<PAGE>   1

                                                                    EXHIBIT 10.1

                      SEPARATION AND DISTRIBUTION AGREEMENT


        THIS SEPARATION AND DISTRIBUTION AGREEMENT (the "Agreement") is made as
of the 31ST day of July, 1998 between PENFORD CORPORATION, a Washington
corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST
PHARMACEUTICALS CO., a Washington corporation ("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, it is the intention of Penford to contribute to Penwest certain
assets and to assign certain liabilities, to transfer certain technology to
Penwest and to make other arrangements to establish Penwest as a separate
enterprise for the purpose of engaging in research, development and marketing of
novel drug delivery technologies and sale and distribution of pharmaceutical
excipients (the "Pharmaceutical Business");

        WHEREAS, Penford and Penwest have determined that it is necessary and
desirable, on the terms and conditions contemplated hereby, for Penford to
distribute to shareholders of Penford the outstanding shares of Penwest Common
Stock held by Penford;

        WHEREAS, the Distribution (as defined below) is intended to qualify as a
tax-free spin-off under Sections 355 and 368 of the Code (as defined below);

        WHEREAS, Penford and Penwest have further determined that it is
necessary and desirable to set forth the principal corporate transactions
required to effect the Separation (as defined below) and the Distribution and to
set forth other agreements that will govern certain other matters following the
Separation and Distribution; and

        WHEREAS, Penford and Penwest are parties to that certain Separation
Agreement dated as of November 3, 1997 (the "Separation Agreement"), which shall
be canceled and superseded by this Separation and Distribution Agreement, with
effect as of November 3, 1997 (the "Effective Date");

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



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                                    ARTICLE I

                                   DEFINITIONS

        1.1 General. As used in this Agreement and the Exhibits hereto, the
following terms shall have the following meanings:

        Action: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.

        Affiliate: affiliate of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and polices of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.

        Agent: the distribution agent to be appointed by Penford to distribute
to the shareholders of Penford the shares of Penwest Common Stock held by
Penford pursuant to the Distribution.

        Ancillary Agreements: all of the agreements, instruments,
understandings, assignments or other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Excipient Supply Agreement, the Services Agreement, the Tax Allocation
Agreement, the Employee Benefits Agreement and the Trademark Assignment.

        Code: the Internal Revenue Code of 1986, as amended.

        Collaborative Agreements: include the following agreements:

                (a) Product Development and Supply Agreement between Penwest,
                Ltd., a Washington corporation ("Penwest, Ltd.") and Mylan
                Pharmaceuticals, Inc., a West Virginia corporation ("Mylan")
                dated August 17, 1994.

                (b) Sales and Distribution Agreement between Penwest, Ltd. and
                Mylan dated January 3, 1997.

                (c) Product Development and Supply Agreement between Penwest,
                Ltd. and Mylan dated August 3, 1995.

                (d) Product Development and Supply Agreement between Penwest,
                Ltd. and Mylan dated March 22, 1996.



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                (e) Custom Blending Agreement between Boehringer Ingelheim
                Pharmaceuticals, Inc. and Penwest, Ltd. dated November 23, 1994.

                (f) Product Development and Supply Agreement between TIMERx
                Technologies, a Washington corporation ("TIMERx Technologies")
                and Kremers Urban Development Company ("Kremers") dated August
                30, 1996.

                (g) Product Development and Supply Agreement between TIMERx
                Technologies and Kremers dated May 31, 1996.

                (h) Heads of Agreement and Development Agreement between TIMERx
                Technologies and Schwarz dated September 20, 1995.

                (i) Product Development, License and Supply Agreement between
                TIMERx Technologies and Sanofi Winthrop International S.A., a
                company incorporated under the laws of France dated February 28,
                1997, as amended.

                (j) The Agreement between Edward Mendell Co., Inc. and Leiras OY
                dated July 27, 1992.

                (k) Letter of Consent between TIMERx Technologies and Leiras OY
                dated May 26, 1995.

                (l) Letter of Agreement between TIMERx Technologies and Leiras
                OY dated May 26, 1995.

                (m) Strategic Alliance Agreement between Penwest Pharmaceuticals
                Group and Endo Pharmaceuticals Inc., dated September 17, 1997.

        Commission: the Securities and Exchange Commission.

        Conveyance and Assumption Instruments: collectively, the various
agreements, instruments and other documents entered into or to be entered into
to effect the transfer, prior to the Distribution Date and in the manner
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement or otherwise, of Penwest Assets to Penwest (including, without
limitation, the intellectual property rights and other assets described in the
Information Statement) and the assumption of Penwest Liabilities by Penwest, in
both cases relating to the business of Penwest as described in the Information
Statement.



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        Distribution: the distribution by Penford on a pro rata basis to holders
of Penford Common Stock of all of the outstanding shares of Penwest Common Stock
owned by Penford on the Distribution Date as set forth in Article IV.

        Distribution Date: August 31, 1998, or such other date as may be set by
the Board of Directors of Penford in its sole discretion.

        Effective Date: November 3, 1997.

        Employee Benefits Agreement: the Employee Benefits Agreement between
Penford and Penwest.

        Excipient Supply Agreement: the Excipient Supply Agreement between
Penford and Penwest pursuant to which Penford will manufacture and supply
exclusively to Penwest, and Penwest will purchase exclusively from Penford, all
of Penwest's requirements for EMDEX and CANDEX.

        Ex-Dividend Date: The trading day on which the Penford Common Stock is
first traded on the Nasdaq National Market at a price that does not reflect the
value of the Penwest Common Stock held by Penford as set by the Nasdaq National
Market.

        Existing Penford Options: Options to acquire shares of Penford Common
Stock held by employees of Penford and/or its Subsidiaries.

        EMDEX/CANDEX: sugar based (Dextrate) binders.

        Exchange Act: the Securities Exchange Act of 1934, as amended.

        Form 10: General Form for Registration of Securities on Form 10,
including the Information Statement, pursuant to which all the outstanding
Penwest's Common Stock will be registered under the Exchange Act, together with
all amendments thereto.

        Governmental Approvals: any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from any Governmental Authority.

        Governmental Authority: any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.

        Information Statement: The Information Statement portion of the Form 10.



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        Liabilities: any and all debts, liabilities and obligations, absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising (unless otherwise specified in
this Agreement), including all costs and expenses relating thereto, and those
debts, liabilities and obligations arising under any law, rule, regulation,
Action, threatened Action, order or consent decree of any Governmental Authority
or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.

        Penford Common Stock: the Common Stock, par value $1.00 per share, of
Penford.

        Penwest Assets:

                (a) any and all assets that are expressly contemplated by the
Penwest Contracts or this Agreement or any other agreement or document
contemplated by this Agreement (or any Schedule hereto or thereto) as assets to
be transferred to Penwest;

                (b) any assets reflected in Penwest's balance sheet dated August
31, 1998 as assets of Penwest, subject to any dispositions of such assets
subsequent to the date of such balance sheet; and

                (c) any and all assets owned or held immediately prior to the
Distribution Date by Penford that are used primarily in the Pharmaceutical
Business. The intention of this clause (c) is only to rectify any inadvertent
omission of transfer or conveyance of any assets that, had the parties given
specific consideration to such asset as of the date hereof, would have otherwise
been classified as a Penwest Asset. No asset shall be deemed to be a Penwest
Asset solely as a result of this clause (c) if such asset is within the category
or type of asset expressly covered by the subject matter of an Ancillary
Agreement.

        Penwest Common Stock: the Common Stock, par value $0.001 per share, of
Penwest, including any associated rights that may be attached to the Common
Stock from time to time.

        Penwest Contracts: the following contracts and agreements to which
Penford is a party or by which its assets are bound, whether or not in writing:

                (a) any supply or vendor contracts or agreements that relate
primarily to the Pharmaceutical Business;

                (b) the Collaborative Agreements;



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                (c) any contract or agreement entered into by Penford or Penwest
that relates primarily to the Pharmaceutical Business;

                (d) any contract or agreement entered into by Penford or Penwest
with any federal, state and local government that relates primarily to the
Pharmaceutical Business;

                (e) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements to be
assigned to Penwest; and

                (f) any guarantee, indemnity, representation, warranty or other
Liability of Penford in respect of any other Penwest Contract, any Penwest
Liability or the Pharmaceutical Business.

        Penwest Employees: Penwest Employees include Penwest's current employees
and any other employees who are hired by Penwest prior to the Distribution Date.

        Penwest Liabilities:

                (a) any and all Liabilities that are expressly contemplated by
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise (or the Schedules hereto or thereto) as Liabilities to be assumed
by Penwest;

                (b) all Liabilities (other than taxes based on, or measured by
reference to, net income), including any Liabilities related to Penwest
Employees and product Liabilities, primarily relating to, arising out of or
resulting from:

                        (i) the operation of the Pharmaceutical Business, as
conducted at any time prior to, on or after the Distribution Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act or any statement made by any director, officer, employee, agent or
representatives (whether or not such act or failure to act or statement is or
was within such Person's authority); or

                        (ii) any Penwest Assets (including any Penwest
Contracts);

in any such case whether arising before, on or after the Distribution Date;

                (c) all Liabilities, excluding any intercompany indebtedness
forgiven pursuant to Section 2.5 of this Agreement, reflected as liabilities or
obligations of Penwest in its balance sheet, subject to any discharge of such
Liabilities subsequent to the date of such balance sheet.



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        Person: an individual, a general or limited partnership, a corporation,
a trust, a joint venture, an unincorporated organization, a limited liability
entity, any other entity and any Governmental Authority.

        Record Date: the close of business on the date to be determined by the
Penford Board of Directors as the record date for determining shareholders of
Penford entitled to receive shares of Penwest Common Stock.

        Separation: the transfer of the Penwest Assets to Penwest and the
assumption by Penwest of the Penwest Liabilities, all as more fully described in
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise.

        Services Agreement: the Services Agreement between Penford and Penwest
providing for, among other things, the provision by Penford to Penwest of
certain administrative and other services on a transitional basis.

        Subsidiary: Subsidiary of any Person means any corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or other performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however, that no Person that is not directly or indirectly
wholly-owned by any other Person shall be a Subsidiary of such other Person
unless such other Person controls, or has the right, power or ability to
control, that Person.

        Tax Allocation Agreement: the Tax Allocation Agreement between Penford
and Penwest, providing for, among other things, the allocation of liabilities
with respect to federal, state and local income taxes and the procedures for
filing returns with respect to such taxes.

        Trademark Assignment: the Trademark Assignment between Penford and
Penwest, providing for, among other things the assignment by Penford to Penwest
of certain trademarks and related rights.



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                                   ARTICLE II

                                 THE SEPARATION

        2.1 Transfer of Assets and Assumption of Liabilities.

                (a) Penford hereby assigns, transfers, conveys and delivers to
Penwest, and Penwest hereby accepts from Penford, all of Penford's right, title
and interest in all Penwest Assets.

                (b) Penwest hereby assumes and agrees faithfully to perform and
fulfill all the Penwest Liabilities, in accordance with their respective terms.
Penwest shall be responsible for all Penwest Liabilities, regardless of when or
where such liabilities arose or arise, or whether the facts on which they are
based occurred prior to or subsequent to the date hereof, regardless of where or
against whom such liabilities are asserted or determined (including any Penwest
Liabilities arising out of claims made by Penford's or Penwest's respective
shareholders, directors, officers, employees, agents, Subsidiaries or Affiliates
against Penford or Penwest) or whether asserted or determined prior to the date
hereof.

                (c) In the event that any time or from time to time (whether
prior to or after the Distribution Date), any party hereto, shall receive or
otherwise possess any asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party shall promptly transfer,
or cause to be transferred, such asset to the Person so entitled thereto. Prior
to any such transfer, the Person receiving or possessing such asset shall hold
such asset in trust for any such other Person.

        2.2 Termination of Agreements. Except as otherwise provided or
contemplated in this Agreement, Penwest and Penford hereby terminate any and all
agreements, arrangements, commitments or understandings, whether or not in
writing, between Penwest and Penford, effective as of the Distribution Date;
provided, however, to the extent any such agreement, arrangement, commitment or
understanding is inconsistent with any Ancillary Agreement such termination
shall be effective as of the date of effectiveness of the applicable Ancillary
Agreement. No such terminated agreement, arrangement, commitment or
understanding (including any provision thereof which purports to survive
termination) shall be of any further force or effect after the Distribution Date
(or, to the extent contemplated by the proviso to the immediately preceding
sentence, after the effective date of the applicable Ancillary Agreement). Each
party shall, at the reasonable request of any other party, take, or cause to be
taken, such other actions as may be necessary to effect the foregoing.



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        2.3 Documents Relating to Other Transfers of Assets and Assumption of
Liabilities. In furtherance of the assignment, transfer and conveyance of
Penwest Assets and the assumption of Penwest Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) each of Penford and Penwest shall
execute and deliver such bills of sale, stock powers, certificates of titles,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to evidence the transfer, conveyance
and assignment of all of Penford's right, title and interest in and to the
Penwest Assets to Penwest and (ii) Penwest shall execute and deliver to Penford
such bills of sale, stock powers, certificates of title, assumptions of
contracts and other instruments of assumption as and to the extent necessary to
evidence the valid and effective assumption of the Penwest Liabilities by
Penwest.

        2.4 Ancillary Agreements. Each of Penford and Penwest will execute and
deliver all Ancillary Agreements to which it is a party, including but not
limited to:

                (a)     the Excipient Supply Agreement, which will become
                        effective as of the Distribution Date;

                (b)     the Services Agreement, which will become effective as
                        of the Distribution Date;

                (c)     the Tax Allocation Agreement, which will become
                        effective as of the Distribution Date;

                (d)     the Employee Benefits Agreement, which will become
                        effective as of the Distribution Date; and 

                (e)     the Trademark Assignment, which became effective as of
                        the Effective Date.

        2.5 Forgiveness of Intercompany Debt. Effective immediately prior to the
Distribution Date (but except for any indebtedness of Penwest to Penford
incurred in connection with an acquisition by Penwest of certain rights relating
to the PRUV product from Astra Production Chemicals AB, if any such acquisition
as approved in concept by the Board of Directors of Penford on March 4, 1998 (as
amended by resolution on May 18, 1998), occurs prior to the Distribution Date),
Penford hereby forgives all existing remaining intercompany indebtedness owed by
Penwest to Penford in order to provide an appropriate level of working capital
and equity at Penwest as it is established as a separate stand alone company.
Each of Penford and Penwest shall execute any documents and instruments
necessary or appropriate to confirm such loan forgiveness. Penford and Penwest
agree that Penford shall treat the loan forgiveness as a contribution to the
capital of Penwest in constructive exchange for Penwest Common Stock, provided
that no additional shares of Penwest Common Stock shall be issued or issuable in
connection with or as a result of such contributions.



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<PAGE>   10

        2.6 Consents. Each party hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document contemplated
by this Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
agreements or the making of any filings or applications contemplated by this
Agreement will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable laws or judgments, it being agreed and
understood that the party to which any assets were or are transferred shall bear
the economic and legal risk that any necessary consents or approvals are not
obtained or that any requirements of laws or judgments are not complied with.
Notwithstanding the foregoing, the parties shall use reasonable best efforts to
obtain all consents and approvals, to enter into all agreements and to make all
filings and applications which may be required for the consummation of the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, including, without limitation, all
applicable regulatory filings or consents under federal or state laws and all
necessary consents, approvals, agreements, filings and applications.

        2.7 Representations or Warranties. Each of the parties hereto
understands and agrees that no party hereto is, in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, making
any representations or warranties with respect to any assets of such party,
except that Penford represents and warrants to the best of its knowledge that
the delivery of all Penwest Assets transferred or being transferred to Penwest
pursuant to this Agreement or any other Conveyance and Assumption Instruments
has vested or will vest good title to such assets in Penwest free and clear of
all material liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever affecting
such assets.

        2.8 Collaborative Agreements. In the event that any transfer of
Penford's rights to Penwest under any of the Collaborative Agreements would
violate or is found to violate the terms of, or result in the loss of rights or
imposition of penalty under, any Collaborative Agreement covered thereby, or
would not be effective subsequent to the Distribution Date, such transfer shall
be deemed null and void and, in lieu thereof, (i) Penford shall retain all
rights and fulfill any obligations, at Penwest's expense, it may have to any
third party under any such Collaborative Agreement, it being understood that to
the extent practicable, Penwest shall fulfill such obligations on Penford's
behalf, (ii) Penford shall pay over to Penwest any royalty or other payments it
may receive from any third party pursuant to any such Collaborative Agreement
and (iii) at the request and expense of Penwest Penford shall use all reasonable
best efforts to arrange for the grant by the applicable third party of
comparable rights to Penwest.

        2.9 Financing and Guaranty. Prior to the date on which the Commission
declares the Form 10 to be effective, Penwest and Penford will use their
reasonable 



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best efforts to execute and deliver loan documents relating to certain bank
financing on terms approved by their Boards of Directors on June 22, 1998 and
June 25, 1998, respectively, including but not limited to Penford's providing
its guaranty of certain indebtedness of Penwest for a period before and after
the Distribution Date as so approved by the Penford Board which guaranty shall
be set forth in such loan documents (the "Guaranty").


                                   ARTICLE III

                                THE DISTRIBUTION

        3.1 The Distribution.

                (a) Following the completion of the actions and the occurrence
of the events set forth in Section 3.2 hereof, or the mutual agreement of
Penford and Penwest that one or more of such actions need not be completed or
one or more of such events need not occur prior to the Distribution, and
provided that this Agreement shall not have been terminated at Penford's
election pursuant to Section 8.2, on or prior to the Distribution Date, Penford
will deliver to the Agent for the benefit of holders of record of Penford Common
Stock on the Record Date, a single stock certificate, endorsed by Penford in
blank, representing all of the outstanding shares of Penwest Common Stock then
owned by Penford, and shall cause the transfer agent for the shares of Penford
Common Stock to instruct the Agent to distribute on the Distribution Date the
appropriate number of such shares of Penwest Common Stock to each such holder or
designated transferee or transferees of such holder.

                (b) Subject to Section 3.3 hereof, each holder of Penford Common
Stock on the Record Date (or such holder's designated transferee or transferees)
shall be entitled to receive, in the Distribution, a number of shares of Penwest
Common Stock equal to the number of outstanding shares of Penwest Common Stock
owned by Penford on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Penford Common Stock held by such holder on the
Record Date, and the denominator of which is the number of shares of Penford
Common Stock outstanding on the Record Date.

                (c) Penwest and Penford, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Distribution on the basis specified above.

        3.2 Actions and Events Prior to the Distribution.

                (a) Penwest shall prepare and file the Form 10, and such
amendments or supplements thereto, as may be necessary in order to cause the
same 



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to become and remain effective as required by law, including, but not limited
to, filing such amendments to the Form 10 as may be required by the Commission
or federal or state securities laws. The Form 10 shall have become effective on
or prior to the Distribution Date, and there shall be no stop-order in effect
with respect thereto.

                (b) Penford and Penwest shall cooperate in preparing, filing
with the appropriate Governmental Authority any documents or statements which
are required to reflect the establishment of, or amendments to, any employee
benefit and other plans necessary or appropriate in connection with the
Separation, the Distribution or the other transactions contemplated by this
Agreement or any other agreement or document contemplated by this Agreement or
otherwise.

                (c) Penford and Penwest shall prepare and mail, prior to the
Record Date, to the holders of Penford Common Stock, the Information Statement
and such other information concerning Penwest, its business, operations and
management, the Distribution and such other matters as Penford and Penwest shall
reasonably determine and as may be required by law.

                (d) Penford and Penwest shall take all other actions as may be
necessary or appropriate under the securities or blue sky laws of the United
States in connection with the Distribution and such actions and filings, where
applicable, shall have become effective or been accepted.

                (e) Penwest shall prepare and file, and shall use its reasonable
best efforts to have approved, an application for the listing of the Penwest
Common Stock to be distributed in the Distribution on the Nasdaq National
Market.

                (f) A private letter ruling from the Internal Revenue Service
(the "Private Letter Ruling") shall have been obtained, and shall continue in
effect, or a written opinion from Ernst & Young LLP shall have been delivered,
in either case to the effect that, among other things, the Distribution will
qualify as a tax-free distribution for federal income tax purposes under
Sections 355 and 368 of the Code, and such ruling or opinion shall be in form
and substance satisfactory to Penford in its sole discretion.

                (g) Any material Governmental Approvals and consents necessary
to consummate the Distribution shall have been obtained and shall be in full
force and effect.

                (h) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the 



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<PAGE>   13

control of Penford shall have occurred or failed to occur that prevents the
consummation of the Distribution.

                (i) The transactions contemplated hereby shall be in compliance
with applicable federal and state securities laws.

                (j) Each of Penwest and Penford shall have received such
consents, and shall have received executed copies of such agreements or
amendments of agreements, as they shall deem necessary in connection with the
completion of the transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.

                (k) All action and other documents and instruments deemed
necessary or advisable in connection with the transactions contemplated hereby
shall have been taken or executed, as the case may be, in form and substance
satisfactory to Penford and Penwest.

        3.3 Fractional Shares. As soon as practicable after the Distribution
Date, Penford shall direct the Agent to determine the number of whole shares and
fractional shares of Penwest Common Stock allocable to each holder of record of
Penford Common Stock as of the Record Date, to aggregate all such fractional
shares and sell the whole shares obtained thereby in open-market transactions in
the Agent's sole discretion as to when, how, through which broker-dealer and at
what price to make such sales, and to cause to be distributed to each such
holder or for the benefit of each such holder, in lieu of any fractional share,
such holder's ratable share of the proceeds of such sale, after making
appropriate deductions of the amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to such sale. Penford and the Agent
shall use their reasonable best efforts to aggregate the shares of Penford
Common Stock that may be held by any holder of record thereof through more than
one account in determining the fractional share allocable to such holder.

                                   ARTICLE IV

                        ACKNOWLEDGEMENT OF MATERIAL FACTS

        4.1 Organization. Penford and Penwest acknowledge that each is duly
organized, validly existing and in good standing under the laws of the State of
Washington, with requisite corporate power to own their properties and assets
and to carry on their respective businesses as presently conducted or
contemplated.



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                                    ARTICLE V

                  MISCELLANEOUS LIABILITIES AND INDEMNIFICATION

        5.1 Penwest Liabilities; Indemnification. Penwest shall indemnify,
defend and hold harmless Penford from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):

                (a) the employment of Penwest Employees;

                (b) the business of Penwest and the Penwest Assets;

                (c) purchase orders, accounts payable, accrued compensation and
other accrued Penwest Liabilities and other agreements which relate to the
business of Penwest and the Penwest Assets; and

                (d) any misstatement or omission of a material fact other than
misstatements or omissions with respect to Penford based on information supplied
in writing by Penford in any documents or filings prepared for purposes of
compliance or qualification under applicable securities laws in connection with
the Separation or the Distribution and related transactions, including, without
limitation, the Form 10.

        5.2 Penford Liabilities; Indemnification. Penford shall indemnify,
defend and hold harmless Penwest from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):

                (a) the business of Penford and the Liabilities not assumed by
Penwest under the terms of this Agreement or any other agreement or document
contemplated by this Agreement; and

                (b) any misstatement or omission of a material fact with respect
to Penford based on information supplied in writing by Penford in any documents
or filings prepared for purposes of compliance or qualification under applicable
securities laws in connection with the Separation or the Distribution and
related transactions, including, without limitation, the Form 10.

        5.3 Procedures for Indemnification of Third Party Claims.

                (a) If any Person entitled to indemnification hereunder (an
"Indemnitee") shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) of any claim or of the
commencement by any such Person of any Action (collectively, a "Third Party
Claim") with respect to which any party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 5.1
or 5.2, or any other 



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<PAGE>   15

Section of this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, such Indemnitee shall give such Indemnifying Party
written notice thereof within twenty (20) days after becoming aware of such
Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee
or other Person to give notice as provided in this Section 5.3(a) shall not
relieve the Indemnifying Party of its obligations under this Article V, except
to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.

                (b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an Indemnitee in accordance with Section 5.3(a)
(or sooner, if the nature of such Third Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of its election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in Section 5.3(c).

                (c) If an Indemnifying Party elects not to assume responsibility
for defending a Third Party Claim, or fails to notify an Indemnitee of its
election as provided in Section 5.3(b), such Indemnitee may defend such Third
Party Claim at the cost and expense (including allocated costs of in-house
counsel and other personnel) of the Indemnifying Party.

                (d) Unless the Indemnifying Party has failed to assume the
defense of the Third Party Claim in accordance with the terms of this Agreement,
no Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.

                (e) No Indemnifying Party shall consent to entry of any judgment
or enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.



                                      -15-
<PAGE>   16

        5.4 Tax Liabilities. Notwithstanding the provisions of Sections 5.1 and
5.2, all tax Liabilities relating to the business of Penwest and the Penwest
Assets including, without limitation, income taxes, franchise taxes, sales
taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the
party to whom the Liability has been allocated in the Tax Allocation Agreement.

        5.5 Additional Matters.

                (a) Any claim on account of a Liability which does not result
from a Third Party Claim shall be asserted by written notice given by the
Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a
period of thirty (30) days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such thirty
(30)-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such thirty (30)-day period or rejects such claim in whole or in
part, such Indemnitee shall be free to pursue such remedies as may be available
to such party as contemplated by this Agreement.

                (b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have the right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.

                (c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant. If such substitution or addition cannot be achieved for any
reason or is not requested, the named defendant shall allow the Indemnifying
Party to manage the Action as set forth in this Section and the Indemnifying
Party shall fully indemnify the named defendant against all costs of defending
the Action (including court costs, sanctions imposed by a court, attorneys'
fees, experts' fees and all other external expenses, and the allocated costs of
in-house counsel and other personnel), the costs of any judgment or settlement,
and the cost of any interest or penalties relating to any judgment or
settlement.



                                      -16-
<PAGE>   17

        5.6 Remedies Cumulative. The remedies provided in this Article V shall
be cumulative and shall not preclude assertion by an Indemnitee of any other
rights or the seeking of any and all other remedies against any Indemnifying
Party.

                                   ARTICLE VI

                       ACCESS TO INFORMATION AND SERVICES

        6.1 Provision of Corporate Records. Upon Penwest's request, Penford
shall arrange as soon as practicable following the Effective Date for the
delivery to Penwest of existing corporate records in the possession of Penford
relating to the business of Penwest or assets to be transferred to Penwest,
together with all active agreements and active litigation files relating to the
businesses of Penwest, except to the extent such items are already in the
possession of Penwest. Such records shall be the property of Penwest but shall
be available to Penford for review and duplication until Penford shall notify
Penwest in writing that such records are no longer of use to Penford.

        6.2 Access to Information. From and after the Effective Date, Penford
shall afford to Penwest and its authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable best
efforts to give access to persons or firms possessing information) and
duplicating rights during normal business hours to all records, books,
contracts, instruments, computer data and other data and information
(collectively, "Information") within Penford's possession relating to the
businesses of Penwest, insofar as such access is reasonably required by Penwest.
Penwest shall afford to Penford and its authorized accountants, counsel and
other designated representatives reasonable access (including using reasonable
best efforts to give access to persons or firms possessing Information) and
duplicating rights during normal business hours to Information within Penwest's
possession relating to the business of Penwest prior to the Distribution or to
the business of Penford, insofar as such access is reasonably required by
Penford. Information may be requested under this Article VI for, without
limitation, audit, accounting, claims, litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing the transactions contemplated in this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.

        6.3 Production of Witnesses. At all times from and after the Effective
Date, each of Penford and Penwest shall use reasonable best efforts to make
available to the other, upon written request, its officers, directors, employees
and agents as witnesses to the extent that such persons may reasonably be
required, in connection with legal, administrative or other proceedings in which
the requesting party may from time to time be involved.



                                      -17-
<PAGE>   18

        6.4 Reimbursement. Except to the extent otherwise contemplated by any
Ancillary Agreement, a party providing information to the other party under this
Article VI shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses, as may be reasonably
incurred in providing such information.

        6.5 Retention of Records. For a period of six (6) years following the
Effective Date, each of Penford and Penwest shall retain all Information
relating to the other as of the Distribution Date, except as otherwise required
by law or set forth in an Ancillary Agreement or except to the extent that such
Information is in the public domain or in the possession of the other party.

        6.6 Confidentiality. Subject to any contrary requirement of law and the
right of each party to enforce its rights hereunder in any legal action, each
party shall keep strictly confidential, and shall cause its employees and agents
to keep strictly confidential, any Information of or concerning the other party
which it or any of its agents or employees may acquire pursuant to, or in the
course of performing its obligations under, any provisions of this Agreement or
any Ancillary Agreement; provided, however, that such obligation to maintain
confidentiality shall not apply to Information which (i) at the time of
disclosure was in the public domain or (ii) was received by the receiving party
from a third party who did not receive such Information from the disclosing
party under an obligation of confidentiality.

                                   ARTICLE VII

                                    COVENANTS

        7.1 Nasdaq National Market Listing. Penwest hereby agrees to use its
reasonable best efforts to effect and maintain the listing of the Penwest Common
Stock on the Nasdaq National Market.

        7.2 Ancillary Agreements. The parties agree that they shall comply with
and provide all services and take any and all actions required to be provided or
taken by the terms of any and all of the Ancillary Agreements following the
effectiveness thereof.

        7.3 Sharing of Utilities

                (a) Penford agrees that Penwest shall be entitled to use and
consume, in an amount reasonably required, at Penwest's Cedar Rapids facility
certain utilities consisting of natural gas, electricity and steam from
Penford's Cedar Rapids facility. Any material change in the provision of such
utilities shall require six (6) months prior notice.



                                      -18-
<PAGE>   19

                (b) In connection with the sharing of utilities as described in
Section 8.3(a), Penwest will reimburse Penford for its consumption of such
utilities based on Penford's total cost for each item and Penwest's fraction of
the total consumption.

                (c) Penford will submit a monthly invoice to Penwest of all
amounts owed by Penwest to Penford with respect to utilities consumed by Penwest
pursuant to Section 7.3(a). The charges will be due when billed and shall be
paid no later than thirty (30) days from the date of billing.

        7.4 Non-Competition

                (a) From the Effective Date to the longer of (i) five years or
(ii) the termination of the Excipient Supply Agreement, neither Penford nor any
of its Affiliates shall, directly or indirectly, manufacture, market, sell or
distribute for inclusion in any pharmaceutical or nutritional product (including
vitamins, minerals and cofactors, but excluding foods) any product having the
same or substantially the same form, composition or applications as EMDEX or
CANDEX or any similar sugar- based product. From the Effective Date to the
longer of (i) five years or (ii) the termination of the Excipient Supply
Agreement, neither Penwest nor any of its Affiliates shall, directly or
indirectly, manufacture, market, sell or distribute for inclusion in any foods
product any product having the same or substantially the same form, composition
or applications as EMDEX or CANDEX or any similar sugar-based product.

                (b) For a period of five years from the Effective Date, neither
Penford nor any of its Affiliates shall directly or indirectly recruit or
solicit any employee of Penwest or any of its Affiliates, or induce or attempt
to induce any employee of Penwest or any of its Affiliates to terminate his or
her employment with, or otherwise cease his or her relationship with, Penwest or
any of its Affiliates. For a period of five years from the Effective Date,
neither Penwest nor any of its Affiliates shall directly or indirectly recruit
or solicit any employee of Penford or any of its Affiliates, or induce or
attempt to induce any employee of Penford or any of its Affiliates to terminate
his or her employment with, or otherwise cease his or her relationship with,
Penford or any of its Affiliates.

                (c) If any restriction set forth in Sections 7.4 (a) or (b) is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.

                (d) The restrictions contained in this Section 7.4 are necessary
for the protection of the respective businesses and goodwill of Penwest and
Penford and are considered by Penford and Penwest to be reasonable for such
purpose. Penford and 



                                      -19-
<PAGE>   20

Penwest agree that any breach of this Section 7.4 is likely to cause Penwest or
Penford, as the case may be, substantial and irrevocable damage and therefore,
in the event of any such breach, Penwest or Penford, as the case may be, in
addition to such other remedies which may be available, shall be entitled to
specific performance and other injunctive relief.




        7.5 Stock Options.

                (a) Each Existing Penford Option, vested and unvested, that is
outstanding at the Distribution Date will be adjusted as of the Distribution
Date in the manner set forth below to provide in exchange therefor new options
to acquire Penford Common Stock ("Adjusted Penford Options") to option holders
other than option holders that will be employed by Penwest as of the
Distribution Date ("Penwest Option Holders"), and separately, new options to
acquire Penwest Common Stock ("Penwest Options") to Penwest Option Holders and
to non-employee directors of Penford. The adjustment will be made by using the
average of the high and low trading prices of Penford Common Stock on the
trading day immediately prior to the Ex-Dividend Date (the "Penford
Pre-Distribution Price") and the average of the high and low trading prices of
Penford Common Stock and Penwest Common Stock on the Ex-Dividend Date (the
"Penford Post-Distribution Price" and "Penwest Post-Distribution Price",
respectively), all as reported by the Nasdaq National Market.

                (b) The per share exercise price under each Adjusted Penford
Option will be determined by multiplying the per share exercise price under the
option holder's applicable Existing Penford Option by the Penford
Post-Distribution Price and then dividing the result by the Penford
Pre-Distribution Price. The number of shares of Penford Common Stock to be
covered by such Adjusted Penford Option will be determined by multiplying the
number of shares covered by such Existing Penford Option by the Penford
Pre-Distribution Price and then dividing the result by the Penford
Post-Distribution Price.

                (c) The per share exercise price under each Penwest Option will
be determined by multiplying the per share exercise price under the option
holder's applicable Existing Penford Option by the Penwest Post-Distribution
Price and then dividing the result by the Penford Pre-Distribution Price. The
number of shares of Penwest Common Stock to be covered by such Penwest Option
will be determined by multiplying the number of shares covered by such Existing
Penford Option by the Penford Pre-Distribution Price and then dividing the
result by the Penwest Post-Distribution Price.

                (d) The number of shares covered by each Adjusted Penford Option
and each Penwest Option as determined pursuant to paragraphs (b) and (c) of this
Section 7.5, respectively, shall be further adjusted in the case of the
non-employee directors of Penford so that the number of shares covered by the
Adjusted Penford 



                                      -20-
<PAGE>   21

Options and the Penwest Options issued to such directors shall each equal 50% of
the economic value of the Existing Penford Option that would have otherwise been
covered by such Adjusted Penford Options and Penwest Options if no adjustment
pursuant to this paragraph (d) had occurred.

                (e) The boards of directors of both Penford and Penwest, or
their respective compensation committees authorized by such board of directors,
retain the authority to modify the foregoing adjustment procedure if, in their
respective judgments, the closing prices as described above reflect significant
disruptive market events that are independent, determinable, and verifiable
effects of events other than the Distribution.

                (f) All other terms and conditions of the Existing Penford
Options pursuant to the stock option plans under which the options were
originally granted will continue to apply to the Adjusted Penford Options and to
the Penwest Options, including the continuation of the remaining portions of
their original vesting schedules and ten-year terms. The Penwest Options granted
to the non-employee directors of Penford will continue to vest so long as such
director is a director of Penford.

        7.6 Representative on Penwest Board of Directors. During any and all
periods in which the Guaranty is effective, and subject to the exercise by the
Board of Directors of Penwest of its fiduciary duties Penwest will use its
reasonable best efforts to assure that at least one person designated by Penford
is elected and retained to serve as a director on the Board of Directors of
Penwest, including, but not limited to, the inclusion of such person in any
slate of nominees for submission to the shareholders of Penwest (unless such
person is already serving on the Penwest Board in a directorship that is
continuing and not subject to re-election at that time), and the prompt election
by the Penwest Board of such a person to fill any vacancy on the Board created
by the departure or removal from the Board of any person previously so
designated by Penford for such service. The initial such person designated by
Penford for service as a director of Penwest is N. Stewart Rogers. Penford may
from time to time designate a different person in replacement of Mr. Rogers or
his successor, whenever his or her directorship becomes subject to re-election,
or should he or she leave the Penwest Board for any reason. Upon the date on
which the Guaranty ceases to be effective, the rights provided under this
Section 7.6 shall terminate and the Penford designee shall resign from the
Penwest Board.

        7.7 Mutual Assurances.

                (a) In addition to the actions specifically provided for
elsewhere in this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, Penford and Penwest agree to cooperate with respect
to the implementation of this Agreement or any other agreement or document
contemplated 



                                      -21-
<PAGE>   22

by this Agreement or otherwise, and to execute such further documents and
instruments as may be necessary to consummate and make effective the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise;

                (b) Penford and Penwest shall arrange, attend and participate in
joint meetings with corporate collaborators, suppliers, customers and others to
the extent necessary to assure the orderly transition of the business and assets
contemplated hereby, provided that nothing herein shall be deemed to obligate
either Penford or Penwest to take any action or reach any understandings which
may violate any applicable laws.

                (c) Penford and Penwest agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Sections 355 and 368 of the Code.

                (d) Penford and Penwest agree that they shall not take any
action which could reasonably be expected to prevent the Distribution from
qualifying as a tax-free distribution within the meaning of Sections 355 and 368
of the Code or any other transaction contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise which is
intended by the parties to be tax-free from failing so to qualify.

                                  ARTICLE VIII

                                   TERMINATION

        8.1 Termination by Mutual Consent. This Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of Penford and
Penwest.

        8.2 Termination by Penford. Prior to the Record Date, Penford may
terminate this Agreement at its election if its Board of Directors determines
that the consummation of the Distribution would, in light of the circumstances
at the time, not be in the best interests of the shareholders of Penford.

        8.3 Other Termination. This Agreement shall terminate if the
Distribution Date shall not have occurred on or prior to December 31, 1999.

        8.4 Effect of Termination. In the event of any termination of this
Agreement, no party to this Agreement (or any of its directors or officers)
shall have any Liability or further obligation to any other party.



                                      -22-
<PAGE>   23

                                   ARTICLE IX

                                  MISCELLANEOUS

        9.1 Governing Law. This Agreement shall be governed by the laws of the
State of Washington.

        9.2 Construction. Each provision of this Agreement shall be interpreted
in a manner to be effective and valid to the fullest extent permissible under
applicable law. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions of this Agreement which
shall remain in full force and effect.

        9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.

        9.4 Exhibits. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be deemed
to be an integral part thereof.

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

        9.6 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:  Prior to the Distribution Date to The
                                    Chief Financial Officer,
                                    thereafter to The President

            or to:

                        Penwest Pharmaceuticals Co.
                        2981 Route 22
                        Patterson, NY 12563-9970
                        Attention:  The Chief Executive Officer



                                      -23-
<PAGE>   24

        9.7 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.

        9.8 Publicity. Prior to the Distribution, each of Penwest and Penford
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the Distribution or any of the other
transactions contemplated hereby and prior to making any filings with any
Governmental Authority with respect thereto.

        9.9 Expenses. Except as expressly set forth in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, whether
or not the Distribution is consummated, all third party fees, costs and expenses
paid or incurred in connection with the Distribution will be paid by Penford.

        9.10 Headings. The article, section and paragraph headings contained in
this Agreement and in the Ancillary Agreements are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement
or any Ancillary Agreement.

        9.11 Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement or any of the Ancillary Agreements (including any
questions of fraud or questions concerning the validity and enforceability of
this Agreement or any of the Ancillary Agreements or any of the rights herein
and therein conveyed), shall be determined and settled by arbitration in
Seattle, Washington, pursuant to the rules then in effect of the American
Arbitration Association as modified by this paragraph. Any award rendered shall
be final and conclusive upon the parties and a judgment thereon may be entered
in any court having competent jurisdiction. The party submitting such dispute
shall give written notice to that effect to the other party, stating the dispute
to be arbitrated and the name and address of a person designated to act as
arbitrator on its behalf. Within fifteen (15) days after such notice, the other
party shall give written notice to the first party stating the name and address
of a person designated to act as an arbitrator on its behalf. In the event that
the second party shall fail to notify the first party of its designation of an
arbitrator within the time specified, then the first party shall request the
American Arbitration Association to appoint a second arbitrator. The two
arbitrators so chosen shall meet within fifteen (15) days after the second
arbitrator has been appointed to appoint a third arbitrator. If the two
arbitrators are unable to agree on the appointment of a third arbitrator within
such fifteen (15) day period, either party may request the American Arbitration
Association to appoint a third arbitrator. Each arbitrator appointed hereunder
shall be independent of the parties 



                                      -24-
<PAGE>   25

and either party may disqualify an arbitrator who is or is affiliated with a
supplier, customer or competitor of either party without the consent of the
other party. Each arbitrator shall be reasonably knowledgeable regarding the
area or areas in dispute. The arbitrators shall follow substantive rules of law
and the Federal Rules of Evidence, require the parties to conduct discovery
pursuant to the rules then in effect under the Federal Rules of Civil Procedure
in an expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.

        9.12 Entire Agreement. This Agreement contains the full understanding of
the parties with respect to the subject matter hereof and supersedes all prior
understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.


                    [Remainder of Page Intentionally Omitted]



                                      -25-
<PAGE>   26

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                             PENFORD CORPORATION


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

                                             Title: CFO
                                                   -----------------------------


                                             PENWEST PHARMACEUTICALS CO.


                                             By: /s/ Tod R. Hamachek
                                                --------------------------------

                                             Title: Chairman & CEO
                                                   -----------------------------



                                      -26-