Fiscal 1997 was an important year for Penford Corporation. Our strategic investment initiatives of the past five years reached critical mass. All three Penford Corporation divisions ended the fiscal year operating at high levels, with strong prospects for future growth. Consequently, we have been able to announce a plan designed to permit our individual businesses to realize their full potential as two independent public entities.

After the completion of the 1997 fiscal year, we announced our intention to conduct an initial public offering (IPO) of Penwest Pharmaceuticals Co. and distribute its remaining shares to our shareholders - a process we hope to complete in the second calendar quarter of 1998, subject to satisfying certain conditions. The specialty chemical starch division, Penford Products Co., and the modified food starch ingredients division, Penford Food Ingredients Co., will form the second corporation, named Penford Corporation. We believe this plan will best enable our drug delivery and pharmaceutical excipient business, and our specialty chemical starch and food starch ingredients businesses to focus their management expertise and resources on their specialized markets. Ultimately, we believe this plan will enable the financial markets to value our businesses more accurately for the long-term benefit of our shareholders.

While the principal focus in recent months has been on the major milestone developments that have been achieved by Penwest Pharmaceuticals, it is important to note that Penford Products and Penford Food Ingredients have been steadily strengthening their businesses, as evidenced by a strong 1997 fiscal year. The Penford Products team has improved manufacturing efficiencies, developed strategic marketing programs and implemented focused sales initiatives. Our major market, the North American paper industry, is running at high levels, representing opportunities for Penford Products.

As a result of these initiatives, Penford Products today is a very different place than it was just a few years ago. Our Cedar Rapids chemical starch plant is an excellent example of this, operating at a level of technical quality and efficiency consistent with the best specialty chemical companies in North America. Penford Products is also focused on developing new, higher margin, value-added products, as well as making incremental improvements to its existing product portfolio. This includes our high margin, starch copolymer business, which evolved directly out of our customer-driven R&D strategy, and achieved 78% revenue growth in 1997. Penford Products' new orientation enhances its long-term growth prospects.

Penford Food Ingredients Co. (PFI) achieved its first full year of profitability in fiscal 1997. Here too the organization has come together with solid growth opportunities producing measurable results. We continue to build on our coated french fry base of business and recently secured a new national customer, Hardee's, which is using our coating product nationwide. Importantly, we continue to expand PFI's business beyond its potato starch expertise, giving us more flexibility in selecting carbohydrate-based raw materials for new, innovative products.

Penwest Pharmaceuticals Co. (PPC) continued to make significant progress throughout the year, capped off by the fourth quarter announcement that its collaborator, Mylan Pharmaceuticals Inc., filed an Abbreviated New Drug Application with the U.S. Food and Drug Administration for controlled release nifedipine tablets incorporating Penwest's TIMERx^® oral controlled release technology. This is the first regulatory filing in the U.S. for a product incorporating our TIMERx technology. Mylan's TIMERx-based nifedipine is the first generic version of the 30 mg dosage strength of Procardia XL. Procardia XL is used to treat angina and hypertension and, in 1997, is the ninth largest selling drug in the United States.

There have been two other major developments announced since the close of the 1997 fiscal year. Schering AG's Finnish division, Leiras OY, was granted Marketing Authorization in Finland for Cystrin CR, the controlled release version of the anti-incontinence drug, oxybutynin, that utilizes TIMERx technology. This marks our first regulatory approval for a TIMERx-based controlled release drug. We also formed a strategic alliance with Endo Pharmaceuticals, Inc. to combine technical and financial resources to develop and commercialize analgesic formulations utilizing TIMERx.

Our understanding of the interaction of pharmaceutical ingredients in oral dose tablets to achieve specific pharmaceutical manufacturing and pharmacological therapeutic outcomes has enabled Penwest Pharma-ceuticals to develop TIMERx, our controlled release technology. It has also led us to develop the industry's first new pharmaceutical excipient in almost forty years, ProSolv SMCCTM. ProSolv SMCC, which is patented, was developed specifically for the pharmaceutical industry to solve problems inherent with existing microcrystalline products that our marketing efforts had identified. As a result, ProSolv SMCC has gained fast and wide acceptance among our customers who are utilizing it to formulate new drugs currently under development.

As part of our IPO and spin-off plan, I will become Chairman and Chief Executive Officer of Penwest Pharmaceuticals Co. Upon completion of the Penwest Pharmaceuticals Co. IPO, Jeffrey Cook will become President and Chief Executive Officer of Penford Corporation. Victor Breed, who is Corporate Director of Finance, will become Chief Financial Officer of Penford Corporation. Jeff has been a key participant in Penford Corporation's strategic planning and an important contributor to what we have achieved. Under Jeff's leadership, Penford Corporation will have a solid future and will continue to serve its shareholders best by providing Penford Corporation's customers with innovative products and impeccable service.

At Penwest Pharmaceuticals Co., Jack Talley will continue as President and will assume the title of Chief Operating Officer. Jennifer Good, who was Penford Corporation's Director of Finance and Secretary until March 1997, will become PPC's Vice President, Finance and Chief Financial Officer. Edmund O. Belsheim, Jr., Penford Corporation's Vice President, Corporate Development and General Counsel, will move to PPC and will become PPC's Senior Vice President, Corporate Development and General Counsel. A registration statement for Penwest Pharma-ceuticals Co.'s initial public offering has been filed with the Securities and Exchange Commission. The prospectus, which describes PPC and the offering, is included in the materials being sent to you with this annual report.

Let me end on a personal note. My decision to go with Penwest Pharmaceuticals was not an easy one. I am, however, eagerly looking forward to the challenge of building a new company. PENWEST, LTD. (now Penford Corporation) was created by Univar Corp. in 1983 and on March 1, 1984 was spun-out as an independent public company with the express mission of creating long-term shareholder value. The stock at the close of the market on March 1, 1984 was $1.83 per share (adjusted for subsequent splits and stock dividends) and as of this writing is $40.50.

Our IPO and spin-off plan is yet another step in fulfilling our mission to you the shareholder. It casts aside the commonly accepted notion that revenue size is the critical measure in judging corporate success and integrity. We believe that highly focused, innovative businesses with attentive, independent boards of directors that ensure that managements are disciplined and motivated can best serve their customers' critical needs and thereby achieve superb long-term financial results. In the end, we believe this will translate into growing significant long-term shareholder wealth. None of this is new to Penford Cor-poration's board or management. It was the logic behind the genesis of PENWEST, LTD. fourteen years ago.

The board and management's focus on building long-term value is a legacy left by James H. Wiborg, Penford Corporation's retired director and Univar's former CEO, who developed the business strategy that led to Penford's creation. Penford Corporation's stock appreciation since inception represents a total gain of 1955% or 25% per year average growth rate. It is in this spirit that the boards and management of Penwest Pharmaceuticals Co. and Penford Corporation will be moving ahead with commit-ments to building and delivering enhanced long-term value for you our fellow shareholders.

Tod R. Hamachek,  President & Chief Executive Officer   December 5, 1997