PENFORD CORPORATION

DEFERRED COMPENSATION PLAN

Amended and Restated as of January 1, 2005

TABLE OF CONTENTS

ARTICLE I—PURPOSE
1.1 Purpose
1.2 Effective Date
ARTICLE II—DEFINITIONS
2.1 Account	2
2.2 Base Annual Salary	2
2.3 Beneficiary	2
2.4 Board	2
2.5 Bonus	2
2.6 Change in Control	2
2.7 Code	4
2.8 Committee	4
2.9 Compensation	5
2.10 Compensation Committee	5
2.11 Corporation	5
2.12 Deferral Commitment	5
2.13 Deferral Period	5
2.14 Determination Date	5
2.15 Director	5
2.16 Elective Deferred Compensation	6
2.17 Executive	6
2.18 Fees	6
2.19 Financial Hardship	6
2.20 Fiscal Year	6
2.21 Interest Rate	6
2.22 Participant	6
2.23 Participation Agreement	7
2.24 Plan	7
2.25 Retirement	7
2.26 Retirement Plan	7
2.27 Separation from Service	7
2.28 Specified Employee	9
2.29 Termination	9
2.30 Valuation Date	9
ARTICLE III—ELIGIBILITY AND DEFERRAL COMMITMENTS	9
3.1 Eligibility and Participation	9
3.2 Deferral Election	10

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3.3 Modification of Deferral Commitment	10
ARTICLE IV—DEFERRED COMPENSATION ACCOUNT	11
4.1 Account	11
4.2 Interest; Determination of Accounts	11
4.3 Statement of Account	11
ARTICLE V—PLAN BENEFITS	11
5.1 Plan Benefits	11
5.2 Form of Benefit Payment	12
5.3 Hardship Distributions	13
5.4 Golden Parachute Payments	13
5.5 Withholding on Benefit Payments	14
5.6 Time of Payment	14
5.7 Payment to Guardian	14
ARTICLE VI—BENEFICIARY DESIGNATION	14
6.1 Beneficiary Designation	14
6.2 Changes to Designation	15
6.3 Change in Marital Status	15
6.4 No Beneficiary Designation	15
6.5 Effect of Payment	16
ARTICLE VII—ADMINISTRATION	16
7.1 Committee; Duties	16
7.2 Agents	16
7.3 Binding Effect of Decisions	16
7.4 Indemnity of Committee	16
ARTICLE VIII—CLAIMS PROCEDURE	17
8.1 Claim	17
8.2 Denial of Claim	17
8.3 Review of Claim	17
8.4 Final Decision	17
ARTICLE IX—AMENDMENT AND TERMINATION OF THE PLAN	18
9.1 Amendment	18
9.2 Termination	18
ARTICLE X—MISCELLANEOUS	18
10.1 Unfunded Plan	18

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10.2 Unsecured General Creditor	19
10.3 Trust Fund	19
10.4 Nonassignability	19
10.5 Not a Contract of Employment	20
10.6 Protective Provisions	20
10.7 Governing Law	20
10.8 Validity	20
10.9 Notice	20
10.10 Successors	20
10.11 Compliance with Code Section 409A	21

APPENDIX A

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PENFORD CORPORATION
DEFERRED COMPENSATION PLAN

Amended and Restated as of January 1, 2005

ARTICLE I—PURPOSE

1.1 Purpose

     Penford Corporation (the “Corporation”) adopts this Deferred Compensation Plan (the “Plan”) to provide current tax planning opportunities as well as supplemental funds for Retirement or death for certain employees and Directors of the Corporation. It is intended that the Plan will aid in attracting and retaining employees and Directors of exceptional ability by providing them with this benefit.

1.2 Effective Date

     The Plan, effective as of September 1, 1989, restated as of September 1, 1996 and restated as of September 1, 2001, is amended by this restatement, as of January 1, 2005.

(a)	Rules That Apply to Pre-2005 Credits. Amounts credited under the Plan which relate entirely to services performed before January 1, 2005, shall continue to be governed by the terms of the Prior Plan Statement, attached hereto as Appendix A.
(b)	Rules That Apply to 2005, 2006 and 2007 Credits. Amounts credited under the Plan which relate all or in part to services performed on or after January 1, 2005, but before January 1, 2008, shall be governed by the terms of the Prior Plan Statement subject to any modifications necessary to comply the deferred compensation provisions in section 409A of the Code and proposed regulations and other guidance issued prior to final regulations thereunder.
(c)	Rules That Apply to Post-2007 Credits. Amounts credited under the Plan which relate all or in part to services performed on or after January 1, 2008, will be governed by the terms of this Plan Statement, the terms of which are intended to comply with the deferred compensation provisions in section 409A of the Code.

ARTICLE II—DEFINITIONS

     For purposes of this Plan, the following terms shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1 Account

     “Account” means the record maintained by the Corporation for each Participant in accordance with Article IV with respect to any deferral of Compensation or Fees pursuant to this Plan.

2.2 Base Annual Salary

     “Base Annual Salary” means the annual compensation payable to an Executive, excluding Bonuses and noncash compensation.

2.3 Beneficiary

     “Beneficiary” means the person, persons or entity designated under Article VI to receive any Plan Benefits payable after a Participant’s death.

2.4 Board

     “Board” means the Executive Compensation and Development Committee of the Board of Directors of Penford Corporation or any successor thereto.

2.5 Bonus

     “Bonus” means the compensation derived under the Corporation’s “Management Incentive Plan” and payable in any year in a lump sum to an Executive.

2.6 Change in Control

     “Change in Control” means the occurrence of a “Change in the Ownership of the Corporation,” “Change in Effective Control of the Corporation,” and/or a “Change in the Ownership of a Substantial Portion of the Corporation’s Assets.”

(a) Change in the Ownership of the Corporation. A Change in the Ownership of the Corporation shall occur on the date that any one person, or more than one “person acting as a group” (as defined in Treasury Regulation §1.409A-3(i)(5)(v)(B)), acquires ownership of stock of the Corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Corporation. If any one person, or more than one person acting as a group, is considered to own more than 50% of the total fair market value or total voting power of the stock of the Corporation, the acquisition of additional stock by the same person or persons shall not cause a Change in the Ownership of the Corporation (or cause a “Change in the Effective Control of the Corporation”). An

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increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Corporation acquires its stock in exchange for property shall be treated as an acquisition of stock for purposes of this section. Notwithstanding the foregoing, a Change in Ownership of the Corporation shall only occur when there is a transfer of stock of the Corporation (or issuance of stock of the Corporation) and stock in the Corporation remains outstanding after the transaction.

(b)

Change in the Effective Control of the Corporation. A Change in the Effective Control of the Corporation shall occur on the date that either:

(i)

Any one person, or more than one “person acting as a group” (as defined in Treasury Regulation §1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Corporation possessing 30% or more of the total voting power of the stock of the Corporation; or

(ii)

A majority of the members of the board of directors of the Corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Corporation’s board of directors prior to the date of the appointment or election; provided that such an event shall only constitute a Change in Effective Control of the Corporation if no other corporation is a majority shareholder.

Notwithstanding the foregoing, if any one person, or more than one “person acting as a group” (as defined in Treasury Regulation §1.409A-3(i)(5)(vi)(D)), is considered to effectively control the Corporation, the acquisition of additional control of the Corporation by the same person or persons is not considered to cause a Change in the Effective Control of the Corporation (or to cause a Change in the Ownership of the Corporation).

(c)

Change in the Ownership of a Substantial Portion of the Corporation’s Assets. A Change in the Ownership of a Substantial Portion of the Corporation’s Assets occurs on the date that any one person, or more than one “person acting as a group” (as defined in Treasury Regulation §1.409A-3(i)(5)(vii)(C)), acquires assets from the Corporation that have a total Gross Fair Market Value equal to or more than 40% of the total Gross Fair Market Value of all of the assets of the Corporation immediately prior to such acquisition or acquisitions. For purposes of this paragraph, “Gross Fair Market Value” means the value of the assets of the Corporation, or the value of

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the assets being disposed of, determined without regard to any liabilities associated with such assets.

Notwithstanding the foregoing, a Change in the Ownership of a Substantial Portion of the Corporation’s Assets will not occur when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by the Corporation is not treated as a Change in the Ownership of the Corporation’s Assets if the assets are transferred to:

(i)	A shareholder of the Corporation (immediately before the asset transfer) in exchange for, or with respect to, its stock; or
(ii)	An entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the Corporation; or
(iii)	A person, or more than one person acting as a group, that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Corporation; or
(iv)	An entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a person, or more than one person acting as a group, that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Corporation.

	For purposes of this paragraph (c), a person’s status shall be determined immediately after the transfer of the assets.
(d)	This section shall be interpreted in accordance with Section 409A of the Code, and to the extent any provision herein conflicts with the terms of Section 409A of the Code, such provision shall be deemed void.

2.7 Code

     “Code” means the Internal Revenue Code of 1986, as amended, and any rules or regulations promulgated thereunder.

2.8 Committee

     “Committee” means a committee of three (3) persons appointed by the Chief Executive Officer of the Corporation to administer the Plan pursuant to Article VII.

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2.9 Compensation

     “Compensation” means the following, determined before reduction for amounts deferred under this Plan:

(a)	For an Executive, the total Base Annual Salary and Bonus remuneration payable by the Corporation to the Executive for services performed for the Corporation.
(b)	For a Director, all of the Fees payable by the Corporation for service on the Board.

2.10 Compensation Committee

     “Compensation Committee” means the Executive Compensation and Development Committee of the Board of Directors of Penford Corporation.

2.11 Corporation

     “Corporation” means Penford Corporation, a Washington corporation, or any successor thereto, and any corporations or other entities affiliated with or subsidiary to it that may be selected by the Compensation Committee to participate in the Plan.

2.12 Deferral Commitment

     “Deferral Commitment” means a commitment to defer the receipt of Base Annual Salary or Bonus by an Executive or a commitment to defer the receipt of Fees by a Director pursuant to Article III and for which a Participation Agreement has been submitted by the Executive or Director to the Committee.

2.13 Deferral Period

     “Deferral Period” means the period for which a Participant has elected to defer a portion of Compensation earned during such Deferral Period.

2.14 Determination Date

     “Determination Date” means the last day of each calendar month.

2.15 Director

     “Director” means a member of the Board.

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2.16 Elective Deferred Compensation

     “Elective Deferred Compensation” means the amount of Compensation or Fees that the Executive or Director elects to defer pursuant to a Deferral Commitment.

2.17 Executive

     “Executive” means one of a select group of management or highly compensated employees of the Corporation, as designated by the Committee and approved by the Compensation Committee for participation in the Plan.

2.18 Fees

     “Fees” means Board meeting, committee meeting, annual retainer and committee chairmanship fees paid by the Corporation for service on the Board.

2.19 Financial Hardship

     “Financial Hardship” means a severe financial hardship to the Participant resulting from illness or accident of the Participant or of a dependent of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Financial Hardship shall be determined by the Committee on the basis of information supplied by the Participant in accordance with the standards set forth by the Committee.

2.20 Fiscal Year

     “Fiscal Year” means the twelve (12) month period ending on August 31.

2.21 Interest Rate

     “Interest Rate” means the monthly equivalent of an annual yield that is two (2) percentage points higher than the annual yield of the Moody’s Average Corporate Bond Yield Index for the preceding month, as published by Moody’s Investor Service, Inc. (or any successor thereto), or, if such index is no longer published, a substantially similar index selected by the Board. At no time shall the Interest Rate be less than six percent (6%) annually.

2.22 Participant

     “Participant” means an Executive or Director who has elected to defer Compensation during any Deferral Period or who has an Account balance in the Plan.

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2.23 Participation Agreement

     “Participation Agreement” means the agreement submitted by an Executive or Director to the Committee prior to the beginning of the Deferral Period in which the Elective Deferred Compensation is earned to defer Compensation and the corresponding elections regarding the time and form in which amounts shall be distributed from the Plan. With respect to Bonus amounts subject to a Deferral Commitment, a Participation Agreement shall be filed with the Committee no later than six (6) months before the end of the Fiscal Year in which such Bonus is earned.

2.24 Plan

     “Plan” means this Penford Corporation Deferred Compensation Plan as amended from time to time.

2.25 Retirement

     “Retirement” means

(a)	With respect to an Executive, the date on which a Participant has a Separation from Service on or after attaining age fifty-five (55), and
(b)	With respect to a Director, the date on which such Participant has a Separation from Service on or after attaining age seventy (70).

2.26 Retirement Plan

     “Retirement Plan” means the Penford Corporation Retirement Plan effective March 1, 1984 as amended from time to time.

2.27 Separation from Service

     “Separation from Service” means

(a) With respect to an Executive, a severance of the Executive’s employment relationship with Penford Corporation and all business entities that are treated as a single employer with the Penford Corporation under the rules of section 414(b) and (c) of the Code, including the 80% standard therein (“Affiliates”) for any reason other than the Executive’s death.

(i) A transfer from employment with the Penford Corporation to employment with an Affiliate, or vice versa, shall not constitute a Separation from Service.

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(ii)	Whether a Separation from Service has occurred is determined based on whether the facts and circumstances indicate that the Corporation and the Executive reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Executive would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding three (3) year period (or the full period of services to the Corporation if the Executive has been providing services to the Corporation for less than twelve months).
(iii)	Separation from Service shall not be deemed to occur while the Executive is on military leave, sick leave or other bona fide leave of absence if the period does not exceed six (6) months or, if longer, so long as the Executive retains a right to reemployment with the Penford Corporation or an Affiliate under an applicable statute or by contract. For this purpose, a leave is bona fide only if, and so long as, there is a reasonable expectation that the Executive will return to perform services for the Penford Corporation or an Affiliate. Notwithstanding the foregoing, a 29-month period of absence will be substituted for such 6-month period if the leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of no less than 6 months and that causes the Executive to be unable to perform the duties of his or her position of employment.
(iv)	Where as part of a sale or other disposition of assets by the Corporation to an entity that is not an Affiliate, an Executive providing services to Penford Corporation or to an Affiliate immediately before the transaction and to the buyer immediately after the transaction (“Affected Executive”) would otherwise experience a Separation from Service from as a result of the transaction, the Corporation and the buyer shall have the discretion to specify that the Affected Employee has not experienced a Separation from Service if (i) the transaction results from bona fide, arm’s length negotiations, (ii) all Affected Employees are treated consistently, and (iii) such treatment is specified in writing no later than the closing date of the transaction.

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(b) With respect to a non-employee Director, the time at which such individual (i) ceases to serve as a member of the Board, and (ii) is not providing services as an independent contractor to Penford Corporation or any Affiliate, and has no present intent to provide such services in the future.

2.28 Specified Employee

     “Specified Employee” means a Participant who is a key employee (as defined in section 416(i) of the Code without regard to paragraph (5) thereof) if the stock of the Corporation or an Affiliate is publicly traded on an established securities market or otherwise. A Participant’s status as a key employee shall be determined once each December 31 based on the facts existing during the year ending on that date. If a Participant is determined to be a key employee on that date, the Participant shall be treated as a Specified Employee for the year beginning the following April 1 (and ending on the next succeeding March 31).

2.29 Termination

     “Termination” means Separation from Service prior to Retirement or death.

2.30 Valuation Date

     “Valuation Date” means the last day of the month immediately following the month in which the Participant dies or has a Separation from Service.

ARTICLE III—ELIGIBILITY AND DEFERRAL COMMITMENTS

3.1 Eligibility and Participation

(a)

Eligibility. The Committee shall specify the name of each Executive and Director who shall be initially entitled to participate in the Plan as of the next succeeding Deferral Period, except as provided for in subsection (c) below. These names shall be submitted to the Board for approval. Once designated as eligible, an Executive may participate in the Plan each year without further approval until such time, if any, that the Committee determines that the Executive’s employment status no longer deserves reward through participation in the Plan. All Directors are eligible to participate in the Plan each Deferral Period.

(b)

Participation. An eligible Executive and Director may elect to participate in the Plan and to make a Deferral Commitment with respect to any Deferral Period by submitting a Participation Agreement to the Committee no later than:

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(i)	The last day of the calendar year preceding the Deferral Period in which Salary or Fees are earned by the Participant; and
(ii)	The date that is six (6) months before the end of the Fiscal Year in which a Bonus is earned.

(c) Initial Year of Eligibility. In the case of the first year in which an Executive or Director becomes eligible to participate in the Plan, such Executive or Director may make a Deferral Commitment within thirty (30) days of becoming eligible to participate in the Plan. Such Deferral Election shall only be effective with respect to Compensation paid for services to be performed after such Deferral Election has been submitted to the Committee.

3.2 Deferral Election

(a)	Election by Executive. By timely execution of a Participation Agreement in accordance with Section 3.1 hereof, an Executive may make a Deferral Commitment by electing to defer receipt of a certain whole percentage or flat dollar amount, up to twenty-five percent (25%), of the Base Annual Salary and a certain whole percentage or flat dollar amount, up to fifty percent (50%), of any Bonus provided, however, that any such Deferral Commitment shall apply only with respect to Base Annual Salary and Bonus payable to the Executive by the Corporation prior to the Executive’s Separation from Service or death.
(b)	Election by Director. By timely execution of a Participation Agreement in accordance with Section 3.1 hereof, a Director may make a Deferral Commitment by electing to defer receipt of a certain whole percentage or flat dollar amount, up to one hundred percent (100%), of Fees.
(c)	Minimum Deferral. Total deferrals by a Participant in a Deferral Period must be fifteen hundred dollars ($1,500) or more. In any partial first year of participation, no minimum deferral shall be required.

3.3 Modification of Deferral Commitment

     Deferral Commitments shall be irrevocable except that the Committee may, in its sole discretion, reduce the amount to be deferred or waive the remainder of the Deferral Commitment upon a finding that the Participant has suffered a Financial Hardship. A finding of Financial Hardship shall not limit a Participant’s ability to participate in succeeding Deferral Periods. However, in the event of a hardship distribution under Section 401(k)-1(d)(3) of the Code a Participant’s deferral election shall be cancelled and further deferrals shall not be made during the Deferral Period.

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ARTICLE IV—DEFERRED COMPENSATION ACCOUNT

4.1 Account

     The Corporation shall establish on its books a separate Account for each Participant who elects to defer Compensation under the Plan, and shall credit to the Account of each Participant the Elective Deferred Compensation. The credit shall be entered on the Corporation’s books of account at the time that Compensation not deferred is paid to the Participant. Any withholding of taxes or other amounts with respect to Deferred Compensation that is required by state, federal, or local law shall be withheld from the Participant’s corresponding nondeferred Compensation to the maximum extent possible and the remaining amount shall reduce the amount credited to the Participant’s Account.

4.2 Interest; Determination of Accounts

     Each Participant’s Account as of each Determination Date shall consist of the balance of the Participant’s Account as of the immediately preceding Determination Date, plus the Participant’s Elective Deferred Compensation credited and any earnings thereon, minus the amount of any distributions made since the immediately preceding Determination Date. Earnings shall be calculated as of each Determination Date based upon the average daily balance of the Account since the preceding Determination Date and the Interest Rate and shall be credited to the Participant’s Account at that time.

4.3 Statement of Account

     A report shall be issued by the Corporation to each Participant setting forth his or her Account balance under the Plan as of the immediately preceding Determination Date as soon as practicable after the close of each Plan Year or such other time as the Committee deems appropriate.

ARTICLE V—PLAN BENEFITS

5.1 Plan Benefits

     The Corporation shall pay benefits pursuant to this Article V equal to the Participant’s Account balance as of the Valuation Date to each Participant upon Separation from Service or death, whichever first occurs, except as provided in subsection (a) below and as further described in this Article V.

(a) Early Withdrawals. A Participant’s Account may be distributed to the Participant before Separation from Service as follows:

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(i)

Early Withdrawals. A Participant may elect in a Participation Agreement to withdraw all or any portion of the amount deferred by that Participation Agreement as of a date specified in the election. Such date shall not be sooner than seven (7) years after the date the Deferral Period commences. The amount withdrawn shall not exceed the amount of Compensation deferred, excluding earnings. All elections shall be irrevocable except that any election made pursuant to this subsection (a) shall be null and void in the event the Participant has a Separation from Service or dies prior to the specified withdrawal date.

(ii)

Form of Payment. Early withdrawals shall be paid in a lump sum and shall be charged to the Participant’s Account as a distribution.

(b)	Retirement and Termination Benefits. Upon a Separation from Service except due to death, Corporation shall pay the Participant a benefit equal to the balance in such Participant’s Account as further described in Section 5.2 herein.
(c)	Death Benefit.

(i)

Pretermination. If a Participant dies while employed by Corporation or serving on the Board, Corporation shall pay to the Participant’s Beneficiary a benefit equal to the balance in such Participant’s Account. The benefit shall be paid in the form elected by the Participant in the applicable Participation Agreement, or, if no such election is on file with the Committee, in a lump sum.

(ii)

Posttermination. If a Participant dies following the Participant’s Separation from Service, Corporation shall pay the Participant’s Beneficiary a benefit equal to the balance, if any, in such Participant’s Account. The benefit shall be paid, or continued to be paid, in the form elected by the Participant in the applicable Participation Agreement for distributions on account of Separation from Service.

5.2 Form of Benefit Payment

(a) Forms of Payment. Each Deferral Commitment made by a Participant shall include an election with respect to the form of benefit payment upon death, Termination, Retirement or upon Separation from Service within twenty-four (24) months after a Change in Control. The Participant may choose from the following options:

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(i)	In up to ten (10) substantially equal annual installments;
(ii)	In a single sum payment; or
(iii)	In a combination of partial lump sum payment, and balance in up to ten (10) substantially equal annual installments,

	Such election shall be irrevocable as of the December 31 prior to the Deferral Period to which such elections apply.
(b)	Small Accounts. If the Participant’s Account balance is under five thousand dollars ($5,000) on the Valuation Date, the Plan Benefits shall be paid in a lump sum notwithstanding anything herein to the contrary.
(c)	Installments. If benefits are paid in installments, the amount of each annual installment shall be determined each year on the twelve (12) month anniversary of the Valuation Date based upon the remaining Account balance, the remaining number of installments and the Interest Rate in effect as of the month preceding the Valuation Date.

5.3 Hardship Distributions

     Notwithstanding anything herein to the contrary, payment from the Participant’s Account may be made to the Participant, or to a Beneficiary following the death of a Participant, if in the sole discretion of the Committee such Participant or Beneficiary has a Financial Hardship. A payment based upon Financial Hardship of the Participant may not exceed the amount required to meet the immediate financial need created by such Financial Hardship and not reasonably available from other sources of the Participant. A Deferral Commitment may be terminated upon proof of a Financial Hardship, and the Participant may make a new Deferral Commitment in accordance with Article III herein.

5.4 Golden Parachute Payments

     If any benefit payable under this Plan would constitute an excess parachute payment under Code Section 280G or any successor provision, the amount payable by the Corporation to a Participant shall be increased to the extent necessary to result in the Participant’s receiving the same net amount after all applicable taxes have been paid as the net after-tax amount the Participant would have received if the benefit had not been subject to additional taxes due to being treated as an excess parachute payment. Such additional benefit shall be paid to Participant at the same time and in the same manner as the benefit to which it relates is paid.

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5.5 Withholding on Benefit Payments

     The Corporation shall withhold from payments made hereunder any taxes required to be withheld from such payments under federal, state or local law. However, a Beneficiary may elect not to have withholding for federal income tax purposes pursuant to Code Section 3405(a)(2) or any successor provision thereto.

5.6 Time of Payment

     A lump sum payment or the first payment in a series of installment payments shall commence no later than thirty-five (35) days after the Valuation Date, except that Participants who are Specified Employees shall not receive a distribution of any amount, where such distribution is made on account of Separation from Service, before the date which is six months after the date of Separation from Service. In the event a distribution must be delayed:

(a)	The amount of the lump-sum payment shall be valued as of the last day of the month immediately preceding the payment date; and
(b)	The first in a series of installment payments shall include an amount equal to the sum of the monthly payments which would have been paid to the Participant but for the payment deferral.

     All payment under Article V of this Plan shall be made as of the first day of a month.

5.7 Payment to Guardian

     If a Plan Benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of property, the Committee may direct payment of such Plan Benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan Benefit. Such distribution shall completely discharge the Committee and the Corporation from all liability with respect to such Plan Benefit.

ARTICLE VI—BENEFICIARY DESIGNATION

6.1 Beneficiary Designation

     Each Participant shall have the right, at any time, to designate any person or persons or an entity as his Beneficiary or Beneficiaries (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of a Participant’s death prior to complete distribution of the benefits due under the Plan. Each Beneficiary Designation shall be in written form prescribed by the Committee and will be effective only when filed with the Committee

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during the Participant’s lifetime. Designation by a married Participant of a Beneficiary other than the Participant’s spouse shall not be effective without spousal execution of a written consent acknowledging the effect of the designation unless such consent cannot be obtained because the spouse cannot be located.

6.2 Changes to Designation

     Any Beneficiary designation may be changed by the Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Committee subject to the spousal consent required in Section 6.1 above. The filing of a new Beneficiary designation shall cancel all designations previously filed, unless the designation clearly indicates that such designation controls the Account attributable to Elective Deferred Compensation for a particular Deferral Period.

6.3 Change in Marital Status

     If the Participant’s marital status changes after the Participant has designated a Beneficiary, the following shall apply:

(a)	If the Participant is married at death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed above.
(b)	If the Participant is unmarried at death but was married when the designation was made:

(i)	The designation shall be void if the spouse was named as Beneficiary.
(ii)	The designation shall remain valid if a nonspouse Beneficiary was named.

(c) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above.

6.4 No Beneficiary Designation

     If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:

(a) The Participant’s surviving spouse;

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(b)	The Participant’s children in equal shares, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share the parent would have taken if living;
(c)	The Participant’s estate.

6.5 Effect of Payment

     The payment to the deemed Beneficiary shall completely discharge the Corporation’s obligations under this Plan.

ARTICLE VII—ADMINISTRATION

7.1 Committee; Duties

     This Plan shall be administered by a committee of three (3) persons appointed by the Chief Executive Officer of the Corporation. The Committee shall have such powers and duties as may be necessary to discharge its responsibilities. These powers shall include, but not be limited to, interpretation of the Plan provisions, determination of amounts due to any Participant, the rights of any Participant or Beneficiary under this Plan, the right to require any necessary information from any Participant, determine the amounts credited to Participant’s Account and earnings, and any other activities deemed necessary or helpful.

7.2 Agents

     The Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Corporation.

7.3 Binding Effect of Decisions

     The decision or action of the Committee in respect of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

7.4 Indemnity of Committee

     To the extent permitted by applicable law, the Corporation shall indemnify, hold harmless and defend the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, on account

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of such member’s service on the Committee, except in the case of gross negligence or willful misconduct.

ARTICLE VIII—CLAIMS PROCEDURE

8.1 Claim

     Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee, which shall respond in writing within thirty (30) days.

8.2 Denial of Claim

     If the claim or request is denied, the written notice of denial shall state:

(a)	The reasons for denial, with specific reference to the Plan provisions on which the denial is based,
(b)	A description of any additional material or information required and an explanation of why it is necessary, and
(c)	An explanation of the Plan’s claims review procedure.

8.3 Review of Claim

     Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee within sixty (60) days of the date of denial or the end of the thirty (30) day period. The claim or request shall be reviewed by the Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing.

8.4 Final Decision

     The decision on review shall normally be made within sixty (60) days of the date the request to review is received by the Committee. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days from the date the request to review is received by the Committee. The Committee’s final decision shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned.

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ARTICLE IX—AMENDMENT AND TERMINATION OF THE PLAN

9.1 Amendment

     The Board may at any time amend the Plan in whole or in part provided, however, that no amendment shall be effective to decrease or restrict the amount credited to any Account maintained under the Plan as of the date of amendment. Changes in the definition of “Interest Rate” shall be subject to the following restrictions:

(a)	Notice. A change shall not become effective before the first day of the calendar year which follows the adoption of the amendment and at least thirty (30) days’ written notice of the amendment to the Executive.
(b)	Change in Control. Any change in the definition of Interest Rate after a Change in Control shall apply only to those amounts credited to the Executive’s Account after the Change in Control.

9.2 Termination

     The Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Corporation.

(a)	Partial Termination. The Board may partially terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments. In the event of such a partial termination, the Plan shall continue to operate and be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination.
(b)	Complete Termination. The Board may completely terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments, and may terminate all ongoing Deferral Commitments and distribute all Account balances provided such termination and liquidation is consistent with Code Section 409A.

ARTICLE X—MISCELLANEOUS

10.1 Unfunded Plan

     This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly-compensated employees” within the meaning of Sections 201, 301, and 401 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and therefore to be exempt from the provisions of Parts 2,

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3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. In the event of a termination under this Section 10.1, all ongoing Deferral Commitments shall terminate, no additional Deferral Commitments will be accepted by the Committee, and the amount of each Participant’s Account balance shall be distributed to such Participant at such time and in such manner as the Committee, in its sole discretion, determines.

10.2 Unsecured General Creditor

     Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Corporation, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Corporation. Except as may be provided in Section 10.3, such policies, annuity contracts or other assets of the Corporation shall not be held under any trust for the benefit of the Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Corporation under this Plan. Any and all of the Corporation’s assets and policies shall be, and remain, the general, unpledged, unrestricted assets of the Corporation. The Corporation’s obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future.

10.3 Trust Fund

     The Corporation shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Corporation may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of such benefits. Although such trust or trusts may be irrevocable, the assets thereof shall be subject to the claims of all the Corporation’s creditors in the event of insolvency. To the extent any benefits provided under the Plan are actually paid from any such trust, the Corporation shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Corporation.

10.4 Nonassignability

     Neither a Participant nor any other person shall have the right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

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10.5 Not a Contract of Employment

     The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Corporation and the Participant, and the Participant (or the Participant’s Beneficiary) shall have no rights against the Corporation except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Corporation or to interfere with the right of the Corporation to discipline or discharge the Participant at any time.

10.6 Protective Provisions

     A Participant will cooperate with the Corporation by furnishing any and all information requested by the Corporation, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Corporation may deem necessary and taking such other actions as may be requested by the Corporation.

10.7 Governing Law

     The provisions of this Plan shall be construed and interpreted according to the laws of the State of Washington, except as preempted by federal law.

10.8 Validity

     If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provisions had never been inserted herein.

10.9 Notice

     Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to any member of the Committee or the Secretary of the Corporation. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the Corporation’s address. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Corporation’s records.

10.10 Successors

     The provisions of this Plan shall bind and inure to the benefit of the Corporation and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Corporation, and successors of any such corporation or other business entity.

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10.11 Compliance with Code Section 409A

     Notwithstanding anything herein to the contrary, all provisions in this document shall be interpreted, to the extent possible, to be in compliance with Code Section 409A. However, in the event any provision of this Agreement is determined to not be in compliance with Code Section 409A and any regulations or other guidance promulgated thereunder, such provision shall be null and void to the extent of such noncompliance.

PENFORD CORPORATION
By:
	President and CEO
Dated:

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APPENDIX A

PENFORD CORPORATION

DEFERRED COMPENSATION PLAN

Effective September 1, 1989

Restated September 1, 2001

TABLE OF CONTENTS

	PAGE
ARTICLE I—PURPOSE		1
1.1 Purpose		1
1.2 Effective Date		1
ARTICLE II—DEFINITIONS
2.1 Account		1
2.2 Base Annual Salary		1
2.3 Beneficiary		1
2.4 Board		1
2.5 Bonus		1
2.6 Change in Control		2
2.7 Committee		2
2.8 Compensation		2
2.9 Corporation		2
2.10 Deferral Commitment		2
2.11 Deferral Period		3
2.12 Determination Date		3
2.13 Director		3
2.14 Early Retirement Date		3
2.15 Elective Deferred Compensation		3
2.16 Executive		3
2.17 Fees		3
2.18 Financial Hardship		3
2.19 Interest		3
2.20 Normal Retirement Date		4
2.21 Participant		4
2.22 Participation Agreement		4
2.23 Plan		4
2.24 Plan Benefit		4
2.25 Plan Year		4
2.26 Retirement		4
2.27 Retirement Plan		4
2.28 Termination		5
ARTICLE III—ELIGIBILITY AND DEFERRAL COMMITMENTS		5
3.1 Account		5
3.2 Deferral Election		5
3.3 Modification of Deferral Commitment		6

(i)

	PAGE
ARTICLE IV—DEFERRED COMPENSATION ACCOUNT		6
4.1 Account		6
4.2 Interest; Determination of Accounts		6
4.3 Statement of Account		6
ARTICLE V—PLAN BENEFITS		6
5.1 Plan Benefit		6
5.2 Commencement of Payments		7
5.3 Form of Benefit Payment		7
5.4 Hardship Distributions		8
5.5 Accelerated Distribution		9
5.6 Supplemental Retirement Benefit		9
5.7 Golden Parachute Payments		9
5.8 Withholding on Benefit Payments		9
5.9 Valuation and Settlement		9
5.10 Payment to Guardian		10
ARTICLE VI—BENEFICIARY DESIGNATION		10
6.1 Beneficiary Designation		10
6.2 Changes to Designation		10
6.3 Change in Marital Status		10
6.4 No Beneficiary Designation		11
6.5 Effect of Payment		11
ARTICLE VII—ADMINISTRATION		11
7.1 Committee; Duties		11
7.2 Agents		11
7.3 Binding Effect of Decisions		11
7.4 Indemnity of Committee		12
ARTICLE VIII—CLAIMS PROCEDURE		12
8.1 Claim		12
8.2 Denial of Claim		12
8.3 Review of Claim		12
8.4 Final Decision		12
ARTICLE IX—AMENDMENT AND TERMINATION OF THE PLAN		12
9.1 Amendment		12
9.2 Corporation’s Right to Terminate		13

(ii)

	PAGE
ARTICLE X—MISCELLANEOUS		14
10.1 Unfunded Plan		14
10.2 Unsecured General Creditor		14
10.3 Trust Fund		14
10.4 Nonassignability		14
10.5 Not a Contract of Employment		15
10.6 Protective Provisions		15
10.7 Governing Law		15
10.8 Validity		15
10.9 Notice		15
10.10 Successors		16

(iii)

PENFORD CORPORATION

DEFERRED COMPENSATION PLAN

ARTICLE I—PURPOSE

1.1 Purpose

     Penford Corporation (the “Corporation”) adopts this Deferred Compensation Plan (the “Plan”) to provide current tax planning opportunities as well as supplemental funds for Retirement or death for certain employees and Directors of the Corporation. It is intended that the Plan will aid in attracting and retaining employees and Directors of exceptional ability by providing them with this benefit.

1.2 Effective Date

     The Plan, effective as of September 1, 1989 and restated September 1, 1996, is amended by this restatement, as of September 1, 2001.

ARTICLE II—DEFINITIONS

     For purposes of this Plan, the following terms shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1 Account

     “Account” means the record maintained by the Corporation for each Participant in accordance with Article IV with respect to any deferral of Compensation or Fees pursuant to this Plan.

2.2 Base Annual Salary

     “Base Annual Salary” means the annual compensation payable to an Executive, excluding Bonuses and noncash compensation.

2.3 Beneficiary

     “Beneficiary” means the person, persons or entity designated under Article VI to receive any Plan Benefits payable after a Participant’s death.

2.4 Board

     “Board” means the Compensation and Benefits Committee of the Board of Directors of Penford Corporation or any successor thereto.

2.5 Bonus

     “Bonus” means the compensation derived under the Corporation’s “Management Incentive Plan” and payable in any year in a lump sum to an Executive.

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2.6 Change in Control

     A Change in Control shall have occurred if:

     (a) Any Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing more than fifty percent (50%) of the voting power of the outstanding Voting Stock,

     (b) The effective date of a merger, consolidation, reorganization or dissolution in which the Corporation is not the surviving entity, or

     (c) During any period of two (2) consecutive years, individuals who constitute the Board of Directors of the Corporation at the beginning of any such period cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation’s shareholders, of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors of the Corporation at the beginning of such period. “Person” means an individual, firm, corporation or other entity, together with all Affiliates and Associates of such Person, but shall not include the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation. “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. “Voting Stock” means the common stock of the Corporation and any other shares entitled to vote for the election of directors of the Corporation.

2.7 Committee

     “Committee” means a committee of three (3) persons appointed by the Chief Executive Officer of the Company to administer the Plan pursuant to Article VII.

2.8 Compensation

     “Compensation” means the following, determined before reduction for amounts deferred under this Plan:

     (a) For an Executive, the total Base Annual Salary and Bonus remuneration payable by the Corporation to the Executive for services.

     (b) For a Director, all of the fees payable by the Corporation for service on the Board.

2.9 Corporation

     “Corporation” means Penford Corporation, a Washington corporation, or any successor thereto, and any corporations or other entities affiliated with or subsidiary to it that may be selected by the Board.

2.10 Deferral Commitment

     “Deferral Commitment” means a Base Annual Salary Deferral Commitment or a Bonus Deferral Commitment made by an Executive or a Fee Deferral Commitment made by a Director pursuant to

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Article III and for which a Participation Agreement has been submitted by the Executive or Director to the Committee.

2.11 Deferral Period

     “Deferral Period” means the period during which a Participant has elected to defer a portion of his Compensation. The Deferral Period shall be a Plan Year.

2.12 Determination Date

     “Determination Date” means the last day of each calendar month.

2.13 Director

     “Director” means a member of the Board.

2.14 Early Retirement Date

     “Early Retirement Date” means the date on which a Participant terminates employment with Employer, the earlier of the date on or after such Participant’s attainment of age fifty-five (55) and completion of twenty (20) Years of Service or age sixty-two (62) and completion of ten (10) Years of Service, but prior to the Participant’s Normal Retirement Date.

2.15 Elective Deferred Compensation

     “Elective Deferred Compensation” means the amount of Compensation or Fees that the Executive or Director elects to defer pursuant to a Deferral Commitment.

2.16 Executive

     “Executive” means one of a select group of management or highly compensated employees of the Corporation, as designated by the Committee and approved by the Board for participation in the Plan.

2.17 Fees

     “Fees” means Board meeting, committee meeting, annual retainer and committee chairmanship fees.

2.18 Financial Hardship

     “Financial Hardship” means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Financial Hardship shall be determined by the Committee on the basis of information supplied by the Participant in accordance with the standards set forth by the Committee.

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2.19 Interest

     “Interest” means the monthly equivalent of an annual yield that is two (2) percentage points higher than the annual yield of the Moody’s Average Corporate Bond Yield Index for the preceding month, as published by Moody’s Investor Service, Inc. (or any successor thereto), or, if such index is no longer published, a substantially similar index selected by the Board. At no time shall the Interest Rate be less than six percent (6%) annually.

2.20 Normal Retirement Date

     “Normal Retirement Date” means the date on which a Participant terminates employment with Employer on or after such Participant’s attainment of age sixty-five (65).

2.21 Participant

     “Participant” means an Executive or Director who has elected to defer Compensation or Fees during any Deferral Period.

2.22 Participation Agreement

     “Participation Agreement” means the agreement submitted by an Executive or Director to the Committee prior to the beginning of the Deferral Period, with respect to one (1) or more Deferral Commitments made for such Deferral Period.

2.23 Plan

     “Plan” means this Deferred Compensation Plan as amended from time to time.

2.24 Plan Benefit

     “Plan Benefit” means:

     (a) The Deferred Compensation Account benefit payable to a Participant as calculated pursuant to Article IV and payable under Sections 5.1 through 5.5; and

     (b) The Supplemental Retirement Benefit payable to an Executive under Section 5.6.

2.25 Plan Year

     “Plan Year” means the fiscal year of the Corporation.

2.26 Retirement

     “Retirement” means:

     (a) For an Executive, termination from service on or after the Early Retirement Date or Normal Retirement Date. The Committee, in its sole discretion, may deem any separation from service as a Retirement.

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     (b) For a Director, termination from service on the Board at or after age seventy (70).

2.27 Retirement Plan

     “Retirement Plan” means the Penford Corporation Retirement Plan effective March 1, 1984 as amended from time to time.

2.28 Termination

     Termination means:

     (a) For an Executive, leaving employment with the Corporation prior to Retirement.

     (b) For a Director, leaving the Board prior to Retirement.

ARTICLE III—ELIGIBILITY AND DEFERRAL COMMITMENTS

3.1 Eligibility and Participation

     (a) Eligibility. The Committee shall specify the name of each Executive who shall be initially entitled to participate in the Plan as of the next succeeding Plan Year. These names shall be submitted to the Board for approval. Once designated eligible, an Executive may participate in the Plan each year without further approval until such time, if any, that the Committee determines that the Executive’s employment status no longer deserves reward through participation in the Plan. Notwithstanding that determination, no account shall be paid out until Retirement or Termination. All Directors are eligible to participate each year.

     (b) Participation. An eligible individual may elect to participate in the Plan with respect to any Deferral Period by submitting a Participation Agreement to the Committee by the thirtieth (30^th) day of the month immediately preceding the beginning of the Deferral Period.

     (c) Part-Year Participation. When an individual first becomes eligible to participate during a Deferral Period, a Participation Agreement may be submitted to the Committee within thirty (30) days following notification of the individual of eligibility to participate, which will be effective only with regard to Compensation earned following such submission.

3.2 Deferral Election

     (a) Election by Executive. Prior to September 1, 2001, an Executive could elect to defer receipt of a certain whole percentage or flat dollar amount, up to fifty percent (50%), of the Base Annual Salary and a certain whole percentage or flat dollar amount, up to one hundred percent (100%), of any Bonus payable to him or her as an employee of the Corporation. Beginning September 1, 2001, an Executive may elect to defer receipt of a certain whole percentage or flat dollar amount, up to twenty-five percent (25%), of the Base Annual Salary and a certain whole percentage or flat dollar amount, up to fifty percent (50%), of any Bonus payable to him or her as an employee of the Corporation for the next Plan Year; provided, however, that any such election to defer shall apply only with respect to Base Annual Salary or any Bonus payable to the Executive by the Corporation prior to the Executive’s termination of employment for any reason.

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     (b) Election by Director. A Director may elect to defer receipt of a certain whole percentage or flat dollar amount, up to one hundred percent (100%), of Fees for the next Plan Year.

     (c) Minimum Deferral. Total deferrals by a Participant in a year must be fifteen hundred dollars ($1,500) or more. In any partial first year of participation, no minimum deferral shall be required.

3.3 Modification of Deferral Commitment

     Deferral Commitments shall be irrevocable except that the Committee may, in its sole discretion, reduce the amount to be deferred or waive the remainder of the Deferral Commitment upon a finding that the Participant has suffered a Financial Hardship. A finding of Financial Hardship shall not limit a Participant’s ability to participate in succeeding Deferral Periods. In the event a Participant becomes disabled under the Penford Long-Term Disability Plan, deferrals will be immediately suspended.

ARTICLE IV—DEFERRED COMPENSATION ACCOUNT

4.1 Account

     The Corporation shall establish on its books a separate account for each Participant who elects to defer Compensation under the Plan, and shall credit to the account of each Participant the Elective Deferred Compensation. The credit shall be entered on the Corporation’s books of account at the time that Compensation or Fees not deferred are paid to the Participant. Any withholding of taxes or other amounts with respect to Deferred Compensation that is required by state, federal, or local law shall be withheld from the Participant’s corresponding nondeferred compensation to the maximum extent possible and the remaining amount shall reduce the amount credited to the Participant’s Account.

4.2 Interest; Determination of Accounts

     Each Participant’s Account as of each Determination Date shall consist of the balance of the Participant’s Account as of the immediately preceding Determination Date, plus the Participant’s Elective Deferred Compensation credited and any Interest earned, minus the amount of any distributions made, since the immediately preceding Determination Date. Interest earned shall be calculated as of each Determination Date based upon the average daily balance of the Account since the preceding Determination Date and shall be credited to the Participant’s Account at that time.

4.3 Statement of Account

     A report shall be issued by the Corporation to each Participant setting forth his or her Account balance under the Plan as of the immediately preceding Determination Date as soon as practicable after the close of each Plan Year or such other time as the Committee deems appropriate.

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ARTICLE V—PLAN BENEFITS

5.1 Plan Benefit

     The Corporation shall pay Plan Benefits pursuant to this Article V equal to the Participant’s Account to each Participant who terminates employment for any reason.

     (a) Early Withdrawals. A Participant’s Account may be distributed to the Participant before Termination of employment or service on the Board as follows:

     (i) Early Withdrawals. A Participant may elect in a Participation Agreement to withdraw all or any portion of the amount deferred by that Participation Agreement as of a date specified in the election. For elections made for a Plan Year prior to September 1, 1996, such withdrawal shall be made for the purchase of a primary residence or the costs of providing a secondary education to a dependent. If at the time the withdrawal is scheduled said reason does not exist, the early withdrawal election shall be null and void. For elections made for a Plan Year beginning September 1, 1996 or thereafter, such withdrawal shall be made for any reason, which reason need not be disclosed by the Participant. Such date shall not be sooner than seven (7) years after the date the Deferral Period commences. The amount withdrawn shall not exceed the amount of Compensation deferred, without Interest.

     (ii) Form of Payment. Withdrawals shall be paid in a lump sum and shall be charged to the Participant’s Account as a distribution.

     (b) Retirement and Termination Benefits. If an Executive terminates employment with Corporation, or if a Director terminates service on the Board, for any reason except death, Corporation shall pay the Participant benefits equal to the balance in the Account.

     (c) Death Benefit.

     (i) Pretermination. If a Participant dies while employed by Corporation or serving on the Board, Corporation shall pay to the Participant’s Beneficiary benefits equal to the balance in the Account. The benefit shall be paid in the form elected by the Participant in the form of payment designation, or, if no such election is on file, in a lump sum.

     (ii) Posttermination. If a Participant dies following the Participant’s Retirement or Termination of employment with Corporation or service on the Board, Corporation shall pay the Participant’s Beneficiary benefits equal to the balance, if any, in the Account. Payments shall continue to be made in the same form as those made to the Participant prior to death.

5.2 Commencement of Payments

     (a) Deferred Compensation Account. Payment of any Deferred Compensation Account benefits under the Plan shall be made as of, or commence as of, the earlier of:

     (i) A date elected by the Participant as specified in the applicable Participation Agreement between the Corporation and the Participant; or

     (ii) The settlement date as provided in Section 5.9.

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     (b) Supplemental Retirement Benefits. Supplemental Retirement Benefits under Section 5.6 shall be made as of, or commence as of, the earliest date for which a monthly payment is payable to or for the Participant under the Retirement Plan.

5.3 Form of Benefit Payment

     At the time the Participant elects to defer Compensation, the Participant shall also elect the form of benefit payment. The Participant may elect a different form of benefit payment for payments made due to either Retirement, Termination prior to Retirement or Termination within twenty-four (24) months following a Change in Control.

     (a) Alternative Forms. Alternative forms of benefit payment are:

     (i) In equal annual installments, the number of such installments not to exceed ten (10), as designated by the Participant;

     (ii) In a single sum payment; or

     (iii) In a combination of partial lump sum payment, and balance in installments, not to exceed ten (10) years.

     Such election shall be irrevocable.

     (b) Small Accounts. If the Participant’s Account is under five thousand dollars ($5,000) on the valuation date, the benefit shall be paid in a lump sum.

     (c) Installments. If payment is by installments, the amount of the installments shall be redetermined each year on the twelve (12) month anniversary of the valuation date based upon the remaining Account balance, the remaining number of installments and Interest equal to the rate in effect as of the preceding month.

5.4 Hardship Distributions

     Notwithstanding the foregoing provisions of this Article V, payment from the Participant’s Deferred Compensation Account may be made to the Participant or a Beneficiary following the death of a Participant in the sole discretion of the Committee by reason of Financial Hardship. A payment based upon Financial Hardship of the Participant may not exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other sources of the Participant. Any resumption of the Participant’s deferrals under the Plan shall be made only at the election of the Participant in accordance with Article III herein.

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5.5 Accelerated Distribution

     Notwithstanding any other provision of the Plan, within twenty-four (24) months following a Change in Control or at any time following Retirement or Termination of employment or service on the Board, a Participant shall be entitled to receive, upon written request to the Committee, a lump sum distribution equal to ninety percent (90%) of the vested Account balance as of the Determination Date immediately preceding the date on which the Committee receives the written request. The remaining balance of ten percent (10%) shall be forfeited by the Participant. A Participant who receives a distribution under this Section 5.5 shall not participate in the Plan for twelve (12) calendar months following the election. The amount payable under this Section shall be paid in a lump sum within sixty-five (65) days following the receipt of the notice by the Committee from the Participant. Following the death of the Participant, the designated Beneficiary may, at any time, request an accelerated distribution under this Section.

5.6 Supplemental Retirement Benefit

     Employer shall restore an amount equal to any reduction in a Participant’s Retirement Plan or Social Security benefits because of deferrals under this Plan to the extent the Retirement Plan or Social Security benefits are not restored by any other Employer-provided plan or agreement.

5.7 Golden Parachute Payments

     If any benefit payable under this Plan would constitute an excess parachute payment under Section 280G of the Internal Revenue Code of 1986, or any successor provision, the amount payable shall be increased to the extent necessary to result in the Participant’s receiving the same net amount after all applicable taxes have been paid as the net after-tax amount the Participant would have received if the benefit had not been subject to additional taxes due to being treated as an excess parachute payment.

5.8 Withholding on Benefit Payments

     The Corporation shall withhold from payments made hereunder any taxes required to be withheld from such payments under federal, state or local law. However, a Beneficiary may elect not to have withholding for federal income tax purposes pursuant to Section 3405(a)(2) of the Internal Revenue Code, or any successor provision thereto.

5.9 Valuation and Settlement

     The last day of the month following the month of Retirement, Termination or death shall be the valuation date. If a lump sum is elected, the amount of the lump sum shall be based on the value of the Participant’s Account on the valuation date. If a combination of lump sum and installments is elected, the lump sum will be paid on the settlement date and installments will commence on the twelve (12) month anniversary of the valuation date. If installment payments are elected, the amount of the installment payments shall be based on the value of the Participant’s Account on the valuation date. The date on which installment payments commence shall be the settlement date. The settlement date shall be no more than thirty-five (35) days after the valuation date. All payments shall be made as of the first day of the month.

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5.10 Payment to Guardian

     If a Plan benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of property, the Committee may direct payment of such Plan benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan benefit. Such distribution shall completely discharge the Committee and the Corporation from all liability with respect to such benefit.

ARTICLE VI—BENEFICIARY DESIGNATION

6.1 Beneficiary Designation

     Each Participant shall have the right, at any time, to designate any person or persons or an entity as his Beneficiary or Beneficiaries (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of a Participant’s death prior to complete distribution of the benefits due under the Plan. Each Beneficiary Designation shall be in written form prescribed by the Committee and will be effective only when filed with the Committee during the Participant’s lifetime. Designation by a married Participant of a Beneficiary other than the Participant’s spouse shall not be effective without spousal execution of a written consent acknowledging the effect of the designation unless such consent cannot be obtained because the spouse cannot be located.

6.2 Changes to Designation

     Any Beneficiary designation may be changed by the Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Committee subject to the spousal consent required in Section 6.1 above. The filing of a new Beneficiary designation shall cancel all designations previously filed, unless the designation clearly indicates that such designation controls the account attributable to deferrals made during the election period in which the designation is filed.

6.3 Change in Marital Status

     If the Participant’s marital status changes after the Participant has designated a Beneficiary, the following shall apply:

     (a) If the Participant is married at death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed above.

     (b) If the Participant is unmarried at death but was married when the designation was made:

     (i) The designation shall be void if the spouse was named as Beneficiary.

     (ii) The designation shall remain valid if a nonspouse Beneficiary was named.

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     (c) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above.

6.4 No Beneficiary Designation

     If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:

     (a) The Participant’s surviving spouse;

     (b) The Participant’s children in equal shares, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share the parent would have taken if living;

     (c) The Participant’s estate.

6.5 Effect of Payment

     The payment to the deemed Beneficiary shall completely discharge the Corporation’s obligations under this Plan.

ARTICLE VII—ADMINISTRATION

7.1 Committee; Duties

     This Plan shall be administered by a committee of three (3) persons appointed by the Chief Executive Officer of the Company. The Committee shall have such powers and duties as may be necessary to discharge its responsibilities. These powers shall include, but not be limited to, interpretation of the Plan provisions, determination of amounts due to any Participant, the rights of any Participant or Beneficiary under this Plan, the right to require any necessary information from any Participant, determine the amounts credited to Participant’s Account and Interest earned, and any other activities deemed necessary or helpful.

7.2 Agents

     The Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Corporation.

7.3 Binding Effect of Decisions

     The decision or action of the Committee in respect of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

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7.4 Indemnity of Committee

     To the extent permitted by applicable law, the Corporation shall indemnify, hold harmless and defend the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, on account of such member’s service on the Committee, except in the case of gross negligence or willful misconduct.

ARTICLE VIII—CLAIMS PROCEDURE

8.1 Claim

     Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable.

8.2 Denial of Claim

     If the claim or request is denied, the written notice of denial shall state:

     (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based,

     (b) A description of any additional material or information required and an explanation of why it is necessary, and

     (c) An explanation of the Plan’s claims review procedure.

8.3 Review of Claim

     Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing.

8.4 Final Decision

     The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned.

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ARTICLE IX—AMENDMENT AND TERMINATION OF THE PLAN

9.1 Amendment

     The Board may at any time amend the Plan in whole or in part provided, however, that no amendment shall be effective to decrease or restrict the amount credited to any Account maintained under the Plan as of the date of amendment. Changes in the definition of “Interest” shall be subject to the following restrictions:

     (a) Notice. A change shall not become effective before the first day of the Plan Year which follows the adoption of the amendment and at least thirty (30) days’ written notice of the amendment to the Executive.

     (b) Change in Control. Any change in the definition of Interest after a Change in Control shall apply only to those amounts credited to the Executive’s Account after the Change in Control.

9.2 Corporation’s Right to Terminate

     The Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Corporation.

     (a) Partial Termination. The Board may partially terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments. In the event of such a partial termination, the Plan shall continue to operate and be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination.

     (b) Complete Termination. The Board may completely terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments, and terminate all ongoing Deferral Commitments. In the event of such a complete termination, the Plan shall cease to operate and, prior to a Change in Control, the Committee shall pay out to each Participant the balance in his Account in equal annual installments amortized over the period listed below based on the Account balance at the time of such complete termination:

Appropriate Account Balance	Payout Period
Less than $10,000	2 Years
$10,000 but less than $50,000	5 Years
More than $50,000	10 Years

     Interest earned on the unpaid balance in the Participant’s Account shall be the applicable Interest rate on the Determination Date immediately preceding the effective date of such complete termination.

     Upon Plan termination prior to a Change in Control, any Participant who is retired and receiving installment payments will receive the account balance in a lump sum.

     After a Change in Control, the benefits shall be paid to each Participant in the form elected by each Participant.

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ARTICLE X—MISCELLANEOUS

10.1 Unfunded Plan

     This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly-compensated employees” within the meaning of Sections 201, 301, and 401 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and therefore to be exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. In the event of a termination under this Section 10.1, all ongoing Deferral Commitments shall terminate, no additional Deferral Commitments will be accepted by the Committee, and the amount of each Participant’s Account balance shall be distributed to such Participant at such time and in such manner as the Committee, in its sole discretion, determines.

10.2 Unsecured General Creditor

     Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Corporation, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Corporation. Except as may be provided in Section 10.3, such policies, annuity contracts or other assets of the Corporation shall not be held under any trust for the benefit of the Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Corporation under this Plan. Any and all of the Corporation’s assets and policies shall be, and remain, the general, unpledged, unrestricted assets of the Corporation. The Corporation’s obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future.

10.3 Trust Fund

     The Corporation shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Corporation may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of such benefits. Although such trust or trusts may be irrevocable, the assets thereof shall be subject to the claims of all the Corporation’s creditors in the event of insolvency. To the extent any benefits provided under the Plan are actually paid from any such trust, the Corporation shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Corporation.

10.4 Nonassignability

     Neither a Participant nor any other person shall have the right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

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10.5 Not a Contract of Employment

     The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Corporation and the Participant, and the Participant (or the Participant’s Beneficiary) shall have no rights against the Corporation except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Corporation or to interfere with the right of the Corporation to discipline or discharge the Participant at any time.

10.6 Protective Provisions

     A Participant will cooperate with the Corporation by furnishing any and all information requested by the Corporation, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Corporation may deem necessary and taking such other actions as may be requested by the Corporation.

10.7 Governing Law

     The provisions of this Plan shall be construed and interpreted according to the laws of the State of Washington, except as preempted by federal law.

10.8 Validity

     If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provisions had never been inserted herein.

10.9 Notice

     Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to any member of the Committee or the Secretary of the Corporation. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the Corporation’s address. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Corporation’s records.

PAGE 15 - DEFERRED COMPENSATION PLAN

10.10 Successors

     The provisions of this Plan shall bind and inure to the benefit of the Corporation and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Corporation, and successors of any such corporation or other business entity.

	PENFORD CORPORATION
By:
	President and CEO
Dated:

PAGE 16 - DEFERRED COMPENSATION PLAN

EX-10.8

Exhibit 10.8

PENFORD CORPORATION
2006 LONG-TERM INCENTIVE PLAN

RESTRICTED STOCK AWARD NOTICE

     Penford Corporation (the “Company”) hereby grants to you a Restricted Stock Award (the “Award”) for shares of the Company’s Common Stock under the Company’s 2006 Long-Term Incentive Plan (the “Plan”). The Award is subject to all the terms and conditions set forth in this Restricted Stock Award Notice (the “Award Notice”) and in the Restricted Stock Award Agreement and the Plan, which are attached to and incorporated into the Award Notice in their entirety.

Participant:
Grant Date:
Vesting Commencement Date:
Number of Shares Subject to the Award (the “Shares”):
Fair Market Value Per Share on Grant Date:	$
Vesting Schedule:

[Plan provides for full vesting upon death]

Additional Terms/Acknowledgement: You acknowledge receipt of, and understand and agree to, this Award Notice, the Restricted Stock Award Agreement and the Plan. You further acknowledge that as of the Grant Date, the Award Notice, the Restricted Stock Award Agreement and the Plan set forth the entire understanding between you and the Company regarding the Award and supersede all prior oral and written agreements on the subject[, with the exception of the Change of Control Agreement dated ___].

PENFORD CORPORATION	PARTICIPANT
By:
Title:

Attachments:
1. Restricted Stock Award Agreement
2. 2006 Long-Term Incentive Plan

PENFORD CORPORATION
2006 LONG-TERM INCENTIVE PLAN

RESTRICTED STOCK AWARD AGREEMENT

     Pursuant to your Restricted Stock Award Notice (the “Award Notice”) and this Restricted Stock Award Agreement (this “Agreement”), Penford Corporation (the “Company”) has granted you a Restricted Stock Award (the “Award”) under its 2006 Long-TermIncentive Plan (the “Plan”) for the number of shares of the Company’s Common Stock indicated in your Award Notice. Capitalized terms not defined in this Agreement but defined in the Plan have the same definitions as in the Plan.

     The details of the Award are as follows:

1. Vesting

     The Award will vest and no longer be subject to forfeiture according to the vesting schedule set forth in the Award Notice (the “Vesting Schedule”). Shares subject to the portion of the Award that has vested and is no longer subject to forfeiture according to the Vesting Schedule are referred to herein as “Vested Shares.” Shares subject to the portion of the Award that has not vested and remains subject to forfeiture under the Vesting Schedule are referred to herein as “Unvested Shares.” The Unvested Shares will vest (and to the extent so vested cease to be Unvested Shares remaining subject to forfeiture) in accordance with the Vesting Schedule (the Unvested and Vested Shares are collectively referred to herein as the “Shares”), provided that vesting will cease upon the cessation of your Continuous Status as a Participant

2. Forfeiture of Unvested Shares upon Termination of Service

     Unless the Committee determines otherwise prior to your termination of employment or other cessation of Continuous Service as a Participant, all Unvested Shares will immediately be forfeited to the Company upon your termination of employment or any other cessation of Continuous Service as a Participant without payment of any consideration to you.

3. Consideration for Award

     The Company acknowledges your payment of full consideration for the Award in the form of services previously rendered and/or services to be rendered hereafter to the Company (in either case, in an amount equal to no less than the aggregate par value of the Shares).

4. Securities Law Compliance

4.1 You represent and warrant that you (a) have been furnished with a copy of the Plan and all information which you deem necessary to evaluate the merits and risks of receipt of the Shares, (b) have had the opportunity to ask questions and receive answers concerning the information received about the Shares and the Company, and (c) have been given the opportunity to obtain any additional information you deem necessary to verify the accuracy of any information obtained concerning the Shares and the Company.

4.2 You hereby represent and warrant that you are receiving the Shares for your own account, for investment purposes only, and not with a view towards the distribution or public offering of all or any part of the Shares.

4.3 You hereby agree that you will in no event sell or distribute all or any part of the Shares unless (a) there is an effective registration statement under the Securities Act of 1933, as amended, and applicable state securities laws covering any such transaction involving the Shares or (b) the Company receives an opinion of your legal counsel (concurred in by legal counsel for the Company) stating that such transaction is exempt from registration or the Company otherwise satisfies itself that such transaction is exempt from registration. You understand that the Company has no obligation to you to register the Shares with the SEC and has not represented to you that it will so register the Shares.

4.4 You hereby consent to the placing of a legend on your certificate(s) as set forth in Section 8 and to the placing of a stop-transfer order on the books of the Company and with any transfer agents against the Shares until the Shares may be legally resold or distributed.

4.5 You hereby agree to indemnify the Company and hold it harmless from and against any loss, claim or liability, including attorneys’ fees or legal expenses, incurred by the Company as a result of any breach by you of, or any inaccuracy in, any representation, warranty or statement made by you in this Agreement or the breach by you of any terms or conditions of this Agreement.

5. Rights as Shareholder

     Unless the Shares are forfeited, you shall be considered a shareholder of the Company with respect to all such Shares that have not been forfeited and shall have all rights with respect to such Shares, including the right to vote or consent to all matters that may be presented to the Shareholders and to receive all dividends and other distributions paid on such Shares. If any dividends or distributions are paid in Common Stock, such Common Stock shall be subject to the same restrictions as the Shares with respect to which it was paid.

6. Transfer Restrictions

     Unless otherwise permitted by the Committee, any sale, pledge assignment, encumbrance, hypothecation, transfer conveyance in trust, gift, or other transfer or disposition of any kind, whether voluntary or by operation of law, directly or indirectly (other than by will or by the laws of descent or distribution), of Unvested Shares or Shares otherwise subject to forfeiture restrictions pursuant to the Agreement will be strictly prohibited and void.

7. Section 83(b) Election for Award

     You understand that under Section 83(a) of the Code, the excess of the Fair Market Value of the Unvested Shares on the date the forfeiture restrictions lapse over the purchase price, if any, paid for such Shares will be taxed, on the date such forfeiture restrictions lapse, as ordinary income subject to payroll and withholding tax and tax reporting, as applicable. For this purpose, the term “forfeiture restrictions” means the right of the Company to receive

back any Unvested Shares upon termination of employment or other cessation of your Continuous Status as Participant. You understand that you may elect under Section 83(b) of the Code to be taxed at the time the Unvested Shares are acquired, rather than when and as the Unvested Shares cease to be subject to the forfeiture restrictions. Such election (an “83(b) Election”) must be filed with the Internal Revenue Service within 30 days from the Grant Date of the Award. Even if the Fair Market Value of the Unvested Shares on the Grant Date equals the purchase price, if any, (and thus no tax is payable), you must file the election within the 30-day period to avoid the risk of adverse tax consequences in the future.

     You understand that (a) you will not be entitled to a deduction for any ordinary income previously recognized as a result of the 83(b) Election if the Unvested Shares are subsequently forfeited to the Company, and (b) the 83(b) Election may cause you to recognize more ordinary income than you would have otherwise recognized if the Internal Revenue Service determines that the value of the Unvested Shares on the date the Shares are transferred is higher than the Fair Market Value of the Shares on that date as determined by the Company and/or the value of the Unvested Shares subsequently declines.

     THE FORM FOR MAKING AN 83(b) ELECTION IS ATTACHED TO THIS AGREEMENT AS EXHIBIT B. YOU UNDERSTAND THAT FAILURE TO FILE SUCH AN ELECTION WITHIN THE 30-DAY PERIOD MAY RESULT IN THE RECOGNITION OF ORDINARY INCOME BY YOU AS THE FORFEITURE RESTRICTIONS LAPSE. You further understand that an additional copy of such election form should be filed with your federal income tax return for the calendar year in which the date of this Agreement falls. You acknowledge that the foregoing is only a summary of the federal income tax laws that apply to the receipt of the Unvested Shares under this Agreement and does not purport to be complete. YOU FURTHER ACKNOWLEDGE THAT THE COMPANY HAS DIRECTED YOU TO SEEK INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE CODE, THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH YOU MAY RESIDE, AND THE TAX CONSEQUENCES OF YOUR DEATH.

     You agree to execute and deliver to the Company with this Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election attached hereto as Exhibit A. You further agree that you will execute and deliver to the Company with this Agreement a copy of the 83(b) Election attached hereto as Exhibit B if you choose to make such an election.

8. Effect of Change in Control

     Notwithstanding any other provision in the Plan to the contrary, the following provisions shall apply unless otherwise prohibited under applicable laws, or by the rules and regulations of any applicable governmental agencies or national securities exchanges or quotation systems. This Award shall be Accelerated (as defined in Section 8(b) below) immediately prior to a Change in Control described in Section 8(c).

     (a) “Accelerated” shall mean that the Award shall become fully vested.

     (b) “Change in Control” shall mean any of the following events:

     (i) The Company is merged, consolidated, or reorganized (“Reorganization”) with another entity and as a result of which less than 50% of the outstanding voting interests or securities of the surviving or resulting entity immediately after the Reorganization are owned in the aggregate by the former shareholders of the Company, as the same shall have existed immediately prior to such Reorganization, in substantially the same proportions as their ownership before such Reorganization;

     (ii) The Company sells all or “Substantially All” of its assets to another entity that is not a wholly-owned subsidiary or affiliate of the Company, provided that a sale shall constitute Substantially All of the Company’s assets only if the fair market value of the consideration received for such assets exceeds 50% of the fair market value of the Company’s average total market capitalization during the twenty (20) trading days ending twenty (20) trading days prior to the first public announcement of such sale; provided further that the fair market value of the consideration received and the total market capitalization of the Company shall be as reasonably determined by the Board in good faith and that both the Company’s stock and any publicly traded consideration received in a sale shall be valued using the closing price for such security (y) for the period referenced above in the case of the Company’s stock and (z) the average closing prices for the first twenty (20) trading days after the closing of any sale or other transaction in which any publicly traded consideration is received;

     (iii) Any person, within the meaning of Sections 3(a)(9), 13(d), or 14(d) (as in effect on the date hereof) of the Exchange Act (“Person”), other than any employee benefit plan then maintained by the Company, acquires more than 40% of the outstanding voting securities of the Company (whether, directly, indirectly, beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act; or

     (iv) During any twenty-four (24) month period individuals who constitute the Board at the beginning of such period cease for any reason to constitute at least a majority thereof, unless the election, or nomination for election by the Company’s shareholders, of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors of the Company at the beginning of such period; provided that no individual shall be considered so approved if such individual initially assumed office as a result of or in connection with an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board.

9. Golden Parachute Taxes

     Subject to the terms of an applicable change in control agreement executed by you and the Company, in the event that any amounts paid or deemed paid to you pursuant to this Agreement are deemed to constitute “excess parachute payments” as defined in Section 280G of the Code (taking into account any other payments made to you under the Plan and any other compensation paid or deemed paid to you), or if you are deemed to receive an “excess parachute payment” by reason of the acceleration of vesting of your Award granted under the Plan due to a Change in Control, the amount of such payments or deemed payments shall be reduced (or, alternatively, the number of Awards that become 100% vested shall be reduced), so that no such payments or deemed payments shall constitute excess parachute payments. The determination of whether a payment or deemed payment constitutes an excess parachute payment shall be in the sole discretion of the Board.

10. Legends

     You understand and agree that the Shares are subject to forfeiture as set forth in this Agreement. You understand that any certificate(s) representing the Shares may bear legends in substantially the following form:

“The securities represented by this certificate are subject to certain restrictions on transfer and forfeiture rights held by the issuer and/or its assignee(s) and may not be sold, assigned, transferred, encumbered or in any way disposed of except as set forth in a restricted stock award agreement between the issuer and the original recipient of these shares, a copy of which may be obtained at the principal office of the issuer. Such transfer restrictions and forfeiture rights are binding on transferees of these shares.”

11. Assignment Separate From Certificate

     As security for the faithful performance of this Agreement, you agree, upon execution of this Agreement, to deliver a stock power in the form attached to this Agreement as Exhibit C, executed by you and by your spouse, if any (with the transferee, certificate number, date and number of Shares left blank), along with any certificate(s) evidencing shares issued to you, to the Secretary of the Company or its designee (“Escrow Holder”), who is hereby appointed to hold such stock power and any such certificate(s) in escrow and to take all such actions and to effectuate all such transfers and/or releases of such Shares as are in accordance with the terms of this Agreement. You and the Company agree that Escrow Holder will not be liable to any party to this Agreement (or to any other party) for any actions or omissions unless Escrow Holder is grossly negligent relative thereto. Escrow Holder may rely on any letter, notice or other document executed by any signature purported to be genuine and may rely on advice of counsel and obey any order of any court with respect to the transactions contemplated in this Agreement. The Shares will be released from escrow upon your written request after termination of the Company’s forfeiture rights under Section 2.

12. Stop-Transfer Notices

     You understand and agree that, in order to ensure compliance with the restrictions referred to in this Agreement, the Company may issue appropriate “stop-transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. The Company will not be required to (a) transfer on its books any Shares that have been sold or transferred in violation of the provisions of this Agreement or (b) treat as the owner of the Shares, or otherwise accord voting, dividend or liquidation rights to, any transferee to whom the Shares have been transferred in contravention of this Agreement.

13. Independent Tax Advice

     You acknowledge that determining the actual tax consequences to you of receiving or disposing of the Shares may be complicated. These tax consequences will depend, in part, on your specific situation and may also depend on other variables not within the control of the Company. You are aware that you should consult a competent and independent tax advisor for a full understanding of the specific tax consequences to you of receiving or disposing of the Shares. Prior to executing the Award Notice, you either have consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the receipt or disposition of the Shares in light of your specific situation or you have had the opportunity to consult with such a tax advisor but chose not to do so.

14. Withholding and Disposition of Shares

     As a condition to the removal of forfeiture restrictions from your Vested Shares, you agree to make arrangements satisfactory to the Company for the payment of any federal, state, local or foreign withholding tax obligations that arise either upon receipt of the Shares or as the forfeiture restrictions on any Shares lapse. Notwithstanding the previous sentence, you acknowledge and agree that the Company and any Subsidiary have the right to withhold Shares or deduct from payments of any kind otherwise due to you any federal, state or local taxes of any kind required by law to be withheld with respect the Award.

15. General Provisions

15.1 No Waiver. No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.

15.2 Cancellation of Shares. If the Company or its assignees exercises the Company’s forfeiture in accordance with the provisions of this Agreement, then, from and after such time, the person from whom such Shares are to be forfeited will no longer have any rights as a recipient of such Shares, such Shares will be deemed forfeited in accordance with the applicable provisions of this Agreement, and the Company or its assignees will be deemed the owner and recipient of such Shares, whether or not the certificates therefor have been delivered as required by this Agreement.

15.3 Undertaking. You hereby agree to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either you or the Shares pursuant to the express provisions of this Agreement.

15.4 Agreement Is Entire Contract. This Agreement and the Award Notice constitute the entire contract between the parties hereto with regard to the subject matter hereof [except for the Change of Control Agreement dated ___] [add this language when applicable]. This Agreement and the Award Notice are made pursuant to the provisions of the Plan and will in all respects be construed in conformity with the express terms and provisions of the Plan.

15.5 Successors and Assigns. The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and you and your legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.

15.6 No Employment or Service Contract. Nothing in this Agreement will affect in any manner whatsoever the right or power of the Company, or a any Subsidiary of the Company, to terminate your employment or services on behalf of the Company or any Subsidiary of the Company, for any reason, with or without Cause.

15.7 Counterparts. The Award Notice may be executed in two or more counterparts, each of which will be deemed an original, but which, upon execution, will constitute one and the same instrument.

15.8 Governing Law. To the extent not otherwise governed by the laws of the United States, this Agreement will be construed and administered in accordance with and governed by the laws of the State of Washington.

EXHIBIT A

ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING SECTION 83(b) ELECTION

     The undersigned, a recipient of ___ shares of Common Stock of Penford Corporation, a Washington corporation (the “Company”), pursuant to a restricted stock award granted pursuant to the Company’s 2006 Long-Term Incentive Plan (the “Plan”), hereby states as follows:

     1. The undersigned acknowledges receipt of a copy of the Plan relating to the offering of such shares. The undersigned has carefully reviewed the Plan and the Restricted Stock Award Notice and Restricted Stock Award Agreement pursuant to which the award was granted.

     2. The undersigned either (check and complete as applicable):

(a)	—	has consulted, and has been fully advised by, the undersigned’s own tax advisor, ___, whose business address is ___, regarding the federal, state and local tax consequences of receiving shares under the Plan, and particularly regarding the advisability of making an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and pursuant to the corresponding provisions, if any, of applicable state law, or
(b)	—	has knowingly chosen not to consult such a tax advisor.

     3. The undersigned hereby states that the undersigned has decided (check as applicable)

(a)	—	to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with the undersigned’s executed Restricted Stock Award Notice, an executed form entitled “Election Under Section 83(b) of the Internal Revenue Code of 1986”, or
(b)	—	not to make an election pursuant to Section 83(b) of the Code.

     4. Neither the Company nor any affiliate or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned’s purchase of shares under the Plan or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law.

Dated:
	[Name]

EXHIBIT B

ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986

     The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code, to include in taxpayer’s gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer’s receipt of the property described below:

1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows:

NAME OF TAXPAYER:

NAME OF SPOUSE:

ADDRESS:

IDENTIFICATION NO. OF TAXPAYER:

IDENTIFICATION NO. OF SPOUSE:

TAXABLE YEAR:

2.	The property with respect to which the election is made is described as follows: ___ shares of the Common Stock of Penford Corporation, a Washington corporation (the “Company”).
3.	The date on which the property was transferred is: ___, 200___
4.	The property is subject to the following restrictions:
	The property is subject to a right pursuant to which taxpayer forfeits the rights in and to the shares if for any reason taxpayer’s service with the Company is terminated. The forfeiture right lapses in a series of installments over a [___]-year period ending on ___.
5.	The aggregate fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $___
6.	The amount (if any) paid for such property is: $___

     The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned’s receipt of the above-described property. The undersigned is the person performing the services in connection with the transfer of said property.

     The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner.

Dated:
	Recipient

DISTRIBUTION OF COPIES

1.	File original with the Internal Revenue Service Center where the taxpayer’s income tax return will be filed. Filing must be made by no later than 30 days after the date the property was transferred.
2.	Attach one copy to the taxpayer’s income tax return for the taxable year in which the property was transferred.
3.	Mail one copy to the Company at the following address:

Penford Corporation
7094 S. Revere Parkway
Centennial, Colorado 80112-3932
Attn: Secretary

EXHIBIT C

STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Award Agreement dated as of ___, ___, the undersigned hereby sells, assigns and transfers unto ___ shares of the Common Stock of Penford Corporation, a Washington corporation, standing in the undersigned’s name on the books of said corporation represented by Certificate No. ___ delivered herewith, and does hereby irrevocably constitute the Secretary of said corporation as attorney-in-fact, with full power of substitution, to transfer said stock on the books of said corporation.

Dated:

Signature:

Please print name:

Please see Section 11 of the Restricted Stock Award Agreement for information on completing this form.

EX-10.14

Exhibit 10.14

NON-EMPLOYEE DIRECTOR COMPENSATION

1. Cash Compensation

	FY 2007		FY 2008 & Beyond
Member Retainer (Base) -Annual	$	23,000	$	72,000
Annual Fee in Lieu of Stock Options	$	10,000		N/A
Chairman Retainer-Annual	$	30,000	$	30,000
Committee Chair Retainer-Audit	$	7,000	$	10,000
Committee Chair Retainer-Governance and ECDC	$	2,000	$	5,000
Standard Board Meeting Fee	$	2,000		N/A
Committee Meeting Fee	$	1,000		N/A
Additional Meetings Fee		N/A	$	1,500
(For each Board of Directors or Committee meeting attended in excess of six meetings per fiscal year)

2. Equity-Based Compensation

Pre-FY 2008: Restricted Stock Grant under 1993 Plan

Restricted stock grant valued at $18,000 made every three years, including on September 1, 2005, based on the last reported sale price of Company stock on the preceding trading day, and in accordance with the 1993 Non-Employee Director Restricted Stock Plan. A non-employee director may sell or otherwise transfer one-third of the shares covered by an award on each anniversary of the date of the award. If a non-employee director ceases to be a director before the restrictions against transfer have lapsed with respect to any shares, then except for death, disability or retirement, the director forfeits such shares. The restrictions lapse upon a change in control.

FY 2008 & Beyond: Restricted Stock Grant under 2006 Long-Term Incentive Plan

Restricted stock grant valued at $20,000 made on January 1 of each year, commencing on January 1, 2008, based on the last reported sale price of Company stock on the preceding trading day, in accordance with the 2006 Long-Term Incentive Plan. Restrictions lapse on the first anniversary date of the award. Awards shall be made in accordance with other terms and forms approved by the Executive Compensation and Development Committee.

EX-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

Year Ended August 31, 2007

		Percent
Name	Incorporation	Owned
Penford Corporation	Washington
Penford Products Co.	Delaware		100	%
Penford Holdings Pty. Limited	New South Wales, Australia		100	%
Penford Australia Limited	New South Wales, Australia		100	%
Penford New Zealand Ltd.	New Zealand		100	%
Penford Export Corporation	U.S. Virgin Islands		100	%

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1)	Registration Statement (Form S-8, No. 33-37553) pertaining to the Penwest Savings and Stock Ownership Plan,
(2)	Registration Statement (Form S-8. No. 2-94198) pertaining to the Penwest Savings Plan,
(3)	Registration Statement (Form S-8, No. 333-92356) pertaining to the Penford Corporation 1994 Stock Option Plan,
(4)	Registration Statement (Form S-8, No. 333-133160) pertaining to the Penford Corporation 2006 Long-Term Incentive Plan,
(5)	Registration Statement (Form S-8, No. 033-58799) pertaining to the 1994 Stock Option Plan,
(6)	Registration Statement (Form S-3 033-88946) pertaining to the Penford Corporation Savings and Stock Ownership Plan
(7)	Registration Statement (Form S-8, No. 333-23433) pertaining to the 1994 Stock Option Plan, and
(8)	Registration Statement (Form S-3, No. 333-144996) pertaining to the potential future sale of Penford Corporation’s common stock, preferred stock or debt securities;

of our report dated November 6, 2007, with respect to the consolidated financial statements of Penford Corporation and our report dated November 6, 2007 with respect to the effectiveness of internal control over financial reporting of Penford Corporation included in this Annual Report (Form 10-K) of Penford Corporation.

/s/ Ernst & Young LLP                    

Denver, Colorado
November 6, 2007

EX-24

Exhibit 24

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas D. Malkoski, Steven O. Cordier and Margaret Von der Schmidt and each of them, severally as attorney-in-fact for him or her in any and all capacities to sign the Annual Report on Form 10-K of Penford Corporation for the fiscal year ended August 31, 2007, and to file such document and any amendments, with exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Signature	Date
/s/ William E. Buchholz	October 30, 2007
William E. Buchholz, Director
/s/ Jeffrey T. Cook	October 30, 2007
Jeffrey T. Cook, Director
/s/ R. Randolph Devening	October 30, 2007
R. Randolph Devening, Director
/s/ Paul H. Hatfield	October 30, 2007
Paul H. Hatfield, Director
/s/ John C. Hunter III	October 30, 2007
John C. Hunter III
/s/ Sally G. Narodick	October 30, 2007
Sally G. Naroldick
/s/ James E. Warjone	October 30, 2007
James E. Warjone

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Thomas D. Malkoski, certify that:

     1. I have reviewed this annual report on Form 10-K of Penford Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     b) designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

     c) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	PENFORD CORPORATION
Date: November 7, 2007	/s/ Thomas D. Malkoski
	Thomas D. Malkoski
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Steven O. Cordier, certify that:

     1. I have reviewed this annual report on Form 10-K of Penford Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     b) designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

     c) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	PENFORD CORPORATION
Date: November 7, 2007	/s/ Steven O. Cordier
	Steven O. Cordier
	Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C.SECTION 1350)

     In connection with the Annual Report of Penford Corporation (the “Company”) on Form 10-K for the period ended August 31, 2007, as filed with the Securities and Exchange Commission (the “Report”), Thomas D. Malkoski, Chief Executive Officer of the Company, and Steven O. Cordier, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to his knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas D. Malkoski  

Thomas D. Malkoski 

Chief Executive Officer 

Dated: November 7, 2007

/s/ Steven O. Cordier  

Steven O. Cordier 

Chief Financial Officer 

Dated: November 7, 2007