Penford (PENX) 10-K 2009 FY Annual report

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, 2009
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 (State or other jurisdiction of incorporation or organization)	91-1221360 (I.R.S. Employer Identification No.)
7094 S. Revere Parkway Centennial, Colorado (Address of Principal Executive Offices)	80112-3932 (Zip Code)

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 Global Market

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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation 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 thisForm 10-K or any amendment to thisForm 10-K.  þ

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

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 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 27, 2009, the last business day of the Registrant’s second quarter of fiscal 2009, was approximately $52.9 million based upon the last sale price reported for such date on The NASDAQ Global Market. 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 3, 2009 was 11,363,553.

Documents Incorporated by Reference

Portions of the Registrant’s definitive Proxy Statement relating to the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of thisForm 10-K.

PENFORD CORPORATION

FISCAL YEAR 2009FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

��		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		14
Item 2.	Properties		14
Item 3.	Legal Proceedings		14
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		15
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		32
Item 8.	Financial Statements and Supplementary Data		34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		71
Item 9A.	Controls and Procedures		71
Item 9B.	Other Information		71
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		71
Item 11.	Executive Compensation		72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		72
Item 13.	Certain Relationships and Related Transactions, and Director Independence		72
Item 14.	Principal Accountant Fees and Services		72
PART IV
Item 15.	Exhibits and Financial Statement Schedules		73
	Signatures		74
	Exhibit Index		75
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32

2

PART I

Forward-looking Statements

This Annual Report onForm 10-K (“Annual Report”), 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, contains statements that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to anticipated operations and business strategies contain forward-looking statements. Likewise, statements regarding anticipated changes in the Company’s business and anticipated market conditions are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events. Forward-looking statements depend on assumptions, dates or methods that may be incorrect or imprecise, and the Company may not be able to realize them. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates,” or the negative use of these words and phrases or similar words or phrases. Forward-looking statements can be identified by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•  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;

•  the amount and timing of flood insurance recoveries;

•  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 returns on pension plan assetsand/or assumptions used for determining employee benefit expense and obligations;

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

•  the Company’s ability to successfully operate under and comply with the terms of its bank credit agreement, as amended;

•  the Company’s ability to execute the disposal of its discontinued operations in Australia; or

•  other factors described in Part I, Item 1A “Risk Factors.”

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 developer, manufacturer and marketer of specialty natural-based ingredient systems for industrial and food ingredient applications, including fuel grade ethanol. The Company’s strategically-located manufacturing facilities in the United States provide it with broad geographic coverage of its target markets. Penford is a

3

Washington corporation originally incorporated in September 1983. The Company commenced operations as a publicly-traded company on March 1, 1984.

Penford operates in two business segments, each utilizing its carbohydrate chemistry expertise to develop starch-based ingredients for value-added applications that improve the quality and performance of customers’ products. The Industrial Ingredients — North America and Food Ingredients — North America segments are broad categories of end-market users. Financial information about Penford’s segments and geographic areas is included in Note 18 to the Consolidated Financial Statements.

The Company has significant 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 two business segments are:

•  Industrial Ingredients — North America, which in fiscal years 2009, 2008 and 2007 generated approximately 73%, 72% and 76%, respectively, of Penford’s continuing 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. Several of Industrial Ingredients’ products are cost-effective alternatives to synthetic, petroleum-based ingredients.

In May 2008, the Company’s Industrial Ingredients — North America segment began commercial production and sales of ethanol from its facility in Cedar Rapids, Iowa. This ethanol plant gave the Company the ability to select an additional output choice to capitalize on changing industry conditions and selling opportunities. Sales of ethanol in fiscal years 2009 and 2008 were 29% and 3%, respectively, of this segment’s reported revenue.

In June 2008, the Company’s Cedar Rapids, Iowa plant, operated by the Industrial Ingredients — North America business, was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. See Note 3 to the Consolidated Financial Statements.

•  Food Ingredients — North America, which in fiscal years 2009, 2008 and 2007 generated approximately 27%, 28% and 24%, respectively, of Penford’s continuing 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’ 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 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.

Discontinued Operations

On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. This determination was the completion of a process, announced on February 27, 2009, involving an examination of a range of strategic and operating choices for the Company’s Australia/New Zealand Operations as part of a continuing program to maximize the Company’s asset values and returns. On September 2, 2009, the Company completed the sale of

4

Penford New Zealand Limited. On November 11, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, executed two asset sale agreements with unrelated parties to sell substantially all of its operating assets. The completion and timing of these transactions remain subject to risks and uncertainties.

The Australia/New Zealand Operations developed, manufactured and marketed ingredient systems, including specialty starches and sweeteners for food and industrial applications. Until September 2, 2009, the Company operated a corn wet milling facility in Auckland, New Zealand. The Company continues to operate a corn wet milling facility in Lane Cove, Australia and a wheat starch manufacturing facility in Tamworth, Australia. These facilities are covered by the asset sale agreements noted above.

The financial data for the Australia/New Zealand Operations have been presented as discontinued operations. The financial statements have been prepared in compliance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Accordingly, for all periods presented herein, the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have been conformed to this presentation. The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. See Note 2 to the Consolidated Financial Statements for further details.

Unless otherwise noted, all amounts, analyses and discussions are based on continuing operations.

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.

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 three years with potato processors in the United States and Canada to acquire potato-based raw materials.

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 regularly uses futures contracts to hedge the price of natural gas.

Corn, potato starch, chemicals and natural gas are not currently subject to availability constraints; however, demand for these items can significantly affect the prices. Penford’s current potato starch requirements constitute a material portion of the available North American supply. Penford estimates that it purchases approximately50-55% 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 consist of the costs of corn, potato starch, 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.

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 $4.3 million, $5.7 million and $5.1 million for fiscal years ended August 31, 2009, 2008 and 2007, respectively.

5

At the end of fiscal 2009, Penford had 29 scientists, including five with a Ph.D. degree with expert knowledge of carbohydrate characteristics and chemistry.

Patents, Trademarks and Tradenames

Penford owns a number of patents, trademarks and trade names.

Penford has approximately 60 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 2012 and 2025. The annual cost to maintain all of the Company’s patents is not significant. 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^® and PenPlus^®.

Quarterly Fluctuations

Penford’s revenues and operating results vary from quarter to quarter. Sales volumes of the Food Ingredients — North America products used in french fry coatings are 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. For more information, see the “Liquidity and Capital Resources” section under “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” in Item 7 and the audited consolidated financial statements and the related notes included elsewhere in this Annual Report onForm 10-K.

Penford generally carries a one- to45-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 a30-day supply of most products. Terms for trade receivables and trade payables are standard for the industry and region and generally do not exceed30-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.

Permits are required by the various environmental agencies that 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 $1.4 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.

6

During fiscal 2009, compliance with environmental regulations did not have any material effects on the Company’s operations. No unusual expenditures for environmental facilities and programs are anticipated in fiscal 2010.

Principal Customers

Penford sells to a variety of customers and has several relatively large customers in each business segment. The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 21% of the Company’s net sales for fiscal year 2009. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 11%, 15% and 17% of the Company’s net sales for fiscal years 2009, 2008 and 2007, respectively. Domtar, Inc. and Eco-Energy are customers 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, approximately six other companies that manufacture specialty food ingredients, and numerous producers of fuel ethanol. 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, 2009, Penford had 320 employees in North America, of which approximately 42% were members of a trade union. The collective bargaining agreement covering the Cedar Rapids-based manufacturing workforce expires in August 2012.

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.

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.

Export Sales

Export sales from Penford’s businesses in the U.S. accounted for approximately 8%, 11% and 12% of total sales in fiscal 2009, 2008 and 2007, respectively. See Note 18 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 iswww.penx.com. The Company makes available, free of charge, through its Internet site, the Company’s annual reports onForm 10-K; quarterly reports onForm 10-Q; current reports onForm 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 will 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 iswww.sec.gov.

7

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		53	President and Chief Executive Officer
Steven O. Cordier		53	Senior Vice President, Chief Financial Officer and Assistant Secretary
Andrew S. Dratt		37	Vice President, Corporate Development
Timothy M. Kortemeyer		43	Vice President and President, Industrial Ingredients
Wallace H. Kunerth		61	Vice President and Chief Science Officer
Christopher L. Lawlor		59	Vice President — Human Resources, General Counsel and Secretary
John R. Randall		65	Vice President and President, 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. Mr. Malkoski holds a Masters of Business Administration degree from the University of Michigan.

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. Dratt joined Penford in June 2008 as Vice President, Corporate Development. From October 2007 to June 2008, Mr. Dratt was the Director — Product Development for Sensient Flavors and Fragrances, a division of Sensient Technologies Corporation, a manufacturer of specialty chemicals and food products. From October 2006 to October 2007, Mr. Dratt was the Director — Global Marketing for Sensient Flavors and Fragrances. Mr. Dratt served as the Director — Beverage & Culinary Business Units from 2005 to October 2006 and the Director — Marketing and Business Development from May 2002 to 2005 for FONA International, a developer and manufacturer of flavors for the food and beverage industries.

Mr. Kortemeyer has served as Vice President of Penford Corporation since October 2005 and President, Industrial Ingredients 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.

8

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, 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

Risks Related to Penford’s Business

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 2009, approximately 38% of Penford’s manufacturing costs were the costs of corn, potato starch and other agricultural raw materials. Weather conditions, plantings, government programs and policies, and energy costs and global supply, among other things, have historically caused volatility in the supply and prices of these agricultural products. Due to localand/or international competition, 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, potato starch and other agricultural raw materials 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 14% and 12%, respectively, of the cost of manufacturing the Company’s products in fiscal 2009. Penford uses natural gas extensively in its Industrial Ingredients business to dry starch products, and, to a lesser extent, in the Food Ingredients business. 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.

The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 21% of the Company’s net sales for fiscal year 2009. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 11%, 15% and 17% of the Company’s net sales for fiscal years 2009, 2008 and 2007, respectively. Sales to the top ten customers represented 69% and 62% of net sales for fiscal years 2009 and 2008, respectively. Generally, the Company does not have multi-year sales agreements with its customers. Many customers place orders on an

9

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 and ethanol that the Company 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, as occurred as a result of the flood of the Cedar River at the Company’s Cedar Rapids, Iowa facility in fiscal 2008. 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;

•  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, 2009, approximately $62.4 million of its outstanding debt was subject to variable interest rates which move in direct relation to the United States or Australian London InterBank Offered Rate (“LIBOR”), 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.

10

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 and, until the operations are divested, the Company is also subject to income taxes in 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. The Company’s revenues and profitability may be adversely affected by fluctuations in exchange rates between the U.S. dollar and other currencies.

Pension expense and the funding of pension obligations are affected by factors outside the Company’s control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.

The future funding obligations for the Company’s two U.S. defined benefit pension plans qualified with the Internal Revenue Service depend upon the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. The pension plans hold a significant amount of equity and fixed income securities. When the values of these securities decline, pension expense can increase and materially affect the Company’s results. Decreases in interest rates that are not offset by contributions and asset returns could also increase the Company’s obligations under such plans. The Company is legally required to make contributions to the pension plans in the future, and those contributions could be material. The Company expects to contribute $1.8 million to its pension plans during fiscal 2010.

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.

The current capital and credit market conditions may adversely affect the Company’s access to capital, cost of capital and business operations.

The general economic and capital market conditions in the United States and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. If these conditions continue or become worse, the Company’s future cost of debt and equity capital and its access to capital markets could be adversely affected. Any inability to obtain adequate financing from debt and equity sources could force the Company to self-fund strategic initiatives or even forgo some opportunities, potentially harming its financial position, results of operations and liquidity.

11

Economic conditions may impair the businesses of the Company’s customers and end user markets, which could adversely affect the Company’s business operations.

As a result of the current economic downturn and macro-economic challenges currently affecting the economy of the United States and other parts of the world, the businesses of some of the Company’s customers may not be successful in generating sufficient revenues. Customers may choose to delay or postpone purchases from the Company until the economy and their businesses strengthen. In this connection, the Company’s Industrial Ingredients business is dependent upon end markets for paper and ethanol in North America. Paper markets have been under competitive pressure from imports and over-capacity and may be further stressed by an economic downturn. Ethanol markets have been under pressure from declining oil prices and increasing ethanol production capacity in the United States. Decisions by current or future customers to forego or defer purchasesand/or customers’ inability to pay the Company for its products may adversely affect the Company’s earnings and cash flow.

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 and local 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 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.

12

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

As of August 31, 2009, approximately 42% of the Company’s 320 North American employees were members of trade unions. Although the Company’s relations with unions are stable and the Company’s labor contract does not expire until August 2012, 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.

The Company may be unable to execute its plan to completely exit from its Australia/New Zealand Operations.

In August 2009, the Company made a determination to exit from its Australia/New Zealand Operations. While the Company has completed the sale of its New Zealand subsidiary, it still must complete the disposal of its remaining operations in Australia. On November 11, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, entered into two asset sale agreements with unrelated parties to sell substantially all of its operating assets. The completion and timing of these transactions remain subject to risks and uncertainties.

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 fiscal 2009, the stock price ranged from a low of $2.07 on March 6, 2009 to a high of $19.79 on September 19, 2008. 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;

•  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, customersand/or suppliers;

•  announcements of alliances, mergers or other relationships by or between the Company’s competitorsand/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 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

13

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.

Item 1B:   Unresolved Staff Comments

Not applicable.

Item 2:   Properties

Penford’s facilities as of August 31, 2009 are as follows:

	Bldg. Area
	(Approx.			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

* Approximately 119,150 square feet are subject to a long-term lease to the purchaser of the Company’s former dextrose business

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.

Penford’s owned and leased property related to the discontinued operations in Lane Cove and Tamworth, Australia, and Auckland, New Zealand, are not included in this Item 2.

Item 3:   Legal Proceedings

On January 23, 2009, the Company filed suit in the U.S. District Court for the Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company, related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. The Company seeks additional payments from the insurers of more than $30 million for property damage, time element and various other exposures due to costs and losses incurred as a result of the flood. The Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

14

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 2009.

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 Global Market under the symbol “PENX.” On November 3, 2009, there were 458 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 2009				Fiscal 2008
	High		Low		High		Low
Quarter Ended November 30	$	19.79	$	7.50	$	41.30	$	23.88
Quarter Ended February 28	$	12.47	$	4.88	$	29.34	$	20.91
Quarter Ended May 31	$	6.72	$	2.07	$	24.00	$	19.63
Quarter Ended August 31	$	7.95	$	5.19	$	21.82	$	11.81

Dividends

During each quarter of the first half of fiscal year 2009 and each quarter of fiscal year 2008, the Board of Directors declared a $0.06 per share cash dividend.

In April 2009, the Board of Directors suspended payment of dividends. Pursuant to an amendment to the Company’s bank credit agreement effective July 9, 2009, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. During fiscal years 2009 and 2008, the Company declared dividends on its common stock of $1.4 million and $2.6 million, respectively.

Issuer Purchases of Equity Securities

None

15

Performance Graph

The following graph compares the Company’s cumulative total shareholder return on its common stock for a five-year period (September 1, 2004 to August 31, 2009) 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, 2004 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

* $100 invested on 8/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending August 31.

ASSUMES $100 INVESTED ON SEPTEMBER 1, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2009

	2004		2005		2006		2007		2008		2009
PENFORD CORPORATION		100.00		86.45		94.73		216.40		102.96		40.45
NASDAQ MARKET INDEX (U.S.)		100.00		117.52		121.39		145.97		129.25		111.34
NASDAQ MARKET CAP ($100-200M)		100.00		117.14		113.87		115.42		86.74		58.79

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.

16

Item 6:   Selected Financial Data

The following table sets forth certain selected financial information for the five fiscal years as of and for the period ended August 31, 2009. The amounts have been restated to reflect the reclassification of discontinued operations and should be read in conjunction with the consolidated financial statements and the notes to these statements included in Item 8.

	Year Ended August 31,
	2009			2008			2007			2006(2)			2005
	(Dollars in thousands, except share and per share data)
Operating Data:
Sales	$	255,556		$	239,581		$	257,944		$	223,006		$	201,443
Cost of sales	$	243,265		$	194,993		$	203,886		$	186,610		$	175,091
Gross margin percentage		4.8	%		18.6	%		21.0	%		16.3	%		13.1	%
Income (loss) from continuing operations(3)	$	(6,645	)	$	(10,808	)(1)	$	11,283	(1)	$	2,966		$	847	(5)
Income (loss) from discontinued operations(4)	$	(58,142	)	$	(1,892	)	$	2,234		$	1,262		$	1,727
Net income (loss)	$	(64,787	)	$	(12,700	)	$	13,517		$	4,228		$	2,574
Diluted earnings per share from continuing operations	$	(0.59	)	$	(1.02	)	$	1.22		$	0.33		$	0.10
Diluted earnings per share from discontinued operations	$	(5.21	)	$	(0.18	)	$	0.24		$	0.14		$	0.19
Diluted earnings per share	$	(5.80	)	$	(1.20	)	$	1.46		$	0.47		$	0.29
Dividends per share	$	0.12		$	0.24		$	0.24		$	0.24		$	0.24
Average common shares and equivalents — assuming dilution		11,170,493			10,565,432			9,283,125			9,004,190			8,946,195
Balance Sheet Data (as of August 31):
Total assets	$	258,245		$	320,433		$	288,388		$	250,668		$	249,917
Capital expenditures		5,379			38,505			32,782			10,582			6,094
Long-term debt		71,141			59,860			63,403			53,171			62,107
Total debt		92,382			67,889			67,459			57,466			66,129
Shareholders’ equity		79,359			160,362			125,676			107,452			100,026

(1)	Includes pre-tax charges of $1.4 million and $2.4 million in fiscal years 2008 and 2007, respectively, related to the settlement of litigation. See Note 20 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 years 2009, 2008, 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.
(3)	In the fourth quarter of fiscal 2008, the Company’s Cedar Rapids, Iowa manufacturing facility suffered severe flooding which suspended production for most of the fourth quarter. The Company recorded pre-tax costs of $27.6 million, net of insurance recoveries in fiscal year 2008 and net insurance recoveries of $9.1 million in fiscal 2009. See Note 3 to the Consolidated Financial Statements. In the first quarter of fiscal 2005, Penford experienced incremental expenses due to a union strike at its Cedar Rapids facility that began in the fourth quarter of fiscal 2004.
(4)	In August 2009, the Company recorded a $33.0 million non-cash asset impairment charge related to the property, plant and equipment of the Australia/New Zealand Operations. In the second quarter of fiscal 2009,

17

the Australia/New Zealand Operations recorded a $13.8 million non-cash goodwill impairment charge. See Note 2 to the Consolidated Financial Statements. Includes a pre-tax gain of $0.7 million related to the sale of land in New Zealand in fiscal year 2008. Includes a pre-tax gain of $1.2 million related to the sale of land in Australia and a $0.7 million pre-tax gain related to the sale of an investment in fiscal year 2005.

(5)

Includes a $0.9 million pre-tax write off of unamortized deferred loan costs in fiscal 2005 and 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.

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 and ethanol. The Company develops and manufactures ingredients with starch as a base, providing value-added applications to its customers. Penford’s starch products are manufactured primarily from corn and potatoes and are used principally as binders and coatings in paper and food production.

In May 2008, the Company’s Industrial Ingredients — North America segment began commercial production and sales of ethanol from its facility in Cedar Rapids, Iowa. This ethanol plant gives the Company the ability to select from multiple output choices to capitalize on changing industry conditions and selling opportunities. This increased flexibility allows the Company to direct production towards the most attractive mix of strategic and financial opportunities.

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 two segments. Industrial Ingredients — North America and Food Ingredients — North America, are broad categories of end-market users, served by operations in the United States. See Item 1 and Note 18 to the Consolidated Financial Statements for additional information regarding the Company’s business segment operations.

On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. This determination was the completion of a process, announced on February 27, 2009, involving the examination of a range of strategic and operating choices for the Company’s Australia/New Zealand Operations as part of a continuing program to maximize the Company’s asset values and returns. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 11, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, executed two asset sale agreements with unrelated parties to sell substantially all of its operating assets. The timing and completion of these transactions remain subject to significant risks and uncertainties.

The financial data for the Australia/New Zealand Operations have been presented as discontinued operations. The financial statements have been prepared in compliance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Accordingly, for all periods presented herein, the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have been conformed to this presentation. The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. See Note 2 to the Consolidated Financial Statements for further details.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes. The notes to the Consolidated Financial Statements referred to in this MD&A are included in Part II Item 8, “Financial Statements and Supplementary Data.” Unless otherwise noted, all amounts and analyses are based on continuing operations.

18

Impact of Cedar River Flooding

On June 12, 2008, the Company’s Industrial Ingredients — North America plant in Cedar Rapids, Iowa was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. The Company sustained substantial damage to this facility and the plant was shut down from mid-June 2008 until the end of August 2008. By the end of August 2008, the Company had begun manufacturing industrial starch in Cedar Rapids. In late September 2008, the Company resumed the commercial production and sale of ethanol.

During the fourth quarter of fiscal 2008, the Company recorded costs of flood remediation and restoration of $27.6 million, net of insurance recoveries of $10.5 million. In fiscal 2009, the Company recorded flood-related costs of $7.6 million and insurance recoveries of $16.7 million. See Note 3 to the Consolidated Financial Statements for details of the flood restoration costs.

The Company maintains property damage and business interruption insurance coverage applicable to the Cedar Rapids plant. The Company is seeking additional payments from its insurers for damages arising from the flooding in June 2008 and has filed a lawsuit against the insurers. See Note 20 to the Consolidated Financial Statements for additional information regarding this lawsuit. The Company does not provide assurance as to any amount or timing of the ultimate recoveries under its insurance policies.

Consolidated Results of Operations

Consolidated fiscal 2009 sales increased 6.7% to $255.6 million from $239.6 million in fiscal 2008 on volume growth arising from the recovery by the Industrial Ingredients — North America business from the severe flooding in Cedar Rapids in fiscal 2008, and on pricing and product mix improvements in the Food Ingredients — North America segment. During fiscal 2009, the Company’s paper industry customers were negatively impacted by the global recession, resulting in weak demand for printing and writing paper products. As the paper demand contracted, paper mills closed, inventory levels declined and production schedules were cut back. As a result, demand declined for the Company’s industrial starch products. In response to this decline, the Company shifted more of its industrial starch manufacturing capacity to the production of ethanol, which accounted for $54.8 million, or 21% of consolidated sales. Food Ingredients — North America sales for fiscal 2009 rose on a 13% improvement in average unit pricing.

Fiscal 2009 consolidated gross margin decreased to $12.3 million, or 4.8% of sales, from $44.6 million, or 18.6% of sales, in fiscal 2008. Consolidated gross margin declined primarily due to the increase in ethanol production with a lower unit price than industrial starch, and falling ethanol and industrial starch prices during fiscal 2009.

Consolidated operating loss was $6.4 million in fiscal 2009 compared to an operating loss of $15.8 million in fiscal 2008. The decline in size of the loss relative to fiscal 2008 is primarily due to $9.1 million of net insurance recoveries recorded in fiscal 2009, as well as a $2.2 million reduction in operating expenses. In fiscal 2008, the operating loss included $27.6 million of net flood-related costs and $1.4 million of litigation settlement costs.

Interest expense in fiscal 2009 was $5.6 million compared with $3.1 million in fiscal 2008. Interest expense increased in fiscal 2009 due to a $1.1 million decrease in capitalized interest costs, an increase in average debt balances, and an increase in the applicable margin over LIBOR beginning in July 2009. Interest costs of $1.1 million related to the construction of the ethanol facility in Cedar Rapids, Iowa were capitalized in fiscal 2008.

The effective tax rate for fiscal 2009 was 34%. In fiscal 2009, the effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to adjustments to the unrecognized tax benefits and adjustments resulting from filing current and amended tax returns, offset by state income taxes. See Note 16 to the Consolidated Financial Statements.

Accounting Changes

Effective September 1, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 157, “Fair Value Measurements” (“SFAS 157”), for financial assets and liabilities carried at fair

19

value that are recognized or disclosed at fair value in the financial statements on a recurring basis. 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. The adoption did not have a material impact on the company’s financial statements. See Note 14 to the Consolidated Financial Statements. Due to the issuance of FASB Staff PositionNo. 157-2(“FSP 157-2”), the effective date of SFAS 157 has been deferred to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value. The Company is continuing to evaluate the impact of adopting these provisions in fiscal 2010. In October 2008, the FASB issued FSPFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”(“FSP 157-3”).FSP 157-3 clarifies the application of SFAS 157 and addresses how the fair value of a financial asset is determined when the market for that financial asset is inactive.FSP 157-3 was effective upon issuance. The implementation of this standard did not have an impact on the Company’s 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”) which allows companies the option to measure certain financial assets and financial liabilities at fair value at specified election dates. Effective September 1, 2008, the Company adopted SFAS 159 and elected not to measure any additional financial instruments and other items at fair value.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives for using derivative instruments and hedging activities, the method of accounting for such instruments under SFAS 133 and its related interpretations, the effect of derivative instruments and related hedged items on financial position, results of operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments and their gains and losses. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14 to the Consolidated Financial Statements.

Results of Operations

Fiscal 2009 Compared to Fiscal 2008

Industrial Ingredients — North America

	Year Ended August 31,
	2009			2008
	(Dollars in thousands)
Sales	$	186,526		$	173,320
Cost of sales	$	195,853		$	147,072
Gross margin		(5.0	)%		15.1	%
Loss from operations	$	(11,154	)	$	(16,541	)

Industrial Ingredients fiscal 2009 sales of $186.5 million increased $13.2 million, or 7.6%, from fiscal 2008. Annual sales volume of industrial starches declined 22.8%. The business suffered severe flood damage to its Cedar Rapids, Iowa manufacturing facility in June 2008 which shut down production for most of the fourth quarter of fiscal 2008. Limited production of starch products resumed in August 2008 and customer shipments were phased in during the first quarter of fiscal 2009 as the business restarted manufacturing processes. During the remainder of fiscal 2009, the Industrial Ingredients starch business was significantly impacted by weak demand for printing and writing paper products. Paper industry customers reacted to the demand decline by implementing extended downtime, closing mills and reducing inventory levels.

As starch demand decreased, the Industrial Ingredients business shifted more of its manufacturing mix to the production of ethanol. In May 2008, the Company began commercial production of ethanol, which was also suspended in June 2008 due to the impact of the Cedar Rapids flood. Ethanol production was restarted on a limited basis in late September 2008. Sales of ethanol in fiscal 2009 were $54.8 million compared to $6.0 million in fiscal 2008.

20

Gross margin declined from $26.2 million in fiscal 2008 to a loss of $9.3 million in fiscal 2009, a reduction of $35.6 million. Gross margin decreased primarily due to the shift in the manufacturing mix to ethanol production and a fall in ethanol selling prices. Ethanol has a lower unit selling price than industrial starch. The effect of lower industrial starch pricing of $5.1 million, higher depreciation on the ethanol facility of $2.2 million, higher distribution costs of $2.4 million, and $3.3 million of lower yields on corn and corn by-products also contributed to the margin decline.

Loss from operations for fiscal 2009 included $9.1 million of net insurance recoveries related to the Cedar Rapids flooding in fiscal 2008. See Note 3 to the Consolidated Financial Statements for details of the costs and recoveries. Operating expenses decreased to $8.3 million in fiscal 2009 from $11.6 million in fiscal 2008 on lower employee costs. Fiscal 2008 operating expenses included $1.4 million related to the settlement of a lawsuit. Research and development expenses decreased $1.0 million primarily due to lower employee costs.

Food Ingredients — North America

	Year Ended August 31,
	2009			2008
	(Dollars in thousands)
Sales	$	69,030		$	66,261
Cost of sales	$	47,412		$	47,921
Gross margin		31.3	%		27.7	%
Income from operations	$	13,512		$	10,178

Sales at the Food Ingredients — North America business of $69.0 million rose $2.8 million, or 4.2%, over fiscal 2008, driven by improvements in average unit selling prices. The annual volume declined 7% from 2008, approximately half of which was due to the sale of the dextrose business in the second quarter of fiscal 2009. Sales of non-coating applications, excluding dextrose applications, grew 3.5% and sales of coating applications rose 11%.

Income from operations grew 32.8% from $10.2 million in fiscal 2008 to $13.5 million in fiscal 2009 on an increase in gross margin. Improvements in average unit pricing and product mix more than offset raw material increases of $2.4 million and the effect of volume declines of $1.4 million.

Corporate Operating Expenses

Corporate operating expenses decreased to $9.3 million in fiscal 2009 from $10.0 million in fiscal 2008, primarily due to a decrease in employee incentive costs and an increase in the cash value of the Company-owned life insurance policies.

Fiscal 2008 Compared to Fiscal 2007

Industrial Ingredients — North America

	Year Ended August 31,
	2008			2007
	(Dollars in thousands)
Sales	$	173,320		$	194,957
Cost of sales	$	147,072		$	159,851
Gross margin		15.1	%		18.0	%
Income (loss) from operations	$	(16,541	)	$	19,251

Industrial Ingredients’ fiscal 2008 sales of $173.3 million decreased $21.6 million, or 11%, from fiscal 2007. Annual sales volume declined 18%, caused by the severe flooding in Cedar Rapids, Iowa, which shut down production for most of the fourth quarter. Limited production of specialty starch products continued after the flooding on June 12, 2008. Sales for the fourth quarter were $14.2 million. Annual sales decreased by $34.4 million due to reduced volumes, partially offset by $12.8 million in improvements in average unit selling prices and product mix.

21

Gross margin declined $8.9 million, or 25%, from fiscal 2007 to $26.2 million, and, as a percentage of sales, decreased to 15.1% in fiscal 2008 compared to 18.0% in fiscal 2007. The impact of improved unit pricing and product mix of $8.1 million was more than offset by higher chemical and corn procurement costs of $3.7 million and the effect of lower volumes due to the flooding of $9.5 million. Also reducing gross margin were higher repair and maintenance expenses, lower utility yields and production inefficiencies caused by severe weather in the Midwest in the first half of the fiscal year and the flooding in the fourth quarter, and thestart-up costs of ethanol production totaling $3.8 million.

Loss from operations for fiscal 2008 included $27.6 million of flood remediation costs incurred in the fourth quarter, net of $10.5 million of insurance recoveries, as discussed above. See Note 3 to the Consolidated Financial Statements for a discussion of the costs recorded in fiscal 2008. Included in operating results for fiscal years 2008 and 2007 are expenses of $1.4 million and $2.4 million related to the settlement of a lawsuit. See Note 20 to the Consolidated Financial Statements. Operating expenses and research and development expenses increased $0.4 million in fiscal 2008.

Food Ingredients — North America

	Year Ended August 31,
	2008			2007
	(Dollars in thousands)
Sales	$	66,261		$	62,987
Cost of sales	$	47,921		$	44,036
Gross margin		27.7	%		30.1	%
Income from operations	$	10,178		$	10,684

Sales at the Food Ingredients — North America business of $66.3 million rose $3.2 million, or 5.2%, over fiscal 2007, driven by an 8.6% increase in average unit sales prices. Annual volumes declined 3% from 2007. Sales of non-coating applications grew 10% and pricing for these products expanded 11%, with sales to the bakery, dairy/cheese, sauces and gravies, and pet chew end markets experiencing double-digit growth in fiscal 2008.

Income from operations declined from $10.7 million in fiscal 2007 to $10.2 million in fiscal 2008. Gross margin decreased by $0.6 million from fiscal 2007 to $18.3 million. Improvements in pricing and product mix were more than offset by higher raw material costs and a decline in volumes. Operating expenses declined by $0.1 million due to a reduction in employee costs.

Corporate Operating Expenses

Corporate operating expenses increased to $10.0 million in fiscal 2008 from $9.6 million in fiscal 2007, primarily due to increases in employee costs and the costs of benefits and insurance.

Non-Operating Income (Expense)

Other non-operating income (expense) consists of the following:

	Year Ended August 31,
	2009		2008			2007
	(Dollars in thousands)
Gain on sale of dextrose product line	$	1,562	$	—		$	—
Gain (loss) on foreign currency transactions		127		(217	)		4
Gain on cash flow hedges		—		2,890			—
Other		226		87			(316	)
	$	1,915	$	2,760		$	(312	)

In the second quarter of fiscal 2009, the Company’s Food Ingredients — North America business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.

22

The Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.

As discussed in Note 3 to the Consolidated Financial Statements, in June 2008, the flooding of the Cedar Rapids manufacturing facility shut down production for most of the fourth quarter of fiscal 2008. The Company had derivative instruments designated as cash flow hedges to reduce the price volatility of corn and natural gas used in the production of starch. Due to the June 12, 2008 flood event, derivative positions held as of that date that were forecasted to hedge exposures during the period the Cedar Rapids plant was shut down were no longer deemed to be effective cash flow hedges. The $2.9 million gain, representing ineffectiveness on these instruments, was reclassified from other comprehensive income and recognized as a component of non-operating income.

Interest expense

Interest expense was $5.6 million, $3.1 million and $3.7 million in fiscal years 2009, 2008 and 2007, respectively. Interest expense for fiscal 2009 increased $2.5 million over the prior year’s expense due to a $1.1 million decrease in capitalized interest costs, an increase in average debt balances, and an increase in the applicable margin over LIBOR beginning July 2009. In connection with the amendment to the Company’s credit facility in July 2009, the Company paid additional arrangement and commitment fees to its lenders of $1.0 million. The amortization of these and existing deferred loan fees over the shortened maturity of the debt will increase annual interest expense by an estimated $1.1 million. This amendment also increased the maximum commitment fee for undrawn balances and the maximum LIBOR margin payable on outstanding debt. The incremental annual interest expense from these pricing changes and the revised amortization schedule is estimated at $1.2 million. See “Liquidity and Capital Resources” in the MD&A for a discussion of the Company’s financing.

Interest expense for fiscal 2008 declined $0.6 million from fiscal 2007 due to a decline in U.S. interest rates from the previous year and lower average debt balances, excluding interest costs which were capitalized on debt related to the construction of the ethanol facility. Interest costs related to construction of the ethanol manufacturing plant were capitalized until May 2008, when the facility began commercial production. No interest costs were capitalized in fiscal 2009. Interest costs of $1.1 million and $0.4 million were capitalized in fiscal years 2008 and 2007, respectively, related to construction of the ethanol facility.

As of August 31, 2009, all of the Company’s outstanding debt was subject to variable interest rates. As of August 31, 2009, under interest rate swap agreements with several banks, the Company had fixed its interest rates on U.S. dollar denominated term debt of $23.2 million at 4.18% and $5.8 million at 5.08%, plus the applicable margin under the Company’s credit facility.

Income taxes

The effective tax rates for fiscal years 2009, 2008 and 2007 were 34%, 33% and 31%, respectively. In fiscal 2009 and 2008, the effective tax rate is lower than the U.S. federal statutory rate of 35% primarily due to adjustments to the unrecognized tax benefits and adjustments resulting from filing current and amended tax returns, offset by state income taxes. See Note 16 to the Consolidated Financial Statements.

The effective tax rate for fiscal 2007 varied from the U.S. federal statutory rate of 35% primarily due to U.S. tax incentives related to research and development, the favorable tax effect of domestic (U.S.) production activities, and the effect of a tax settlement. In May 2007, the Company settled 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. In connection with the settlement of these audits, 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.

23

Results of Discontinued Operations

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Sales	$	78,030		$	107,532		$	105,244
Cost of sales		82,166			102,523		$	95,141
Gross margin		(4,136	)		5,009			10,103
Operating expenses		5,025			6,536			5,331
Research and development expenses		1,745			2,262			1,674
Restructure costs		—			1,356			—
Goodwill impairment		13,828			—			—
Asset impairment		33,020			—			—
Income (loss) from operations		(57,754	)		(5,145	)		3,098
Non-operating income		1,734			2,675			1,957
Interest expense		973			993			1,998
Income (loss) on discontinued operations before income taxes		(56,993	)		(3,463	)		3,057
Income tax expense (benefit)		1,149			(1,571	)		823
Income (loss) on discontinued operations		(58,142	)		(1,892	)		2,234

Overview

On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. This determination was the completion of a process, announced on February 27, 2009, involving the examination of a range of strategic and operating choices for the Company’s Australia/New Zealand Operations as part of a continuing program to maximize the Company’s asset values and returns. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 11, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, executed two asset sale agreements with unrelated parties to sell substantially all of its operating assets. The timing and completion of these transactions remain subject to significant risks and uncertainties. The Australia/New Zealand Operations was previously reported in the consolidated financial statements as an operating segment.

Fiscal 2009 Compared to Fiscal 2008

The Australian business reported a $29.5 million decrease in sales in fiscal 2009 over fiscal 2008 on a $19.5 million decline in foreign currency exchange rates compared to the U.S. dollar, and a sales volume decrease of 11%, partially offset by $1.8 million of improvements in pricing and product mix. Sales in local currency declined 10% and average unit pricing increased 1.2% in local currency.

Fiscal 2009 gross margin declined $9.1 million from last year, from positive margin of $5.0 million to a loss of $4.1 million as raw material grain costs rose $6.4 million and unit manufacturing costs rose $5.3 million. Favorable average unit pricing partially offset the increased input and production costs. Operating and research and development expenses for fiscal 2009 decreased by $2.0 million over the same period a year ago due to the decrease in average foreign currency exchange rates.

In the second quarter of fiscal 2009, the Company performed an interim impairment evaluation of its goodwill. As a result of this interim assessment, the Company recorded a non-cash goodwill impairment charge of $13.8 million representing all of the goodwill allocated to the Australia/New Zealand reporting unit.

The financial statements have been prepared in compliance with the provisions of SFAS 144. Accordingly, as of August 31, 2009, the Company stated the long-lived assets of the Australia/New Zealand Operations at the lower

24

of their carrying values or fair value less costs to sell. The Company estimated fair value of the long-lived assets based on executed sales agreements for substantially all of its Australian operating assets and the completed sale price of Penford New Zealand. The Company recorded a non-cash asset impairment charge of $33.0 million in the fourth quarter of fiscal 2009 to reduce the carrying value of the long-lived assets of the Australia/New Zealand Operations to estimated fair value less costs to sell. The estimates used in determining the impairment charge, including, but not limited to, the sales proceeds and costs to sell, are subject to significant risks and uncertainties. The actual asset impairment may be materially more or less than the charge recorded at August 31, 2009. Estimates of fair value will be evaluated each quarter and revisions to the estimates will be recorded as adjustments to the carrying values of the long-lived assets.

The Company’s Australian operations reported a tax loss for fiscal years 2009 and 2008. Australian tax law provides for an unlimited carryforward period for net operating losses but does not allow losses to be carried back to previous tax years. Due to classification of the Australia operations as discontinued and the uncertainty related to generating sufficient future taxable income in Australia, the Company currently believes that it is more likely than not that the net deferred tax benefit will not be realized. At August 31, 2009, the Company has recorded a valuation allowance against the entire Australian net deferred tax asset.

Fiscal 2008 Compared to Fiscal 2007

The Australian business reported a 2.2% increase in sales in fiscal 2008 over fiscal 2007. Volumes declined 21% from fiscal 2007 levels, reflecting a planned shift to product offerings with higher long-term return opportunities. Improvements in average unit selling prices of 29% contributed $12.7 million to revenue gains and stronger average foreign currency exchange rates increased revenues by $11.5 million. Sales in local currencies declined 10%.

Gross margin declined to 4.7% of sales in fiscal 2008 from 9.6% in fiscal 2007 on lower volumes and higher manufacturing costs. Manufacturing costs increased due to higher procurement and processing charges on grain that was imported to supplement local grain supplies. Increased raw material grain and chemical costs were offset by higher selling prices.

Operating expenses increased $0.8 million in fiscal 2008 compared to fiscal 2007 primarily due to the strengthening of the Australian and New Zealand dollar exchange rates which added $0.7 million to expenses. The remainder of the increase was due to higher employee costs. Similarly, research and development expenses increased $0.6 million, of which half was due to foreign currency exchange rates and the remainder due to increased headcount, patent and consultant costs.

The segment’s operating loss for fiscal 2008 included $1.4 million of employee severance costs and related benefits that were paid in connection with workforce reductions implemented during the reconfiguring of the Australian and New Zealand businesses.

Liquidity and Capital Resources

The Company’s primary sources of short- and long-term liquidity are cash flow from operations and its 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 2010.

Operating Activities

At August 31, 2009, Penford had working capital from continuing operations of $23.4 million, and $91.4 million outstanding under its credit facility. Cash flow from continuing operations was $(11.2) million, $(1.4) million and $19.2 million in fiscal years 2009, 2008 and 2007, respectively. The change in cash flow in fiscal 2009 was primarily due to an increase in trade receivables of $20.1 million as sales of the Industrial Ingredients business grew after the Cedar Rapids flooding in fiscal 2008 and reduction in payables of $16.0 million. The decline in cash flow in fiscal 2008 compared to fiscal 2007 is primarily related to the fourth quarter operating loss due to the temporary shut down of the Company’s Cedar Rapids, Iowa plant, operated by the Industrial Ingredients — North America business, due to record flooding of the Cedar River and government-ordered mandatory evacuation of the

25

plant and surrounding areas. In addition, the fluctuations in working capital balances in fiscal 2008 compared to fiscal 2007 are primarily related to the interruption in operations due to the flooding and additional payables at year end related to the flood discussed above.

Investing Activities

Capital expenditures were $5.4 million, $38.5 million and $32.8 million in fiscal years 2009, 2008 and 2007, respectively. Capital expenditures in fiscal years 2008 and 2007 include $26.9 million and $19.3 million, respectively, for construction of the ethanol production facility in Cedar Rapids, Iowa. Penford expects capital expenditures to be approximately $6.5 million in fiscal 2010. In fiscal 2009, the Company’s Food Ingredients — North America business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs.

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 (now Bank of America); 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.

On February 26, 2009, the Company entered into a second amendment to the 2007 Agreement (the “Second Amendment”). The Second Amendment adjusted certain covenants and other provisions in the 2007 Agreement to provide additional relief from the financial impact of the flood at the Company’s Cedar Rapids, Iowa facility. Pursuant to the Second Amendment, Bank of Montreal became the Administrative agent under the 2007 Agreement, replacing Harris N.A.

On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third amendment to the 2007 Agreement (the “Third Amendment”). The Third Amendment, among other things, amended financial covenants effective as of May 31, 2009, reduced the amounts that the Company may borrow under the various facilities available under the 2007 Agreement, shortened the maturity dates on borrowed funds, increased applicable interest rates, eliminated the Company’s ability to declare dividends on its stock, and adjusted the amortization schedule and provisions regulating mandatory prepayments, additional indebtedness, subsidiary company support, and reporting requirements.

The Third Amendment adjusted the final maturity date of the term loan available under the 2007 Agreement to December 15, 2009, and the maturity date of the revolver and the capital expansion loans to November 30, 2010. Beginning on September 30, 2009, the Company was required to repay the capital expansion loans in quarterly installments of $1.0 million through December 31, 2009, and $2.0 million thereafter. In addition to the quarterly installments on the capital expansion loan, a one-time payment of $9.625 million is due on December 15, 2009. Any remaining amount due on the capital expansion loans and revolver is due at final maturity.

The Third Amendment adjusted the financial covenants in the 2007 Agreement, as amended, effective May 31, 2009. The Company must maintain a minimum EBITDA (as defined in the Third Amendment), tangible net worth and fixed charge coverage ratio each fiscal quarter in accordance with the revisions contained in the Third Amendment. The Third Amendment also provides that the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. Annual capital expenditures are limited to $8 million. The availability on the $60 million revolver facility is limited to $52.5 million unless the Company obtains the approval of the lenders holding more than 50% of the U.S. Dollar equivalent of the sum of the total borrowing and unused commitments under the 2007 Agreement.

In connection with the Third Amendment, the Company paid additional arrangement and commitment fees to its lenders of $1.0 million. The amortization of these and existing deferred loan fees over the shortened maturity of the Company’s debt will increase annual interest expense by an estimated $1.1 million. The Third Amendment increased the maximum commitment fee for undrawn balances by 25 basis points and the maximum London Interbank Offering Rates (“LIBOR”) margin payable on outstanding debt by 150 basis points to 5.00%. The incremental annual interest expense from these pricing changes and the revised amortization schedule is estimated

26

at $1.2 million. Interest rates under the 2007 Agreement are based on either the LIBOR in Australia or the United States, or the prime rate, depending on the selection of available borrowing options under the 2007 Agreement.

At August 31, 2009, the Company had $45.6 million and $5.4 million outstanding, respectively, under the revolving credit and term loan portions of its credit facility. In addition, the Company had $40.4 million outstanding under its capital expansion credit facility on August 31, 2009. The Company’s ability to borrow under its revolving credit facility is subject to the Company’s compliance with, and is limited by, the covenants in the 2007 Agreement, as amended. The Company was in compliance with the covenants in the 2007 Agreement, as amended, as of August 31, 2009.

As of August 31, 2009, all of the Company’s outstanding debt was 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 $23.2 million at 4.18% and $5.8 million at 5.08%, plus the applicable margin under the 2007 Agreement.

In December 2007, the Company completed a public offering of common stock resulting in the issuance of 2,000,000 additional common shares at a price to the public of $25.00 per share. The Company received approximately $47.2 million of net proceeds (net of $2.8 million of expenses related to the offering) from the sale of 2,000,000 shares and these proceeds were used to reduce the Company’s outstanding debt.

Dividends

During each quarter of the first half of fiscal year 2009 and each quarter of fiscal year 2008, the Board of Directors declared a $0.06 per share cash dividend.

In April 2009, the Company’s Board of Directors suspended payment of dividends. Pursuant to the Third Amendment, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. During fiscal years 2009 and 2008, the Company declared dividends on its common stock of $1.4 million and $2.6 million, respectively.

Critical Accounting Estimates

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 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 estimates and related disclosures with the Audit Committee of the Board of Directors. The estimates 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

27

•  Stock-based compensation

•  Discontinued operations

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, 2009, the allowance for doubtful accounts receivable was $0.6 million.

Hedging Activities

Penford uses derivative instruments, primarily exchange traded futures contracts, to reduce exposure to price fluctuations of commodities used in the manufacturing processes in the United States. The Company relies upon exchange settlement to address the default risk exposure. 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. Penford usesover-the-counter interest rate swap agreements with large commercial banks as counterparties. The Company is unaware of any events or circumstances that would prevent these banks from fulfilling their obligations.

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. See Note 14 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 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 12 to the Consolidated Financial Statements. See “Defined Benefit Pension and Postretirement 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 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. In the second quarter of fiscal 2009, the Company

28

performed an interim impairment evaluation of its goodwill. As a result of this interim assessment, the Company recorded a non-cash goodwill impairment charge of $13.8 million representing all of the goodwill allocated to the Australia/New Zealand reporting unit. The impairment charge is included in the results of operations for discontinued operations.

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 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.

Prior to fiscal 2008, in evaluating the exposures connected with the various tax filing positions, the Company established an accrual, when, despite management’s belief that the Company’s tax return positions were supportable, management believed that certain positions may be successfully challenged and a loss was probable. When facts and circumstances changed, these accruals were adjusted. Beginning in fiscal 2008, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which changed the accounting for uncertain tax positions. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 16 to the Consolidated Financial Statements.

The liability for unrecognized tax benefits contains uncertainties because the Company is required to make assumptions and to apply judgment to estimate the exposures associated with the various tax filing positions. Management believes that the judgments and estimates it uses in evaluating its tax filing positions are reasonable; however, actual results could differ, and the Company may be exposed to significant gains and losses and the Company’s effective tax rate in a given financial statement period could be materially affected.

Stock-Based Compensation

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 11 to the Consolidated Financial Statements.

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.

29

Discontinued Operations

In connection with classifying its Australia/New Zealand Operations as “held for sale,” the Company stated the long-lived assets of the Australia/New Zealand Operations at the lower of their carrying values or fair value less costs to sell. The Company estimated fair value of the long-lived assets based on executed sales agreements for substantially all of its Australian operating assets and the completed sale price of Penford New Zealand. The Company recorded a non-cash asset impairment charge of $33.0 million in the fourth quarter of fiscal 2009 to reduce the carrying value of the long-lived assets of the Australia/New Zealand Operations to estimated fair value less costs to sell. The estimates used in determining the impairment charge, including, but not limited to, the sales proceeds and costs to sell, are subject to significant risks and uncertainties. The actual asset impairment may be materially more or less than the charge recorded at August 31, 2009.

Contractual Obligations

As more fully described in Notes 7 and 10 to the Consolidated Financial Statements, the Company is a party to various debt and lease agreements at August 31, 2009 that contractually commit the Company to pay certain amounts in the future. The purchase obligations at August 31, 2009 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, 2009 (in thousands):

	2010		2011-2012		2013-2014		2015 & After		Total
Long-term debt and capital lease obligations	$	21,241	$	70,904	$	237	$	—	$	92,382
Postretirement medical(1)		667		1,496		1,802		5,627		9,592
Defined benefit pensions(2)		1,802		—		—		—		1,802
Operating lease obligations, net		5,117		6,489		3,748		1,494		16,848
Purchase obligations		43,616		5,661		63		—		49,340
	$	72,443	$	84,550	$	5,850	$	7,121	$	169,964

(1)	Estimated contributions to the unfunded postretirement medical plan made in amounts needed to fund benefit payments for participants through fiscal 2019 based on actuarial assumptions.
(2)	Estimated contributions to the defined benefit pension plans for fiscal year 2010. The actual amounts funded in 2010 may differ from the amounts listed above. Contributions in fiscal years 2011 through 2015 and beyond are excluded as those amounts are unknown.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 12 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

30

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 2007 (6.15%), 2008 (6.51%) and 2009 (6.92%) 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 $0.2 million and other postretirement benefit expense by $0.01 million. During fiscal 2009, bond yields declined and Penford has lowered the discount rate for calculating its benefit obligations at August 31, 2009, as well as net periodic expense for fiscal 2010, to 5.98%.

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 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 2009. A 50 basis point decrease (increase) in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.1 million based on plan assets at August 31, 2009. The expected return on plan assets used in calculating fiscal 2010 pension expense is 8.0%.

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, 2009, unrecognized losses from all sources are $15.6 million for the pension plans and unrecognized losses of $4.2 million for the postretirement health care plan. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $1.2 million in fiscal 2010. Amortization of unrecognized net losses is expected to increase net postretirement health care expense by approximately $0.3 million in fiscal 2010.

Penford recognized pension expense of $2.0 million, $1.6 million and $1.7 million in fiscal years 2009, 2008 and 2007, respectively. Penford expects pension expense to be approximately $3.6 million in fiscal 2010. The Company contributed $1.1 million, $1.5 million and $1.0 million to the pension plans in fiscal years 2009, 2008 and 2007, respectively. Penford estimates that it will be required to make minimum contributions to the pension plans of $1.8 million during fiscal 2010. Because of the decline in general economic and capital market conditions, the Company expects that pension plan funding contributions will increase over the medium and long term.

The Company recognized benefit expense for its postretirement health care plan of $1.0 million in each fiscal years 2009, 2008 and 2007. Penford expects to recognize approximately $1.6 million in postretirement health care benefit expense in fiscal 2010. The Company contributed $0.5 million, $0.5 million, and $0.6 million in fiscal years 2009, 2008 and 2007 to the postretirement health care plans and estimates that it will contribute $0.7 million in fiscal 2010.

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 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the first quarter of fiscal 2010, all references made to U.S. generally accepted accounting principles will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter U.S. generally

31

accepted accounting principles, the Company does not believe that the adoption of SFAS 168 will have any impact on its consolidated financial statements.

In April 2009, the FASB issued FSPSFAS 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPSFAS 107-1 and APB28-1”). This FSP requires additional disclosures regarding financial instruments for interim reporting periods of publicly traded companies. This FSP requires that disclosures provide quantitative and qualitative information on fair value estimates for all financial instruments not measured on the balance sheet at fair value, when practicable, with the exception of certain financial instruments listed in SFAS 107. This FSP is effective prospectively for interim reporting periods ending after June 15, 2009. The Company will adopt FSP in the first quarter of fiscal 2010. The Company is currently evaluating the disclosure requirements of this standard.

In December 2008, the FASB issued Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requires additional disclosures on a prospective basis about assets held in an employer’s defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The Company is currently evaluating the disclosure requirements of this standard.

In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (“EITF”)03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSPEITF 03-6-1”). FSPEITF 03-6-1 addresses whether unvested share-based payment awards that contain rights to nonforfeitable dividends are participating securities prior to vesting and, therefore, included in the computation of earnings per share. FSPEITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The Company is currently evaluating the impact of adopting FSPEITF 03-6-1 on the Company’s consolidated financial statements.

In February 2008, the FASB issued FASB Staff PositionNo. 157-2, “Effective Date of SFAS No. 157”(“FSP 157-2”), which delays the effective date of SFAS 157, “Fair Value Measurements,” for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company). The Company is continuing to evaluate the impact of adopting these provisions in fiscal 2010.

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, 2009, all of the Company’s outstanding debt 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 $23.2 million at 4.18% and $5.8 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, 2009 is approximately $0.7 million.

Foreign Currency Exchange Rates

The Company hasU.S.-Australian dollar currency exchange rate risks due to debt borrowings denominated in Australian dollars. At August 31, 2009, the Company had $10.1 million of Australian dollar-denominated debt outstanding. The Company does not maintain any derivative instruments to mitigate theU.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. At August 31, 2009, a

32

10% change in the Australian dollar foreign currency exchange rates compared with the U.S. dollar would increase or decrease reported debt balances by $1.0 million.

From time to time, Penford enters into foreign exchange forward contracts to manage exposure to payables denominated in currencies different from the U.S. dollar. At August 31, 2009 and 2008, Penford had no foreign exchange forward contracts outstanding.

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 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, 2009 and 2008, the fair value of the Company’s net corn position was approximately $(1.5) million and $1.8 million, respectively. The market risk associated with a 10% adverse change in corn prices at August 31, 2009 and 2008 is approximately $149,000 and $180,000, respectively.

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, 2009 and 2008, the fair value of the natural gas exchange-traded futures and options contracts was a loss of approximately $1.3 million and a loss of approximately $1.2 million, respectively. The market risk associated with a 10% adverse change in natural gas prices at August 31, 2009 and 2008 is estimated at $130,000 and $123,000, respectively.

33

Item 8:   Financial Statements and Supplementary Data

TABLE OF CONTENTS

	Page
Consolidated Balance Sheets		35
Consolidated Statements of Operations		36
Consolidated Statements of Comprehensive Income (Loss)		37
Consolidated Statements of Cash Flows		38
Consolidated Statements of Shareholders’ Equity		39
Notes to Consolidated Financial Statements		40
Reports of Independent Registered Public Accounting Firm		69

34

Consolidated Balance Sheets

	August 31,
	2009			2008
	(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	5,540		$	—
Trade accounts receivable, net		32,192			12,081
Inventories		18,155			26,746
Prepaid expenses		5,081			3,722
Insurance recovery receivable		—			8,000
Income tax receivable		3,892			9,914
Other		3,476			3,281
Current assets of discontinued operations		38,486			42,045
Total current assets		106,822			105,789
Property, plant and equipment, net		119,049			128,194
Restricted cash value of life insurance		9,761			10,465
Deferred tax assets		8,277			4,932
Other assets		2,075			1,151
Other intangible assets, net		481			554
Goodwill, net		7,553			7,726
Non-current assets of discontinued operations		4,227			61,622
Total assets	$	258,245		$	320,433
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Cash overdraft, net	$	—		$	1,301
Current portion of long-term debt and capital lease obligations		21,241			8,029
Accounts payable		14,745			29,540
Accrued liabilities		8,972			9,003
Current liabilities of discontinued operations		16,028			19,803
Total current liabilities		60,986			67,676
Long-term debt and capital lease obligations		71,141	��		59,860
Other postretirement benefits		17,678			12,862
Pension benefit liability		18,043			7,454
Other liabilities		8,187			7,573
Non-current liabilities of discontinued operations		2,851			4,646
Total liabilities		178,886			160,071
Commitments and contingencies (Notes 10 and 20)
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 13,157,387 shares in 2009 and 13,127,369 shares in 2008, including treasury shares		13,157			13,127
Additional paid-in capital		93,829			91,443
Retained earnings		7,944			74,092
Treasury stock, at cost, 1,981,016 shares		(32,757	)		(32,757	)
Accumulated other comprehensive income (loss)		(2,814	)		14,457
Total shareholders’ equity		79,359			160,362
Total liabilities and shareholders’ equity	$	258,245		$	320,433

The accompanying notes are an integral part of these statements.

35

Consolidated Statements of Operations

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands, except
	share and per share data)
Sales	$	255,556		$	239,581		$	257,944
Cost of sales		243,265			194,993			203,886
Gross margin		12,291			44,588			54,058
Operating expenses		23,501			25,727			26,060
Research and development expenses		4,348			5,671			5,138
Flood related costs, net of insurance proceeds		(9,109	)		27,555			—
Other costs		—			1,411			2,400
Income (loss) from operations		(6,449	)		(15,776	)		20,460
Interest expense		5,557			3,089			3,713
Other non-operating income (expense), net		1,915			2,760			(312	)
Income (loss) from continuing operations before income taxes		(10,091	)		(16,105	)		16,435
Income tax expense (benefit)		(3,446	)		(5,297	)		5,152
Income (loss) from continuing operations		(6,645	)		(10,808	)		11,283
Income (loss) from discontinued operations, net of tax		(58,142	)		(1,892	)		2,234
Net income (loss)	$	(64,787	)	$	(12,700	)	$	13,517
Weighted average common shares and equivalents outstanding, assuming dilution		11,170,493			10,565,432			9,283,125
Earnings (loss) per common share:
Basic earnings (loss) per share from continuing operations	$	(0.59	)	$	(1.02	)	$	1.25
Basic earnings (loss) per share from discontinued operations		(5.21	)		(0.18	)		0.25
Basic earnings (loss) per share	$	(5.80	)	$	(1.20	)	$	1.50
Diluted earnings (loss) per share from continuing operations	$	(0.59	)	$	(1.02	)	$	1.22
Diluted earnings (loss) per share from discontinued operations		(5.21	)		(0.18	)		0.24
Diluted earnings (loss) per share	$	(5.80	)	$	(1.20	)	$	1.46
Dividends declared per common share	$	0.12		$	0.24		$	0.24

The accompanying notes are an integral part of these statements.

36

Consolidated Statements of Comprehensive Income (Loss)

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Net income (loss)	$	(64,787	)	$	(12,700	)	$	13,517
Other comprehensive income (loss):
Change in fair value of derivatives, net of tax benefit (expense) of $(1,255), $1,999 and $1,619		2,047			(3,261	)		(2,641	)
Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax benefit (expense) of $(1,837), $1,574 and $950		(2,998	)		2,568			1,550
Foreign currency translation adjustments		(7,635	)		2,041			4,690
(Increase) decrease in post retirement liabilities, net of applicable income tax benefit (expense) of $5,323, $513 and $(864)		(8,685	)		(837	)		1,409
Other comprehensive income (loss)		(17,271	)		511			5,008
Total comprehensive income (loss)	$	(82,058	)	$	(12,189	)	$	18,525

The accompanying notes are an integral part of these statements.

37

Consolidated Statements of Cash Flows

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Operating activities:
Net income (loss)	$	(64,787	)	$	(12,700	)	$	13,517
Less: Income (loss) from discontinued operations	$	(58,142	)	$	(1,892	)	$	2,234
Net income (loss) from continuing operations	$	(6,645	)	$	(10,808	)	$	11,283
Adjustments to reconcile net income (loss) from continuing operations to net cash (used in) provided by operations:
Depreciation and amortization		14,455			12,066			11,091
Stock-based compensation		2,656			2,256			1,047
Loss (gain) on sale and disposal of assets		(1,554	)		3,669			323
Deferred income tax benefit		—			(5,019	)		(566	)
Loss (gain) on derivative transactions		(133	)		661			(946	)
Foreign currency transaction gain		(127	)		(706	)		(4	)
Excess tax benefit from stock-based compensation		—			(86	)		(1,001	)
Other		—			—			97
Change in operating assets and liabilities:
Trade receivables		(20,111	)		24,615			(6,704	)
Inventories		7,754			(9,572	)		(5,657	)
Prepaid expenses		(1,429	)		305			(193	)
Accounts payable and accrued liabilities		(15,987	)		6,222			4,651
Taxes payable		4,222			(8,453	)		1,831
Insurance recovery receivable		8,000			(8,000	)		—
Other		(2,281	)		(8,529	)		3,960
Net cash flow (used in) provided by operating activities — continuing operations		(11,180	)		(1,379	)		19,212
Investing activities:
Acquisitions of property, plant and equipment, net		(5,379	)		(38,505	)		(32,782	)
Proceeds from sale of dextrose product line		2,857			—			—
Other		725			(75	)		(45	)
Net cash used in investing activities — continuing operations		(1,797	)		(38,580	)		(32,827	)
Financing activities:
Proceeds from revolving line of credit		55,931			67,529			54,454
Payments on revolving line of credit		(24,500	)		(41,052	)		(45,255	)
Proceeds from long-term debt		—			—			4,200
Payments on long-term debt		(7,750	)		(27,625	)		(4,249	)
Exercise of stock options		—			352			2,572
Payment of loan fees		(1,574	)		(63	)		(836	)
Excess tax benefit from stock-based compensation		—			86			1,001
Increase (decrease) in cash overdraft		(1,301	)		(3,609	)		3,950
Payment of dividends		(2,026	)		(2,449	)		(2,163	)
Net proceeds from issuance of common stock		—			46,844			—
Other		(263	)		(54	)		(59	)
Net cash provided by (used in) financing activities — continuing operations		18,517			39,959			13,615
Cash flows from discontinued operations:
Net cash from (used in) provided by operating activities		(1,713	)		9,901			3,317
Net cash used in investing activities		(290	)		(1,249	)		(1,951	)
Net cash provided by (used in) financing activities		2,044			(7,722	)		(2,366	)
Effect of exchange rate changes on cash and cash equivalents		59			(396	)		61
Net cash provided by (used in) discontinued operations		100			534			(939	)
Increase (decrease) in cash and cash equivalents		5,640			534			(939	)
Cash and cash equivalents of continuing operations , beginning of year		—			—			—
Cash balance of discontinued operations, beginning of year		534			—			939
Cash and cash equivalents, end of year		6,174			534			—
Less: cash balance of discontinued operations, end of year		634			534			—
Cash and cash equivalents of continuing operations, end of year	$	5,540		$	—		$	—
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	3,596		$	2,609		$	3,588
Income taxes (refunds), net	$	(10,300	)	$	9,742		$	4,719
Noncash investing and financing activities:
Capital lease obligations incurred for certain equipment leases	$	—		$	1,150		$	72

The accompanying notes are an integral part of these statements.

38

Consolidated Statements of Shareholders’ Equity

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Common stock
Balance, beginning of year	$	13,127		$	11,099		$	10,909
Exercise of stock options		—			28			190
Issuance of restricted stock, net		30			—			—
Issuance of common stock		—			2,000			—
Balance, end of year		13,157			13,127			11,099
Additional paid-in capital
Balance, beginning of year		91,443			43,902			39,427
Exercise of stock options		—			322			2,382
Tax benefit of stock option exercises		(256	)		86			1,001
Stock based compensation		2,672			2,289			1,092
Issuance of restricted stock, net		(30	)		—			—
Issuance of common stock		—			44,844			—
Balance, end of year		93,829			91,443			43,902
Retained earnings
Balance, beginning of year		74,092			89,486			78,131
Cumulative effect of a change in accounting principle		—			(118	)		—
		74,092			89,368			78,131
Net income (loss)		(64,787	)		(12,700	)		13,517
Dividends declared		(1,352	)		(2,576	)		(2,162	)
Other		(9	)		—			—
Balance, end of year		7,944			74,092			89,486
Treasury stock		(32,757	)		(32,757	)		(32,757	)
Accumulated other comprehensive income (loss):
Balance, beginning of year		14,457			13,946			11,742
Change in fair value of derivatives, net of tax		2,047			(3,261	)		(2,641	)
Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax		(2,998	)		2,568			1,550
Foreign currency translation adjustments		(7,635	)		2,041			4,690
(Increase) decrease in postretirement liabilities, net of tax		(8,685	)		(837	)		1,409
Adoption of SFAS No. 158 recognition provision, net of tax		—			—			(2,804	)
Balance, end of year		(2,814	)		14,457			13,946
Total shareholders’ equity	$	79,359		$	160,362		$	125,676

The accompanying notes are an integral part of these statements.

39

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 and ethanol. 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 two segments. The Industrial Ingredients and Food Ingredients segments, located in the U.S., are broad categories of end-market users. The Industrial Ingredients segment is a supplier of chemically modified specialty starches to the paper and packaging industries and a producer of ethanol. The Food Ingredients segment is a developer and manufacturer of specialty starches and dextrins to the food manufacturing and food service industries. See Note 18 for financial information regarding the Company’s business segments.

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 primarily related to discontinued operations in order to conform to the current year presentation.

Discontinued Operations

In August 2009, the Company committed to a plan to exit from the business conducted by the Company’s Australia/New Zealand Operations. On August 13, 2009, the Company announced that it had entered into a contract to sell Penford New Zealand Limited and on September 2, 2009, the Company completed that sale. The financial results of the Australia/New Zealand Operations have been classified as discontinued operations in the consolidated statement of operations for all periods presented. The assets and liabilities of this business are reflected as assets and liabilities of discontinued operations in the consolidated balance sheets for all periods presented. See Note 2 for additional information regarding discontinued operations. Unless otherwise indicated, amounts and discussions in these notes pertain to the Company’s continuing operations.

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.

40

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 2009, 2008 and 2007 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:
2009	$	550	$	(2	)	$	57		$	605
2008	$	725	$	(154	)	$	(21	)	$	550
2007	$	800	$	379		$	(454	)	$	725

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

Approximately 52%, 70% and 76% of the Company’s sales in fiscal 2009, 2008 and 2007, respectively, 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 thefirst-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, 2009, 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, which includes depreciation of assets under capital leases, of $13.8 million, $11.7 million and $10.7 million was recorded in fiscal years 2009, 2008 and 2007, respectively. For income tax purposes, the Company generally uses accelerated depreciation methods.

Interest is capitalized on major construction projects while in progress. In fiscal 2008 and 2007, the Company capitalized $1.1 million and $0.4 million, respectively, in interest costs related to the ethanol facility construction. No interest was capitalized in fiscal 2009.

41

Income Taxes

The provision for income taxes includes federal and state 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. The Company has not provided deferred taxes related to its investment in foreign subsidiaries, which are classified as discontinued operations, as it does not expect future distributions from the subsidiaries or repayments of permanent advances.

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 is 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 $4.3 million, $5.7 million and $5.1 million in fiscal 2009, 2008 and 2007, 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. Statement of Operations amounts are translated at average exchange rates prevailing during the year. For fiscal years 2009 and 2008, the net foreign currency transaction gain (loss) recognized in earnings was $0.1 million and $(0.2) million. For fiscal year 2007, the net foreign currency transaction gain (loss) was not material.

Derivatives

Penford uses derivative instruments to manage the exposures associated with commodity prices, interest rates and energy costs. The derivative instruments aremarked-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.

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitments are recognized in current earnings as a component of cost of goods sold. 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 (loss), 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.

Significant Customer and Export Sales

The Company has several relatively large customers in each business segment. The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 21% of the Company’s net sales for fiscal year 2009. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 11%, 15% and 17% of the Company’s net sales for fiscal years 2009, 2008 and 2007, respectively. Domtar, Inc. and Eco-Energy are customers of the Company’s Industrial Ingredients — North America business. Export sales accounted for approximately 8%, 11% and 12% of consolidated sales in fiscal 2009, 2008 and 2007, respectively.

42

Stock-Based Compensation

The Company recognizes 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 11 for further detail.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the first quarter of fiscal 2010, all references made to U.S. generally accepted accounting principles will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter U.S. generally accepted accounting principles, the Company does not believe that the adoption of SFAS 168 will have any impact on its consolidated financial statements.

In April 2009, the FASB issued FSPSFAS 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPSFAS 107-1 and APB28-1”). This FSP requires additional disclosures regarding financial instruments for interim reporting periods of publicly traded companies. This FSP requires that disclosures provide quantitative and qualitative information on fair value estimates for all financial instruments not measured on the balance sheet at fair value, when practicable, with the exception of certain financial instruments listed in SFAS 107. This FSP is effective prospectively for interim reporting periods ending after June 15, 2009. The Company will adopt FSP in the first quarter of fiscal 2010. The Company is currently evaluating the disclosure requirements of this standard.

In December 2008, the FASB issued Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requires additional disclosures on a prospective basis about assets held in an employer’s defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The Company is currently evaluating the disclosure requirements of this standard.

In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (“EITF”)03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSPEITF 03-6-1”). FSPEITF 03-6-1 addresses whether unvested share-based payment awards that contain rights to nonforfeitable dividends are participating securities prior to vesting and, therefore, included in the computation of earnings per share. FSPEITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The Company is currently evaluating the impact of adopting FSPEITF 03-6-1 on the Company’s consolidated financial statements.

In February 2008, the FASB issued FASB Staff PositionNo. 157-2, “Effective Date of SFAS No. 157”(“FSP 157-2”), which delays the effective date of SFAS 157, “Fair Value Measurements,” for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company). The Company is continuing to evaluate the impact of adopting these provisions in fiscal 2010.

43

Note 2 — Discontinued Operations

As described in Note 1, the Company committed to a plan to exit from the business conducted by its Australia/New Zealand Operations. As a result, the Company’s financial statements reflect the Australia/New Zealand Operations as discontinued operations for all periods presented in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144). The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. The following tables summarize the financial information for discontinued operations related to the Australia/New Zealand Operations. Interest expense on debt directly attributable to the Australia/New Zealand Operations has been allocated to discontinued operations.

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Sales	$	78,030		$	107,532		$	105,244
Income (loss) from operations	$	(57,754	)	$	(5,145	)	$	3,098
Interest expense		973			993			1,998
Other non-operating income, net		1,734			2,675			1,957
Income (loss) from discontinued operations before taxes		(56,993	)		(3,463	)		3,057
Income tax expense (benefit)		1,149			(1,571	)		823
Income (loss) from discontinued operations, net of tax	$	(58,142	)	$	(1,892	)	$	2,234

	August 31,
	2009		2008
	(Dollars in thousands)
ASSETS
Cash	$	634	$	534
Trade accounts receivable, net		14,482		16,671
Inventories		22,129		23,454
Prepaid expenses		595		648
Income tax receivable		190		137
Other		456		601
Current assets of discontinued operations		38,486		42,045
Property, plant and equipment, net		3,799		41,738
Goodwill and other intangible assets, net		—		18,317
Other assets		428		1,567
Non-current assets of discontinued operations		4,227		61,622
Total assets of discontinued operations	$	42,713	$	103,667
LIABILITIES
Short-term borrowings	$	3,327	$	676
Accounts payable		10,697		16,935
Accrued liabilities		2,004		2,192
Current liabilities of discontinued operations		16,028		19,803
Other liabilities		2,851		4,646
Non-current liabilities of discontinued operations		2,851		4,646
Total liabilities of discontinued operations	$	18,879	$	24,449

44

During the first half of fiscal 2009, the Company experienced a worsening demand outlook and a decline in its sales and operating income, as well as a reduction in its expected future cash flows. Penford also experienced a sustained, significant decline in its stock price. In addition, the Company’s Australia/New Zealand Operations continued to report lower quarterly margins and operating income than previous years. Given these impairment indictors, the Company determined that there was a potential for its goodwill to be impaired.

Accordingly, the Company performed an interim impairment evaluation of its goodwill as of February 28, 2009. In order to identify potential impairments, Penford compared the fair value of the Australia/New Zealand reporting unit with its carrying amount, including goodwill. Penford then compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of the reporting units was determined using the discounted cash flow method, the implied market capitalization method and the guideline company method. As a result of this interim assessment, the Company recorded a non-cash goodwill impairment charge of $13.8 million representing all of the goodwill allocated to the Australia/New Zealand reporting unit.

The financial statements have been prepared in compliance with the provisions of SFAS 144. Accordingly, as of August 31, 2009, the Company stated the long-lived assets of the Australia/New Zealand Operations at the lower of their carrying values or fair value less costs to sell. The Company estimated fair value of the long-lived assets based on executed sales agreements for substantially all of its Australian operating assets and the completed sale price of Penford New Zealand. The Company recorded a non-cash asset impairment charge of $33.0 million in the fourth quarter of fiscal 2009 to reduce the carrying value of the long-lived assets of the Australia/New Zealand Operations to estimated fair value less costs to sell. The estimates used in determining the impairment charge, including, but not limited to, the sales proceeds,and costs to sell, are subject to significant risks and uncertainties. The actual asset impairment may be materially more or less than the charge recorded at August 31, 2009. Estimates of fair value will be evaluated each quarter and revisions to the estimates will be recorded as adjustments to the carrying values of the long-lived assets.

The Company’s Australian operations reported a tax loss for fiscal years 2009 and 2008. Australian tax law provides for an unlimited carryforward period for net operating losses but does not allow losses to be carried back to previous tax years. Due to the classification of the Australia operations as discontinued and the uncertainty related to generating sufficient future taxable income in Australia, the Company currently believes that it is more likely than not that the net deferred tax benefit will not be realized. At August 31, 2009, the Company has recorded a valuation allowance against the entire Australian net deferred tax asset. The significant components of deferred tax assets and liabilities are as follows:

	August 31,
	2009			2008
	(Dollars in thousands)
Deferred tax assets:
Net operating loss carryforward	$	13,660		$	1,730
Other		4,064			1,609
Total deferred tax assets		17,724			3,339
Deferred tax liabilities:
Depreciation		2,736			1,978
Net deferred tax assets		14,988			1,361
Less valuation allowance		(14,614	)		—
Net deferred tax asset	$	374		$	1,361

Short-term borrowings consist of an Australian revolving grain 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 U.S. $33.7 million at the exchange rate at August 31, 2009. This facility 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. This facility has expired and the balance was paid in September 2009.

45

Note 3 — Cedar Rapids Flood

On June 12, 2008, the Company’s Cedar Rapids, Iowa plant, operated by the Industrial Ingredients — North America business, was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas.

During fiscal years 2009 and 2008, the Company recorded flood restoration costs of $45.6 million, and insurance recoveries of $27.2 million, as follows:

	Year Ended August 31
	2009			2008			Total
	(Dollars in thousands)
Repairs of buildings and equipment	$	6,346		$	17,082		$	23,428
Site remediation		348			5,389			5,737
Write off of inventory and fixed assets		71			4,016			4,087
Continuing costs during production shut down		—			9,771			9,771
Other		820			1,797			2,617
		7,585			38,055			45,640
Insurance recoveries		(16,694	)		(10,500	)		(27,194	)
Net flood costs (recoveries)	$	(9,109	)	$	27,555		$	18,446

The direct costs of the flood in the table above do not include lost profits from the interruption of the business.

Site remediation began as soon as the flood waters subsided. The Company engaged outside contractors to pump water and clean and sanitize the facilities and grounds of the manufacturing facility prior to access by Company personnel. The buildings and equipment in Cedar Rapids sustained damages due to the severe flooding.

The carrying value of fixed assets and related equipment spare parts destroyed in the flooding were written off, totaling $2.5 million. The write-off of inventory, totaling $1.5 million, included the cost of raw materials,work-in-process and finished goods inventories that were not able to be used or sold due to flood damage, the establishment of reserves for estimated recoverability losses, and the costs of disposal, including freight, for removal of damaged inventory.

During the suspension of production in the fourth quarter of fiscal 2008, the Company incurred costs for wages, salaries and related payroll costs, depreciation, pension expense, insurance, rental costs and other items which continued regardless of the level of production. Employees normally engaged in the production of industrial starch were utilized in theclean-up and repairs of the facility and equipment, assessment and recovery of inventories and other aspects of the site restoration. These expenses totaled $9.8 million.

Insurance recoveries

During the fiscal years 2009 and 2008, the Company recognized insurance recoveries of $16.7 million and $10.5 million, respectively. These recoveries have been recorded as an offset to the losses caused by the flooding. The Company is seeking additional payments from its insurers for damages arising from the flooding and has filed a lawsuit against the insurers. The Company is unable to estimate the amount or timing of future recoveries, if any. The amount ultimately recovered from the Company’s insurers may be materially more or less than the Company’s direct costs of the flood. See Note 20.

Note 4 — Inventories

Components of inventory are as follows:

	August 31,
	2009		2008
	(Dollars in thousands)
Raw materials	$	7,265	$	16,853
Work in progress		1,921		990
Finished goods		8,969		8,903
Total inventories	$	18,155	$	26,746

46

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 futures are not purchased or sold for trading or speculative purposes and are designated as hedges. See Note 14.

Note 5 — Property and equipment

Components of property and equipment are as follows:

	August 31,
	2009			2008
	(Dollars in thousands)
Land	$	10,229		$	9,480
Plant and equipment		321,356			318,251
Construction in progress		2,214			5,539
		333,799			333,270
Accumulated depreciation		(214,750	)		(205,076	)
Net property and equipment	$	119,049		$	128,194

The above table includes approximately $0.9 million and $1.2 million of equipment under capital leases for fiscal years 2009 and 2008, respectively.

During fiscal years 2008 and 2007, the Company capitalized $1.1 million and $0.4 million, respectively of interest costs related to the construction of the Company’s ethanol facility in Cedar Rapids, Iowa.

Note 6 — Goodwill and other intangible assets

The Company’s goodwill of $7.6 million and $7.7 million at August 31, 2009 and 2008, respectively, represents the excess of acquisition costs over the fair value of the net assets of Penford Australia which was allocated to the Company’s Food Ingredients — North America reporting unit. The decrease in goodwill is due to the change in the foreign currency exchange rates.

The Company tests its goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. During the first half of fiscal 2009, the Company experienced a worsening demand outlook and a decline in its sales and operating income, as well as a reduction in its expected future cash flows. In addition, Penford experienced a sustained, significant decline in its stock price. Given these impairment indictors, the Company determined that there was a potential for its goodwill to be impaired. Accordingly, the Company performed an interim impairment evaluation of its goodwill as of February 28, 2009. 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 the discounted cash flow method, the implied market capitalization method and the guideline company method. The estimated fair value of the Food Ingredients — North America reporting unit exceeded the carrying value of its net assets and the Company determined that no adjustment to the recorded amount of goodwill of this reporting unit was required.

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, 2009. 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, 2009				August 31, 2008
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Intangible assets:
Patents	$	1,768	$	1,287	$	1,768	$	1,214

47

Amortization expense related to intangible assets was $0.1 million in each of fiscal years 2009, 2008 and 2007. The estimated aggregate annual amortization expense for patents is not significant for the next five fiscal years, 2010 through 2014.

Note 7 — Debt

	August 31,
	2009		2008
	(Dollars in thousands)
Secured credit agreements — revolving loans, 5.02% weighted average interest rate at August 31, 2009	$	45,610	$	13,086
Secured credit agreements — term loans, 5.12% weighted average interest rate at August 31, 2009		5,375		9,375
Secured credit agreements — capital expansion loans, 5.12% weighted average interest rate at August 31, 2009		40,451		44,200
Capital lease obligations		946		1,228
		92,382		67,889
Less: current portion and short-term borrowings		21,241		8,029
Long-term debt and capital lease obligations	$	71,141	$	59,860

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 (now Bank of America); 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 Company’s obligations under the 2007 Agreement are secured by substantially all of the Company’s U.S. assets.

Effective July 8, 2008, the 2007 Agreement was amended to temporarily adjust the calculation of selected covenant formulas for the costs of flood damage at the Company’s Cedar Rapids, Iowa facility and the associated property damage and business interruption insurance recoveries.

On February 26, 2009, the Company entered into a second amendment to the 2007 Agreement (the “Second Amendment”). The Second Amendment adjusted certain covenants and other provisions in the 2007 Agreement to provide additional relief from the financial impact of the flood at the Company’s Cedar Rapids, Iowa facility. Pursuant to the Second Amendment, Bank of Montreal became the Administrative agent under the 2007 Agreement, replacing Harris N.A.

On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third amendment to the 2007 Agreement (the “Third Amendment”). The Third Amendment, among other things, amended financial covenants effective as of May 31, 2009, reduced the amounts that the Company may borrow under the various facilities available under the 2007 Agreement, shortened the maturity dates on borrowed funds, increased applicable interest rates, eliminated the Company’s ability to declare dividends on its stock, and adjusted the amortization schedule and provisions regulating mandatory prepayments, additional indebtedness, subsidiary company support, and reporting requirements.

The Third Amendment adjusted the final maturity date of the term loan available under the 2007 Agreement to December 15, 2009, and the maturity date of the revolver and the capital expansion loans to November 30, 2010. Beginning on September 30, 2009, the Company must repay the capital expansion loans in quarterly installments of $1.0 million through December 31, 2009, and $2.0 million thereafter. In addition to the quarterly installments on the capital expansion loan, a one-time payment of $9.625 million is due on December 15, 2009. Any remaining amount due on the capital expansion loans and revolver is due at final maturity.

The Third Amendment adjusted the financial covenants in the 2007 Agreement, as amended, effective May 31, 2009. The Company must maintain a minimum EBITDA (as defined in the Third Amendment), tangible net worth and fixed charge coverage ratio each fiscal quarter in accordance with the revisions contained in the Third Amendment. The Third Amendment also provides that the Company may not declare or pay dividends on, or make

48

any other distributions in respect of, its common stock. Annual capital expenditures are limited to $8 million. The availability on the $60 million revolver facility is limited to $52.5 million unless the Company obtains the approval of the lenders holding more than 50% of the U.S. Dollar equivalent of the sum of the total borrowing and unused commitments under the 2007 Agreement.

In connection with the Third Amendment, the Company paid additional arrangement and commitment fees to its lenders of $1.0 million. The amortization of these and existing deferred loan fees over the shortened maturity of the Company’s debt will increase annual interest expense by an estimated $1.1 million. The Third Amendment increases the maximum commitment fee for undrawn balances by 25 basis points and the maximum London Interbank Offering Rates (“LIBOR”) margin payable on outstanding debt by 150 basis points to 5.00%. The incremental annual interest expense from these pricing changes and the revised amortization schedule is estimated at $1.2 million. Interest rates under the 2007 Agreement are based on either the LIBOR in Australia or the United States, or the prime rate, depending on the selection of available borrowing options under the 2007 Agreement.

At August 31, 2009, the Company had $45.6 million and $5.4 million outstanding, respectively, under the revolving credit and term loan portions of its credit facility. In addition, the Company had $40.4 million outstanding under its capital expansion credit facility on August 31, 2009. The Company’s ability to borrow under its revolving credit facility is subject to the Company’s compliance with, and is limited by, the covenants in the 2007 Agreement, as amended. Pursuant to the Third Amendment, the availability of the revolving credit facility has been limited to $52.5 million unless the Company obtains the approval of the lenders holding more than 50% of the U.S. Dollar equivalent of the sum of the total borrowing and unused commitments under the 2007 Agreement. The Company was in compliance with the covenants in the 2007 Agreement, as amended, as of August 31, 2009.

As of August 31, 2009, 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 $23.2 million at 4.18% and $5.8 million at 5.08%, plus the applicable margin under the 2007 Agreement.

As of August 31, 2009, Penford borrowed $5.4 million in term loans, $40.5 million under the capital expansion facility and $45.6 million under its revolving line of credit, of which U.S. $10.1 million was denominated in Australian dollars. The maturities of debt existing at August 31, 2009 for the fiscal years beginning with fiscal 2010 are as follows (dollars in thousands):

2010		21,241
2011		70,673
2012		232
2013		236
	$	92,382

Included in the Company’s long-term debt at August 31, 2009 is $0.9 million of capital lease obligations, of which $0.2 million is considered current portion of long-term debt. See Note 10.

Note 8 — Stockholders’ Equity

Common Stock

	Year Ended August 31,
	2009		2008		2007
Common shares outstanding
Balance, beginning of year		13,127,369		11,098,739		10,909,153
Exercise of stock options		—		28,630		189,586
Issuance of restricted stock, net		30,018		—		—
Issuance of stock		—		2,000,000		—
Balance, end of year		13,157,387		13,127,369		11,098,739

49

In December 2007, the Company completed a public offering of common stock resulting in the issuance of 2,000,000 common shares at a price to the public of $25.00 per share. The Company received approximately $47.2 million of net proceeds (net of $2.8 million of expenses related to the offering) from the sale of the shares. This transaction increased the recorded amounts of common stock by $2.0 million and increased additional paid-in capital by $45.2 million in the second quarter of fiscal 2008. The Company incurred approximately $0.4 million in professional fees related to the common stock issuance.

Change in Accounting Principle

The Company adopted the provisions of Emerging Issues Task Force (“EITF”) IssueNo. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” effective September 1, 2007. EITF IssueNo. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. Upon adoption, the Company recognized a $0.1 million charge to beginning retained earnings as a cumulative effect of a change in accounting principle.

Note 9 — Accumulated Other Comprehensive Income (Loss)

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

	August 31,
	2009			2008
	(Dollars in thousands)
Net unrealized loss on derivatives, net of tax	$	(2,256	)	$	(1,304	)
Foreign currency translation adjustments		12,490			20,124
Minimum pension liability and SFAS No. 158, net of tax		(13,048	)		(4,363	)
	$	(2,814	)	$	14,457

Deferred taxes have not been recognized on foreign currency translation adjustments as the sale of the Company’s foreign subsidiaries is expected to result in no tax benefit or expense. See Note 2.

Note 10 — 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. In fiscal 2009, rental expense under operating leases was $6.8 million, net of sublease rental income of approximately $0.3 million. In fiscal 2008, rental expense under operating leases was $6.9 million, net of sublease rental income of approximately $0.4 million, and fiscal year 2007 was $6.6 million. Future minimum lease payments for fiscal years beginning with fiscal year 2010 for noncancelable operating and capital leases having initial lease terms of more than one year are as follows (dollars in thousands):

				Operating Leases
	Capital			Minimum Lease
	Leases			Payments		Sublease			Net
2010	$	287		$	5,292	$	(175	)	$	5,117
2011		269			3,581		—			3,581
2012		251			2,908		—			2,908
2013		244			2,227		—			2,227
2014		—			1,521		—			1,521
Thereafter		—			1,494		—			1,494
Total minimum lease payments		1,051		$	17,023	$	(175	)	$	16,848
Less: amounts representing interest		(105	)
Net minimum lease payments	$	946

50

Note 11 — 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. As of August 31, 2009, 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 191,403. In addition, any shares previously granted under the Penford Corporation 1994 Stock Option 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 2006 Incentive Plan generally vest ratably over four years and expire seven years from the date of grant.

General Option Information

A summary of the stock option activity for the year ended August 31, 2009 are as follows:

								Weighted
						Weighted		Average
						Average		Remaining		Aggregate
	Number of			Option Price		Exercise		Term (in		Intrinsic
	Shares			Range		Price		Years)		Value
Outstanding Balance, August 31, 2008		1,376,347		$	7.59 — 21.73	$	15.17
Granted		—
Exercised		—
Cancelled		(12,576	)		9.28 — 17.07		13.10
Outstanding Balance, August 31, 2009		1,363,771			7.59 — 21.73		15.18		4.29	$	—
Options Exercisable at August 31, 2009		994,771		$	7.59 — 21.73	$	14.50		3.82	$	—

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $6.44 per share as of August 31, 2009 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 2008 and 2007 was $291,800 and $2,761,400, respectively. No stock options were exercised in fiscal year 2009.

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 arein-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:

	2008			2007
Expected volatility		41	%		45	%
Expected life (years)		5.5			5.5
Interest rate (percent)		2.8-3.7			4.5-4.9
Dividend yield		1.0	%		1.5	%
Weighted-average fair values	$	6.65		$	6.88

51

No stock options were granted in fiscal year 2009. As of August 31, 2009, the Company had $1.3 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.

Restricted Stock Awards

The grant date fair value of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The following table summarizes the restricted stock award activity for the twelve months ended August 31, 2009 as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Nonvested at August 31, 2008		109,365		$	34.15
Granted		13,832			10.12
Vested		(33,615	)		31.84
Cancelled		—			—
Nonvested at August 31, 2009		89,582		$	31.31

On January 1, 2009 and 2008, each non-employee director received an award of 1,976 and 781 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day, which will vest one year from grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.

As of August 31, 2009, the Company had $0.9 million of unrecognized compensation costs related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.4 years.

Compensation Expense

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. The following table summarizes the total stock-based compensation cost under SFAS No. 123R for fiscal years 2009, 2008 and 2007 and the effect on the Company’s consolidated statements of operations (dollars in thousands):

	2009		2008		2007
Cost of sales	$	307	$	176	$	103
Operating expenses		2,300		2,055		926
Research and development expenses		49		25		18
Income (loss) from discontinued operations		16		33		45
Total stock-based compensation expense	$	2,672	$	2,289	$	1,092
Tax benefit		1,015		870		415
Total stock-based compensation expense, net of tax	$	1,657	$	1,419	$	677

Note 12 — 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.

52

Obligations and Funded Status

The following represents information summarizing the Company’s pension and other postretirement benefit plans. A measurement date of August 31, 2009 was used for all plans.

	Year Ended August 31,
	Pension Benefits						Other Benefits
	2009			2008			2009			2008
	(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at September 1	$	38,289		$	39,241		$	13,532		$	13,410
Service cost		1,420			1,485			259			310
Interest cost		2,581			2,491			913			854
Plan participants’ contributions		—			—			147			159
Amendments		—			—			—			—
Actuarial (gain) loss		(507	)		188			2,423			506
Change in assumptions		3,950			(3,273	)		1,748			(1,062	)
Benefits paid		(1,872	)		(1,843	)		(677	)		(645	)
Benefit obligation at August 31	$	43,861		$	38,289		$	18,345		$	13,532
Change in plan assets:
Fair value of plan assets at September 1	$	30,835		$	33,627		$	—		$	—
Actual return on plan assets		(4,279	)		(2,491	)		—			—
Company contributions		1,134			1,542			530			486
Plan participants’ contributions		—			—			147			159
Benefits paid		(1,872	)		(1,843	)		(677	)		(645	)
Fair value of the plan assets at August 31	$	25,818		$	30,835		$	—		$	—
Funded status:
Net liability — Plan assets less than projected benefit obligation	$	(18,043	)	$	(7,454	)	$	(18,345	)	$	(13,532	)
Recognized as:
Current accrued benefit liability	$	—		$	—		$	(667	)	$	(670	)
Non-current accrued benefit liability		(18,043	)		(7,454	)		(17,678	)		(12,862	)
Net Amount Recognized	$	(18,043	)	$	(7,454	)	$	(18,345	)	$	(13,532	)

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

	August 31, 2009					August 31, 2008
	Pension		Other			Pension		Other
	Benefits		Benefits			Benefits		Benefits
Unrecognized prior service cost (credit)	$	2,017	$	(763	)	$	2,270	$	(915	)
Unrecognized net actuarial loss (gain)		15,632		4,160			5,694		(11	)
Total	$	17,649	$	3,397		$	7,964	$	(926	)

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,
	2009		2008
Projected benefit obligation	$	43,861	$	38,289
Accumulated benefit obligation	$	41,427	$	35,509
Fair value of plan assets	$	25,818	$	30,835

53

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
	2009			2008			2007			2009			2008			2007
	(Dollars in thousands)
Components of net periodic benefit cost
Service cost	$	1,420		$	1,485		$	1,467		$	259		$	310		$	309
Interest cost		2,581			2,491			2,207			913			854			818
Expected return on plan assets		(2,428	)		(2,652	)		(2,379	)		—			—			—
Amortization of prior service cost		253			253			191			(152	)		(152	)		(152	)
Amortization of actuarial loss		211			50			190			—			—			—
Benefit cost	$	2,037		$	1,627		$	1,676		$	1,020		$	1,012		$	975

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
	2009			2008			2007			2009			2008			2007
Weighted-average assumptions used to calculate net periodic expense:
Discount rate		6.92	%		6.51	%		6.15	%		6.92	%		6.51	%		6.15	%
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		5.98	%		6.92	%		6.51	%		5.98	%		6.92	%		6.51	%
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 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 2009. A decrease (increase) of 50 basis points in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.1 million based on the assets of the plans at August 31, 2009. The expected return on plan assets to be used in calculating fiscal 2010 pension expense is 8.0%.

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

54

expected to match the timing and amounts of projected future benefit payments. The discount rates to determine net periodic expense used in 2007 (6.15%), 2008 (6.51%) and 2009 (6.92%) reflect the change in bond yields over the last several years. During fiscal 2009, bond yields declined and Penford has lowered the discount rate for calculating its benefit obligations at August 31, 2009, as well as net periodic expense for fiscal 2010, to 5.98%. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.2 million and other postretirement benefit expense by $0.1 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 $1.2 million in fiscal 2010. Amortization of unrecognized net losses is expected to increase net postretirement health care expense by approximately $0.3 million in fiscal 2010.

	2009			2008			2007
Assumed health care cost trend rates:
Current health care trend assumption		9.00	%		9.00	%		9.00	%
Ultimate health care trend rate		4.75	%		4.75	%		4.75	%
Year ultimate health care trend is reached		2016			2016			2015

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 2009	$	190	$	(127	)
Effect on postretirement accumulated benefit obligation as of August 31, 2009	$	2,805	$	(2,303	)

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			2009			2008
U.S. equities		55	%		57	%		55	%
International equities		15	%		16	%		14	%
Fixed income investments		25	%		24	%		25	%
Real estate		5	%		3	%		6	%

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 $1.1 million, $1.5 million and $1.0 million in fiscal 2009, 2008 and 2007, respectively. The Company estimates that the minimum pension plan funding contribution during fiscal 2010 will be approximately $1.8 million.

55

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 2010 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)
2010	$	2.0	$	0.7
2011		2.1		0.7
2012		2.1		0.8
2013		2.3		0.9
2014		2.3		0.9
2015-2019	$	13.0	$	5.6

Note 13 — 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 $935,000, $986,000 and $920,000 for fiscal years 2009, 2008 and 2007, 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 $231,000, $209,000 and $180,000 was accrued in fiscal years 2009, 2008 and 2007, 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 2009, 2008 and 2007, the net periodic pension expense accrued for this plan was $342,000, $330,000 and $320,000, respectively. The accrued obligation related to the plan was $4.3 million and $4.2 million for fiscal years 2009 and 2008, 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 employee contributions, was $4.3 million, $4.1 million and $4.4 million in fiscal years 2009, 2008 and 2007, respectively.

Note 14 — Fair Value Measurements and Derivative Instruments

Effective September 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for its measurement, and expands disclosures concerning fair value measurements. The Company adopted the provisions of SFAS 157 with respect to financial assets and liabilities. In February 2008, the FASB issued Staff PositionNo. 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. The major categories of assets and liabilities that are measured at fair value, for which the Company has not applied the provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142 and the initial recognition of asset retirement obligations. The adoption of SFAS 157 did not have a

56

material impact on the Company’s results of operations, financial position or cash flow, but did result in additional disclosures.

SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in Penford’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources outside the reporting entity. Unobservable inputs are inputs that reflect Penford’s own assumptions based on market data and on assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three levels of inputs that may be used to measure fair value are:

•  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

•  Level 2 inputs are other than quoted prices included within Level 1 that are observable for assets and liabilities such as (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, or (3) inputs that are derived principally or corroborated by observable market date by correlation or other means.

•  Level 3 inputs are unobservable inputs to the valuation methodology for the assets or liabilities.

Presented below are the fair values of the Company’s financial instruments at August 31, 2009.

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Current assets (Other Current Assets):
Commodity derivatives(1)	$	430	$	—	$	—	$	430
Current liabilities (Accrued Liabilities):
Interest rate swaps	$	—	$	1,829	$	—	$	1,829

(1) As allowed by FSPFIN 39-1, “Amendment of FASB Interpretation No. 39,” commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $0.4 million at August 31, 2009.

For assets that are measured using quoted market prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held. Interest rate swaps are valued based on inputs that are derived principally from or corroborated by observable market data, primarily market rates for Eurodollar futures, and adjusted for credit risk.

Derivative Instruments

Effective December 1, 2008, the Company adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives for using derivative instruments and hedging activities, method of accounting for such instruments under SFAS 133 and its related interpretations, the effect of derivative instruments and related hedged items on financial position, results of operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments and their gains and losses.

57

Interest Rate Swap Agreements

The Company uses interest rate swaps to manage the variability of interest payments associated with its floating-rate long-term debt obligations. The interest payable on the long-term debt effectively becomes fixed at a certain rate and reduces the impact of future interest rate changes on future interest expense. As of August 31, 2009, the Company had three interest rate swaps which fixed the interest payable on $23.2 million of long-term debt at 4.18% and on $5.8 million of long-term debt at 5.08%, plus the applicable margin under the 2007 Agreement, as amended. The notional amounts, interest rate reset dates, underlying benchmark rates and interest payment dates match the terms of the long-term debt. The Company has designated the swap agreements as cash flow hedges and accounts for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The unrealized losses on the interest rate swaps are included in accumulated other comprehensive income (loss). The periodic settlements on the swaps are recorded as interest expense.

Foreign Currency Contracts

In fiscal year 2009, the Company’s Food Ingredients — North America business purchased certain raw materials in a foreign currency, the Czech koruna (CZK), the monetary unit of the Czech Republic. In order to manage the variability in forecasted cash flows due to the foreign currency risk associated with settlement of accounts payable denominated in CZK, the Company purchased foreign currency forward contracts. The Company designated these contracts as cash flow hedges and accounted for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” To the extent the amounts and timing of the forecasted cash flows and the forward contracts continued to match, the unrealized losses on the foreign currency purchase contracts were included in accumulated other comprehensive income (loss). The gain or loss on the contracts was recorded in cost of sales at the time the inventory is sold. At August 31, 2009, the Company had no outstanding foreign currency contracts.

Commodity Contracts

The Company uses forward contracts and readily marketable exchange-traded futures on corn and natural gas to manage the price risk of those inputs to its manufacturing process. The Company has designated these instruments as hedges and accounts for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitmentsand/or inventory are recognized in current earnings as a component of cost of sales. 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 (loss), 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 sales in the period when the finished goods produced from the hedged item are sold. 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.

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 futures are not purchased or sold for trading or speculative purposes and are designated as hedges. 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 and firm corn purchase contracts. Hedged transactions are expected to occur within 12 months of the time the hedge is established.

As of August 31, 2009, Penford had purchased corn positions of 3.1 million bushels, of which 2.8 million bushels represented equivalent firm priced starch sales contract volume, resulting in an open position of 0.3 million bushels.

58

As of August 31, 2009, the Company had the following outstanding forward contracts, futures contracts and interest rate swaps:

Corn Futures	1,795,000 Bushels
Natural Gas Futures	360,000 mmbtu (millions of British thermal units)
Interest Rate Swap Contracts	29,000,000 US Dollars (notional Amount)

In addition, at August 31, 2009, the Company had natural gas purchase commitments of 147,900 mmbtu.

The fair values of the Company’s financial assets, liabilities, and statement of derivative positions in the scope of SFAS 161 as of August 31, 2009, were as follows:

	Fair Value of Derivative Instruments
	as of August 31, 2009
	2009 Asset Derivatives			2009 Liability Derivatives
Derivatives Designated as	Balance Sheet			Balance Sheet
Hedging Instruments Under SFAS 133	Location	Fair Value		Location	Fair Value
	(Dollars in thousands)
Cash Flow Hedges:
Corn Futures	Other Current Assets	$	82	Other Current Assets	$	(916	)
Natural Gas Futures	Other Current Assets		—	Other Current Assets		(1,301	)
Interest Rate Contracts	Other Current Assets		—	Accrued Liabilities		(1,829	)
Foreign Exchange Contracts	Other Current Assets		—	Accrued Liabilities		—
Total Cash Flow Hedges			82			(4,046	)
Fair Value Hedges:
Corn Futures	Other Current Assets		1,303	Other Current Assets		(174	)
Total Fair Value Hedges			1,303			(174	)
Total Derivatives Designated as Hedging Instruments under SFAS 133		$	1,385		$	(4,220	)

	The Effect of Derivative Instruments on the Statement of Financial Performance
	for the Year Ended August 31, 2009
				Location of	Amount of			Location of	Amount of
	Amount of			Gain or (Loss)	Gain or (Loss)			Gain or (Loss)	Gain or (Loss)
	Gain or (Loss)			Reclassified	Reclassified			Recognized in	Recognized
	Recognized			from Accum	from Accum			Income on	in Income on
	in OCI			OCI into Income	OCI into Income			Derivative	Derivative
	(Effective			(Effective	(Effective			(Ineffective	(Ineffective
Derivatives in SFAS 133 Cash Flow Hedging Relationships	Portion)			Portion)	Portion)			Portion)	Portion)
				Income Statement				Income Statement
				Location				Location
	(Dollars in thousands)
Cash Flow Hedging Relationships:
Corn Futures	$	(2,077	)	Cost of sales	$	654		Cost of sales	$	(559	)
Natural Gas Futures		(12,603	)	Cost of sales		(6,618	)	Cost of sales		—
Interest Rate Contracts		(1,648	)	Interest expense		(736	)	Interest Expense		—
Foreign Exchange Contracts		(74	)	Cost of sales		(49	)	Cost of sales		—
Total	$	(16,402	)		$	(6,749	)		$	(559	)

59

At August 31, 2009, the amount of deferred losses in other comprehensive income (loss) related to derivative transactions which the Company expects to recognize in pretax income in fiscal 2010 is approximately $3.0 million.

	The Effect of Derivative Instruments on the Statement of Financial Performance
	for the Year Ended August 31, 2009
	Location of	Amount of		Hedged	Location of	Location of
	Gain/(Loss)	Gain/(Loss)		Item in	Gain/(Loss)	Gain/(Loss)
	Recognized	Recognized		SFAS 133	Recognized	Recognized
	in Income	in Income		Fair	in Income	in Income
	(Loss) on	(Loss) on		Value Hedge	on Related	on Related
Derivatives in SFAS 133 Fair Value Hedging Relationships	Derivative	Derivative		Relationships	Hedged Item	Hedged Item
	Income Statement				Income Statement
	Location				Location
	(Dollars in thousands)
Fair Value Hedge Relationships:
Corn Futures	Cost of sales		—	Firm Commitments/ Inventory	Cost of sales	$	390
	��
Total			—			$	390

Note 15 — Other Non-operating Income (Expense)

Other non-operating income (expense) consists of the following:

	Year Ended August 31,
	2009		2008			2007
	(Dollars in thousands)
Gain on sale of dextrose product line	$	1,562	$	—		$	—
Gain (loss) on foreign currency transactions		127		(217	)		4
Gain on cash flow hedges		—		2,890			—
Other		226		87			(316	)
	$	1,915	$	2,760		$	(312	)

In the second quarter of fiscal 2009, the Company’s Food Ingredients — North America business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.

The Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.

As discussed in Note 3, in June 2008, the flooding of the Cedar Rapids manufacturing facility shut down production for most of the quarter. The Company had derivative instruments designated as cash flow hedges to reduce the price volatility of corn and natural gas used in the production of starch. Due to the June 12, 2008 flood event, derivative positions held as of that date that were forecasted to hedge exposures during the period the Cedar Rapids plant was shut down were no longer deemed to be effective cash flow hedges. The $2.9 million gain, representing ineffectiveness on these instruments, was reclassified from other comprehensive income and recognized as a component of non-operating income.

Note 16 — Income Taxes

All of the Company’s income (loss) from continuing operations before income taxes of $(10.1) million, $(16.1) million and $16.4 million is related to the Company’s domestic operations. See Note 2 for foreign income (loss) before income taxes and foreign tax expense. All of the Company’s foreign operations are included in the discontinued operations presentation in the consolidated financial statements.

60

Income tax expense (benefit) on continuing operations consists of the following:

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Current:
Federal	$	(3,305	)	$	(157	)	$	4,665
State		(141	)		(121	)		1,053
		(3,446	)		(278	)		5,718
Deferred:
Federal		291			(4,365	)		78
State		(291	)		(654	)		(644	)
		0			(5,019	)		(566	)
Total	$	(3,446	)	$	(5,297	)	$	5,152

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Comprehensive tax expense (benefit) allocable to:
Income (loss) before taxes	$	(3,446	)	$	(5,297	)	$	5,152
Discontinued operations		1,149			(1,571	)		823
Comprehensive income (loss)		(5,906	)		(938	)		194
	$	(8,203	)	$	(7,806	)	$	6,169

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

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Statutory tax rate		35	%		35	%		35	%
Statutory tax on income	$	(3,532	)	$	(5,637	)	$	5,752
State taxes, net of federal benefit		(221	)		(500	)		81
Domestic production exclusion benefit		—			—			(202	)
Tax credits, including research and development credits		(181	)		(2	)		(240	)
Extraterritorial income exclusion benefit		—			—			(5	)
Other		488			842			(234	)
Total provision (benefit)	$	(3,446	)	$	(5,297	)	$	5,152

61

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

	August 31,
	2009		2008
	(Dollars in thousands)
Deferred tax assets:
Alternative minimum tax credit	$	3,117	$	252
Postretirement benefits		15,209		9,874
Provisions for accrued expenses		2,185		2,190
Stock-based compensation		2,168		1,567
Deferred flood losses		3,297		6,758
Net operating loss carryforward		899		85
Other		3,230		2,301
Total deferred tax assets		30,105		23,027
Deferred tax liabilities:
Depreciation		19,324		16,325
Other		808		1,754
Total deferred tax liabilities		20,132		18,079
Net deferred tax assets	$	9,973	$	4,948
Recognized as:
Other current assets	$	1,696	$	16
Deferred tax asset		8,277		4,932
Total net deferred tax assets	$	9,973	$	4,948

At August 31, 2009, in the United States, the Company had U.S. federal alternative minimum tax credit carryforwards of $3.1 million, a research and development carryforward of $0.7 million, a net operating loss carryback of $20.3 million, and a net operating loss carryforward of $0.2 million. The Company also has U.S. state net operating loss carrybacks of $2.5 million and net operating loss carryforwards of $9.8 million with various expiration dates. A valuation allowance has not been provided on the net deferred tax assets as the Company expects to recover its tax assets through future taxable income. The Company’s losses in fiscal years 2008 and 2009, which are not expected to recur, were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the Company’s manufacturing facility for most of the fourth quarter of fiscal 2008. See Note 3.

Deferred tax liabilities or assets are not recognized on temporary differences from undistributed earnings of foreign subsidiaries and from foreign exchange translation gains or losses on permanent advances to foreign subsidiaries as the Company does not expect that the divestiture of its foreign subsidiaries will result in any tax benefit or expense.

In May 2007, the Company settled outstanding IRS audits of the Company’s U.S. federal income tax returns for the fiscal years ended August 31, 2001 and 2002. 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.

FIN 48

Prior to fiscal 2008, in evaluating the exposures connected with the various tax filing positions, the Company established an accrual when, despite management’s belief that the Company’s tax return positions were supportable, management believed that certain positions may be successfully challenged and a loss was probable. When facts and circumstances changed, these accruals were adjusted.

62

On September 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties and transition issues. FIN 48 contains a two-step process for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained on audit, including related appeals or litigation. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48 on September 1, 2007, Penford reclassified $0.9 million of previously recorded tax reserves from a current income tax liability to a long-term liability for unrecognized tax benefits. The Company reclassified unrecognized tax benefits for which it does not anticipate the payment or receipt of cash within one year. The Company historically classified unrecognized tax benefits in current income taxes payable. There was no change in retained earnings resulting from the adoption of FIN 48. The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense (benefit) in the consolidated statements of operations. Since the company has a U.S. net operating loss in the current year which is expected to be carried forward in part to future years, $0.2 million of the FIN 48 liability has been netted against the deferred tax asset. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):

	2009			2008
Unrecognized tax benefits at beginning of year	$	698		$	936
Additions for tax positions related to prior years		531			158
Reductions for tax positions related to prior years		(4	)		(147	)
Additions for tax positions related to current year		233			153
Reductions due to lapse of applicable statute of limitations		(162	)		(402	)
Settlements with taxing authorities		(15	)		—
Unrecognized tax benefits at end of year	$	1,281		$	698

As of August 31, 2009, the Company had $0.2 million of accrued interest and penalties included in the long-term tax liability. During fiscal 2009, the Company increased the liability for unrecognized tax benefits by $39,000 for interest and $40,000 for penalties. At August 31, 2009, the liability for unrecognized tax benefits was $1.3 million, all of which, if recognized, would favorably impact the effective tax rate.

The Company files tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. With few exceptions, the Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2006.

63

Note 17 — Earnings per Common Share

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

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands, except
	share and per share data)
Income (loss) from continuing operations	$	(6,645	)	$	(10,808	)	$	11,283
Income (loss) from discontinued operations, net of tax		(58,142	)		(1,892	)		2,234
Net income (loss)	$	(64,787	)	$	(12,700	)	$	13,517
Weighted average common shares outstanding		11,170,493			10,565,432			8,986,413
Net effect of dilutive stock options		—			—			296,712
Weighted average common shares and equivalents outstanding, assuming dilution		11,170,493			10,565,432			9,283,125
Earnings (loss) per common share:
Basic earnings (loss) per share from continuing operations	$	(0.59	)	$	(1.02	)	$	1.25
Basic earnings (loss) per share from discontinued operations		(5.21	)		(0.18	)		0.25
Basic earnings (loss) per share	$	(5.80	)	$	(1.20	)	$	1.50
Diluted earnings (loss) per share from continuing operations	$	(0.59	)	$	(1.02	)	$	1.22
Diluted earnings (loss) per share from discontinued operations		(5.21	)		(0.18	)		0.24
Diluted earnings (loss) per share	$	(5.80	)	$	(1.20	)	$	1.46

Weighted-average restricted stock awards of 90,868 and 88,363 for fiscal years 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive. Weighted-average stock options omitted from the denominator of the earnings per share calculation because they were antidilutive were 1,371,701, 1,036,474 and 57,159 for 2009, 2008 and 2007, respectively.

Note 18 — Segment Reporting

Financial information from continuing operations for the Company’s two segments, Industrial Ingredients — North America and Food Ingredients — North America, is presented below. 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 and ethanol industries. The Food Ingredients segment produces specialty starches for food applications. A third 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 accounting policies of the reportable segments are the same as those described in Note 1.

64

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Sales
Industrial ingredients — North America	$	186,526		$	173,320		$	194,957
Food ingredients — North America		69,030			66,261			62,987
	$	255,556		$	239,581		$	257,944
Depreciation and amortization
Industrial ingredients — North America	$	11,081		$	9,073		$	7,830
Food ingredients — North America		2,759			2,693			2,944
Corporate and other		615			300			317
	$	14,455		$	12,066		$	11,091
Income (loss) from continuing operations
Industrial ingredients — North America	$	(11,154	)	$	(16,541	)	$	19,251
Food ingredients — North America		13,512			10,178			10,684
Corporate and other		(8,807	)		(9,413	)		(9,475	)
	$	(6,449	)	$	(15,776	)	$	20,460
Capital expenditures, net
Industrial ingredients — North America	$	3,683		$	35,415		$	30,492
Food ingredients — North America		1,696			3,090			2,477
Corporate and other		—			—			(187	)
	$	5,379		$	38,505		$	32,782

	August 31,
	2009		2008
	(Dollars in thousands)
Total assets
Industrial ingredients — North America	$	139,609	$	141,618
Food ingredients — North America		37,387		42,826
Discontinued operations		42,713		103,667
Corporate and other		38,536		32,322
	$	258,245	$	320,433

Assets of discontinued operations are located in Australia and New Zealand. All other assets are located in the United States.

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

	Year Ended August 31,
	2009			2008			2007
	(Dollars in thousands)
Income (loss) from operations	$	(6,449	)	$	(15,776	)	$	20,460
Interest expense		(5,557	)		(3,089	)		(3,713	)
Other non-operating income (expense)		1,915			2,760			(312	)
Income (loss) from continuing operations before income taxes	$	(10,091	)	$	(16,105	)	$	16,435

65

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

	Year Ended August 31,
	2009		2008		2007
	(Dollars in thousands)
United States	$	234,081	$	213,702	$	226,498
Canada		5,137		11,839		12,654
Mexico		9,086		7,777		10,358
Other		7,252		6,263		8,434
Non-United States		21,475		25,879		31,446
Total	$	255,556	$	239,581	$	257,944

Note 19 — Quarterly Financial Data (Unaudited)

	First			Second			Third			Fourth
Fiscal 2009	Quarter			Quarter			Quarter			Quarter			Total
	(Dollars in thousands, except per share data)
Sales	$	59,584		$	63,939		$	61,276		$	70,757		$	255,556
Cost of sales		54,179			66,519			61,262			61,305			243,265
Gross margin		5,405			(2,580	)		14			9,452			12,291
Income (loss) from continuing operations		563			(4,205	)		(4,342	)		1,339			(6,645	)
Income (loss) from discontinued operations		(932	)		(17,973	)		(3,072	)		(36,165	)		(58,142	)
Net income (loss)		(369	)		(22,178	)		(7,414	)		(34,826	)		(64,787	)
Earnings (loss) per common share:
Basic — continuing operations	$	0.05		$	(0.38	)	$	(0.39	)	$	0.12		$	(0.59	)
Basic — discontinued operations		(0.08	)		(1.61	)		(0.27	)		(3.24	)		(5.21	)
Basic earnings (loss) per share	$	(0.03	)	$	(1.99	)	$	(0.66	)	$	(3.12	)	$	(5.80	)
Diluted — continuing operations	$	0.05		$	(0.38	)	$	(0.39	)	$	0.12		$	(0.59	)
Diluted — discontinued operations		(0.08	)		(1.61	)		(0.27	)		(3.24	)		(5.21	)
Diluted earnings (loss) per share	$	(0.03	)	$	(1.99	)	$	(0.66	)	$	(3.12	)	$	(5.80	)
Dividends declared	$	0.06		$	0.06		$	—		$	—		$	0.12

	First			Second			Third			Fourth
Fiscal 2008	Quarter			Quarter			Quarter			Quarter			Total
	(Dollars in thousands, except per share data)
Sales	$	65,286		$	64,718		$	78,000		$	31,577		$	239,581
Cost of sales		52,175			53,129			63,704			25,985			194,993
Gross margin		13,111			11,589			14,296			5,592			44,588
Income (loss) from continuing operations		3,232			3,339			3,027			(20,406	)		(10,808	)
Income (loss) from discontinued operations		(68	)		(1,024	)		(323	)		(477	)		(1,892	)
Net income (loss)		3,164			2,315			2,704			(20,883	)		(12,700	)
Earnings (loss) per common share:
Basic — continuing operations	$	0.36		$	0.31		$	0.27		$	(1.83	)	$	(1.02	)
Basic — discontinued operations		(0.01	)		(0.10	)		(0.03	)		(0.04	)		(0.18	)
Basic earnings (loss) per share	$	0.35		$	0.21		$	0.24		$	(1.87	)	$	(1.20	)
Diluted — continuing operations	$	0.34		$	0.30		$	0.27		$	(1.83	)	$	(1.02	)
Diluted — discontinued operations		(0.01	)		(0.09	)		(0.03	)		(0.04	)		(0.18	)
Diluted earnings (loss) per share	$	0.33		$	0.21		$	0.24		$	(1.87	)	$	(1.20	)
Dividends declared	$	0.06		$	0.06		$	0.06		$	0.06		$	0.24

66

In the fourth quarter of fiscal 2009, the Company recorded a $33.0 million non-cash asset impairment charge related to discontinued operations. See Note 2.

In the fourth quarter of fiscal 2008, the Company’s Cedar Rapids, Iowa plant was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. See Note 3 for further detail. The Company recorded flood related costs of approximately $27.6 million, net of insurance recoveries of $10.5 million in fiscal year 2008. In fiscal year 2009, loss from continuing operations included $9.1 million of net insurance proceeds related to the Cedar Rapids flooding in fiscal 2008. The following table summarizes the flood related costs and insurance proceeds recorded by quarter for fiscal year 2009.

	First			Second			Third			Fourth
Fiscal 2009	Quarter			Quarter			Quarter			Quarter		Total
	(Dollars in thousands)
Flood related costs	$	6,786		$	631		$	168		$	—	$	7,585
Insurance proceeds		(11,020	)		(4,430	)		(1,244	)		—		(16,694	)
Insurance proceeds, net of flood related costs	$	(4,234	)	$	(3,799	)	$	(1,076	)	$	—	$	(9,109	)

Note 20 — Legal Proceedings

On January 23, 2009 the Company filed suit in the U.S. District Court for the Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company, related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. The Company seeks additional payments from the insurers of more than $30 million for property damage, time element and various other exposures due to costs and losses incurred as a result of the flood. The Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

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 Penford Products’ alleged breach of an agreement to supply Graphic with certain starch products during the 2004 strike affecting the Penford Products Cedar Rapids, Iowa plant. The case was tried before a judge of the above-noted court in October 2007. On May 5, 2008, the Company received notice the trial judge ruled in favor of Graphic and found Penford Products liable for alleged damages in the amount of $3,242,302, as well as pre-and post-judgment interest and costs that were alleged to be in an amount in excess of $810,000. After evaluating its options, the Company elected to satisfy the judgment and waive appeal rights by paying Graphic the sum of $3,810,837. The Company had previously reserved $2.4 million against this matter in fiscal 2007.

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.

Note 21 — Guarantee

In the second quarter of fiscal 2009, Penford Corporation entered into an agreement with a supplier of grain to the Company’s subsidiary company, Penford New Zealand Limited. Pursuant to this agreement, the Company guaranteed the trade payable obligations of Penford New Zealand arising from the purchase of grain from this supplier up to a limit of 9.0 million New Zealand Dollars or the New Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The guarantee continued for the period during which the supplier sold grain to Penford New Zealand. As of August 31, 2009, the outstanding payable balance related to this guarantee was 2.3 million New Zealand Dollars. This guarantee was terminated on September 2, 2009 in connection with the sale of the Company’s New Zealand subsidiary. See Note 2.

67

Note 22 — Subsequent Events

Penford has evaluated subsequent events, as defined by SFAS 165, through the date that the financial statements were issued on November 13, 2009.

On November 11, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, executed two asset sale agreements with unrelated parties for the sale of substantially all of its operating assets. These transactions are not expected to be completed for several weeks. The completion and timing of these transactions remain subject to risks and uncertainties.

68

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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Penford Corporation’s internal control over financial reporting as of August 31, 2009, 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 13, 2009 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Denver, Colorado

November 13, 2009

69

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, 2009, 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, 2009, 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, 2009 and 2008, 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, 2009 of Penford Corporation and our report dated November 13, 2009 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Denver, Colorado

November 13, 2009

70

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 ActRule 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 to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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, 2009 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, 2009.

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 2010 Annual Meeting of Shareholders (the “2010 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

71

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 regulations. The Code is available on the Company’s Internet site atewww.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 2010 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 2010 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, 2009. The Company has no equity compensation plans that have not been approved by security holders.

	(a)				(c)
	Number of		(b)		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)		688,675	$	14.28		—
2006 Long-Term Incentive Plan(2)		586,750	$	16.97		191,403
Stock Option Plan for Non-Employee Directors(3)		88,346	$	10.40		—
Total		1,363,771	$	15.19		191,403

(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)	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. Does not include 89,582 issued but unvested shares of common stock at August 31, 2009.
(3)	This plan has been terminated and no additional options will be granted under this plan.

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 2010 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 2010 Proxy Statement and is incorporated herein by reference.

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 2010 Proxy Statement and is incorporated herein by reference.

72

PART IV

Item 15.   Exhibits and Financial Statement Schedules.

(a)(1)Financial Statements

The consolidated balance sheets as of August 31, 2009 and 2008 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, 2009 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 75.

(b) Exhibits

See Item 15(a)(3), above.

(c) Financial Statement Schedules

None

73

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 13th day of November 2009.

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 13, 2009.

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

74

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 FileNo. 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 FileNo. 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 29, 2008 (filed as an exhibit to Registrant’s FileNo. 000-11488, Current Report onForm 8-K filed October 31, 2008)
	10	.1	Penford Corporation Deferred Compensation Plan, amended and restated as of January 1, 2005 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)*
	10	.2	Form of Change of Control Agreement and Annexes between Penford Corporation and Messrs. Kortemeyer, Cordier, Lawlor, Malkoski and Randall and certain other key employees (a representative copy of these agreements is filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended February 28, 2006, filed April 10, 2006)*
	10	.3	Form of Amendment to Change in Control Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended November 30, 2008, filed January 9, 2009)*
	10	.4	Penford Corporation 1993 Non-Employee Director Restricted Stock Plan (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended November 30, 1993)*
	10	.5	Penford Corporation 1994 Stock Option Plan as amended and restated as of January 8, 2002 (filed as an exhibit to Registrant’s FileNo. 000-11488, Proxy Statement filed with the Commission on January 18, 2002)*
	10	.6	Penford Corporation Stock Option Plan for Non-Employee Directors (filed as a exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 1996, filed July 15, 1996)*
	10	.7	Penford Corporation 2006 Long-Term Incentive Plan (incorporated by reference to Appendix A to Registrant’s FileNo. 000-11488, Proxy Statement filed December 20, 2005)*
	10	.8	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 FileNo. 000-11488, Current Report onForm 8-K filed February 21, 2006)*
	10	.9	Form of Penford Corporation 2006 Long-Term Incentive Plan Restricted Stock Award Notice and Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)*
	10	.10	Second Amended and Restated Credit Agreement dated as of October 5, 2006 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated October 5, 2006, filed October 10, 2006)
	10	.11	First Amendment to Second Amended and Restated Credit Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 2008, filed July 10, 2008)
	10	.12	Second Amendment to Second Amended and Restated Credit Agreement, Resignation of Agent and Appointment of Successor Agent dated as of February 26, 2009 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated February 26, 2009, filed March 3, 2009)
	10	.13	Third Amendment to Second Amended and Restated Credit Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 2009, filed July 10, 2009)
	10	.14	Director Special Assignments Policy dated August 26, 2005 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated August 26, 2005, filed September 1, 2005)*
	10	.15	Non-Employee Director Compensation Term Sheet (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)*
	21		Subsidiaries of the Registrant

75

Exhibit No.			Item
	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

76