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                                                                    EXHIBIT 10.3

                           EMPLOYEE BENEFITS AGREEMENT


        This Agreement is made on July 31, 1998 (the "Effective Date")
between PENFORD CORPORATION, a Washington corporation (previously known as
PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington
corporation (previously known as Edward Mendell Co., Inc.) ("Penwest").

                                    RECITALS

        WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;

        WHEREAS, to effect the separation of its pharmaceutical division,
Penford intends as of a date certain (the "Distribution Date") to distribute to
its shareholders, in a pro-rata distribution of a dividend (the "Distribution")
all shares of Penwest common stock held by Penford;

        WHEREAS, the current employees of Penwest are participants in some of
Penford's employee benefit plans and certain employees of Penford are expected
to become employees of Penwest as of the Distribution Date;

        WHEREAS, this Agreement sets forth the employment and employee benefit
plan arrangements that will apply to Penwest's current employees, and any other
employees who are hired by Penwest prior to the Distribution Date (all of such
employees being referred to herein as the "Penwest Employees"); and

        WHEREAS, the Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of [____________] between Penford and Penwest
(the "Separation and Distribution Agreement");

        NOW THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:

  SECTION 1 - TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER PENFORD PLANS

        1.1 Termination of Coverage of Penwest Employees under Certain Penford
Plans

        Effective as of the Distribution Date, Penwest Employees shall cease to
be eligible to actively participate in the following employee benefit plans
offered by Penford:

        (a) the Penford Corporation Supplemental Executive Retirement Plan (the
"Penford SERP");



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        (b) the Penford Corporation Deferred Compensation Plan;

        (c) certain Penford welfare plans (consisting of basic life insurance,
accidental death and dismemberment insurance, supplemental life insurance,
long-term disability, supplemental disability, business travel accident
insurance and employee assistance plan, as set forth in Exhibit 1 (the "Penford
Welfare Plans");

        (d) the Penford Corporation Savings and Stock Ownership Plan (the
"Penford 401(k) Plan");

        1.2 Termination of Coverage For Penwest Employees Under the Penford
Corporation Health and Flex Plans

        Pursuant to prior agreement between Penford and Penwest and appropriate
Board action by Penford, effective midnight on December 31, 1997, Penwest
Employees ceased to be covered under the Penford health and cafeteria plans, as
set forth in exhibit 2 ("Penford Health/Flex Plans") and Penford has no further
obligation to cover the Penwest Employees under such plans; provided, however,
that nothing in this section 1.2 is intended to abrogate, discontinue or
terminate stop loss coverage under the policy maintained by Penford to the
extent that it applies to medical claims and expenses resulting from injury or
illness to Penwest employees incurred prior to January 1, 1998, but for which no
claim was filed, or is filed, until after December 31, 1997.

        1.3 Termination of Coverage of Penwest Employees Under the Penford
Corporation Retirement Plan

        (a) Effective as of the Distribution Date, Penford shall amend the
retirement plan sponsored by Penford (the "Penford Retirement Plan") to freeze
all benefits accrued in the Penford Retirement Plan for all Penwest Employees
and to permit the distribution of the accrued benefits of Penwest employees.
After the Distribution Date and the receipt of approval by the Internal Revenue
Service of such amendments, a Penwest Employee may elect to receive his or her
fully vested interest under the Penford Retirement Plan in the form of a lump
sum cash payment or an annuity.

        (b) It is contemplated that Penford will amend the Penford Retirement
Plan to provide enhanced pension plan benefits to certain older participants who
were Penwest Employees and are identified by the Penford Retirement Plan
Administrative Committee ("Administrative Committee"), provided (i) that such
participants shall not be deemed to continue to accrue any benefits under the
Penford Retirement Plan as a result of such pension enhancement and (ii) that
the amount of any such enhancements is to be determined solely in the discretion
of the Administrative Committee.



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        1.4 Notice to Administrators and Insurers

        To the extent required, Penford agrees to inform, on or prior to the
Distribution Date, all relevant third party administrators and insurance
carriers, that coverage of the Penwest Employees in the Penford Welfare Plans
ceases as of the Distribution Date.

        1.5 Amendment and Termination of Plans

        Nothing in this Agreement, including without limitation the agreement of
Penford and Penwest to maintain employee benefit plans or to make contributions
to such plans for any period, shall be construed as a limitation of the right of
Penford or Penwest to amend or terminate one or more of such plans in accordance
with the terms of this Agreement and applicable law.


        SECTION 2 - ESTABLISHMENT OF PENWEST EMPLOYEE BENEFIT PLANS

        2.1 Establishment of Penwest Savings and Stock Ownership Plan

        (a) Effective as of the Distribution Date, Penwest will cease to be a
participating Employer under the Penford 401(k) Plan and Penwest Employees will
cease to accrue any benefits under such plan. Effective on the Distribution
Date, Penwest will establish a 401(k) retirement plan (the "Penwest 401(k)
Plan") substantially the same in all material features to the Penford 401(k)
Plan as of that date.

        (b) As soon as practicable following the Distribution Date and the
establishment of the Penwest 401(k) Plan, Penford shall direct the trustee of
the Penford 401(k) Plan to transfer to the trustee of the Penwest 401(k) Plan
(which shall accept such transfer) all assets (including, but not limited to,
loans) and liabilities in the individual accounts of Penwest Employees in the
Penford 401(k) Plan ("First Transfer of Account Balances"). Accounts in the name
of such Penwest Employees will be maintained under the Penford 401(k) Plan
(although these accounts will show a $0 account balance following the First
Transfer of Account Balances) until the allocation of profit sharing
contributions to the accounts of participants in the Penford 401(k) Plan for the
fiscal year ending 8/31/98 ("Profit Sharing Allocation"). Following the Profit
Sharing Allocation, Penford shall direct the trustee of the Penford 401(k) Plan
to transfer to the trustee of the Penwest 401(k) Plan (which shall accept such
transfer) all remaining assets and liabilities in the individual accounts of
Penwest Employees in the Penford 401(k) Plan ("Second Transfer of Account
Balances").

        (c) As of the date of the First Transfer of Account Balances, Penwest
and the Penwest 401(k) Plan shall assume all liabilities for all accrued
benefits under the Penford 401(k) Plan for the Penwest Employees, and the
Penford 401(k) Plan shall be relieved of all liabilities for such benefits,
except for claims relating to account balances resulting from the Profit Sharing
Allocation. As of the date of the Second Transfer of Account Balances, Penwest
and the Penwest 401(k) Plan shall assume all liabilities for accrued benefits
under the Penford 401(k) 



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Plan for the Penwest Employees, including claims relating to account balances
resulting from the Profit Sharing Allocation, and the Penford 401(k) Plan shall
be relieved of all such liabilities..

        (d) The Penwest 401(k) Plan shall provide the following:

                1. that Penwest employees shall participate in the Penwest
401(k) Plan to the extent that they were eligible to participate in the Penford
401(k) Plan immediately prior to the Distribution Date, and shall receive credit
for eligibility, vesting, and benefit accrual service for all service credited
for such purposes under the Penford 401(k) Plan;

                2. that the compensation paid by Penford to the Penwest
Employees that was recognized under the Penford 401(k) Plan shall be credited
for all applicable purposes under the Penwest 401(k) Plan; and

                3. that with respect to any amounts transferred from the Penford
401(k) Plan, the Penwest 401(k) Plan will preserve any rights and features
protected under Section 411(d)(6) of the Internal Revenue Code ("Code").

        2.2 Establishment of Penwest Supplemental Executive Retirement Plan and
Penwest Deferred Compensation Plan

        (a) Effective upon the Distribution Date, Penwest shall adopt, or cause
to be adopted, a supplemental executive retirement plan and a deferred
compensation plan (the "Penwest SERP and DC Plans") and establish a related
grantor trust (the "Penwest Rabbi Trust") to provide benefits to Tod R.
Hamachek, after he becomes an employee of Penwest, and to Jack V. Talley, Jr.
(the "Transferring Executives").

        (b) As of the Distribution Date, Penwest and the Penwest SERP and DC
Plans shall assume all liabilities for all accrued benefits under the Penford
SERP and Penford Corporation Deferred Compensation Plan for the Transferring
Executives.

        (c) As soon as practicable after receipt by Penford of (1) a copy of the
Penwest SERP and DC Plans and (2) certified resolutions of Penwest's Board of
Directors evidencing adoption of the Penwest SERP and DC Plans and the creation
of a the Penwest Rabbi Trust thereunder, Penford shall direct the trustees of
the Penford SERP and the Penford Corporation Deferred Compensation Plan to
transfer to the trustee of the Penwest SERP and DC Plans all accounts in the
Penford SERP and the Penford Corporation Deferred Compensation Plan of the
Transferring Executives.

        (d) Penwest and Penford shall take any and all action necessary to
ensure that participants in the Penwest SERP and DC Plans or the Penford SERP
and Penford Corporation Deferred Compensation Plan shall not suffer any adverse
federal income tax consequences as a result of the transfer of liabilities to
the Penwest SERP and DC Plans.

        (e) Effective as of or before the Distribution Date, Penwest shall
appoint Wells Fargo Bank as trustee under the Penwest Rabbi Trust and Penford
shall transfer, or cause to be 



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transferred by a comparable rabbi trust established by Penford, to the Penwest
Rabbi Trust, life insurance policies sufficient to cover the accrued benefits
(as of the date of transfer) of the Transferring Executives under the Penford
SERP and to cover the account balances of the Transferring Executives in the
Penford Corporation Deferred Compensation Plan ("Transferred Policies"). Penwest
will be responsible for any premium payments with respect to the Transferred
Policies which become due after the date of transfer of the Transferred
Policies.

        2.3 Penwest Welfare Plans

        Effective upon the Distribution Date, Penwest shall adopt, or cause to
be adopted, on a fully pooled basis, welfare plans ("Penwest Welfare Plans")
substantially identical in all material features to the corresponding plans
offered by Penford as of the Distribution Date to its salaried employees, and
set forth on Exhibit 1, as follows:

        (a) basic life insurance;

        (b) basic accidental death and dismemberment insurance;

        (c) supplemental life insurance;

        (d) business travel accident insurance;

        (e) employee assistance plan;

        (f) long term disability;

        (g) supplemental disability

        2.4 Penwest Health/Flex Plan

        Effective as of January 1, 1998, Penwest adopted the Penwest Health/Flex
Plans substantially identical in all material features to the Penford
Health/Flex Plans, which plans are listed on Exhibit 2. As of the Distribution
Date, Tod Hamachek will be covered under the Penwest Health/Flex Plans, and will
cease to be covered by the Penford Health/Flex Plans.

        2.5 COBRA

        Pursuant to prior agreement between Penford and Penwest, acknowledged
and ratified herein, effective January 1, 1998, Penwest assumed any and all
liability and responsibility for providing continuation of health care coverage
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to
any active Penwest Employee (and any qualified beneficiaries with respect to
such employee), whether or not such continuation requirements arose under the
Penford Health/Flex Plans, and Penford has no further obligation or liability
for any requirements to provide continuation of health care coverage to any
Penwest Employees.



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        2.6 Cooperation

        Penford and Penwest agree to provide each other with all records and
information necessary or useful to carry out their obligations under this
Agreement, and to cooperate in the filing of documents required by the transfer
of assets and liabilities described herein and to take any other actions
necessary or advisable to meet any statutory, regulatory or contractual
requirements under this Agreement.

                           SECTION 3 - INDEMNIFICATION

        3.1 Indemnification

        (a) Penwest agrees to indemnify and hold harmless Penford and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford Welfare Plans, the Penford SERP, the Penford Deferred Compensation Plan,
the Penford 401(k) Plan, and the Penford Health/Flex Plans (collectively
referred to as the "Penford Benefit Plans") (other than the determination of the
amount, if any, of claims and accrued benefits payable from such plans) with
respect to the Penwest Employees and from any liability relating to any
applicable taxes or penalties arising from the failure of the Penwest 401(k)
Plan, to be qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code") at the time of the asset transfer other than any failure
attributable to the terms or operation of the Penford 401(k) Plan prior to the
asset transfer.

        (b) Penford agrees to indemnify and hold harmless Penwest and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford benefit plans which are attributable to the determination of the amount
of any claims payable to Penwest Employees from the Penford Welfare Plans; the
determination of the accrued benefits to be transferred to the Penwest 401(k)
Plan; the determination of book reserves or salary deduction liabilities with
respect to the Penwest Employees under and from the Penford benefit plans; any
claims under the Penford benefit plans which are not attributable to Penwest
Employees and assumed by Penwest under this Agreement; and any liability
relating to the applicable taxes or penalties arising from the failure of the
Penwest 401(k) Plan to be qualified under Section 401(a) of the Code due to the
terms or operation of the Penford 401(k) Plan prior to the date the assets are
transferred.

        3.2 Health and Welfare Benefit Claims

        Except as provided in Section 3.1, Penwest agrees that it shall assume
and be solely responsible for the following:

        (a) all liabilities and obligations of Penford in connection with the
claims for benefits brought by or on behalf of Penwest Employees under the
Penford Welfare Plans and the Penford Health/Flex Plans, and Penford shall cease
to have any such liabilities or obligation related to such claims; and



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        (b) all liabilities and obligations of Penford in connection with claims
for post-employment health and welfare benefits (including but not limited to,
medical, dental, and vision benefits, severance pay, disability and life
insurance) made by or on behalf of Penwest Employees who retire or otherwise
terminate employment with Penwest after January 1, 1998.

                            SECTION 4 - MISCELLANEOUS

        4.1 Notices

        Notices hereunder shall be effective if given in writing and delivered
or mailed, postage prepaid, by registered or certified mail to:

                        Penford Corporation
                        777 - 108th Avenue NE
                        Suite 2390
                        Bellevue, WA  98004-5193
                        Attention:  Susan M. Iverson

            or to:

                        Penwest Pharmaceuticals Co.
                        2981 Route 22
                        Patterson, NY  12563-9970
                        Attention:  Jennifer L. Good

        4.2 Amendments; Waivers

        This Agreement may be amended or modified only in writing executed on
behalf of Penford and Penwest. No waiver shall operate to waive any further or
future act and no failure to object or forbearance shall operate as a waiver.

        4.3 No Third Party Beneficiary

        This Agreement is solely between Penford and Penwest, and nothing
herein, whether expressed or implied, shall confer any rights or remedies on any
employee of Penford or Penwest, any former employee of Penford, or any other
person.

        4.4 Entire Agreement

        This Agreement constitutes the sole and entire agreement and
understanding between the parties with respect to the matters covered hereby.
Any amendment, modification, or termination of this Agreement must be in writing
and must be signed by both parties.



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        4.5 Governing Law

        This Agreement shall be governed by the laws of the State of Washington,
except to the extent preempted by the Employee Retirement Income Security Act of
1974, as amended.

        4.6 Successors and Assigns This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto and
any attempt to effect any such assignment without such consent shall be void.

        IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their authorized representatives as of the Effective Date.

                                             PENFORD CORPORATION



                                             By: /s/ Jeffrey T. Cook
                                                --------------------------------
                                             Title: CFO
                                                   -----------------------------

                                             PENWEST PHARMACEUTICALS CO.



                                             By: /s/ Jennifer L. Good
                                                --------------------------------
                                             Title: VP Finance & CFO
                                                   -----------------------------



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                                    EXHIBIT 1

                              PENFORD WELFARE PLANS


UNUM INSURANCE COMPANY OF AMERICA

        -       Group Life (Basic Life Insurance) and Accidental Death and
                Dismemberment Insurance Plan

        -       Supplemental Life Plan

        -       Long-Term Disability Income Plan

        -       Group Travel Accident Insurance Plan


MANAGED HEALTH NETWORK

        -       Employee Assistance Program

MCG NORTHWEST

        -       Supplemental Disability Plan



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                                    EXHIBIT 2

                            PENFORD HEALTH/FLEX PLANS


BLUE CROSS BLUE SHIELD OF IOWA

        -       Medical Plan for Salaried Employees

ADVANCE PARADIGM

        -       Prescription Drug Plan

DELTA DENTAL - USA

        -       Dental Plan for Salaried Employees

VISION SERVICE PLAN

        -       Vision Plan for Salaried Employees

PENCHOICE FLEXIBLE BENEFITS PROGRAM

Pre-tax health plan premiums, medical reimbursement flexible spending account,
dependent care flexible spending



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