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                                                                   EXHIBIT 10.24


                            [SCOTIABANK LETTERHEAD]



                                  July 2, 1998


Penwest Pharmaceuticals Co.,
a Washington corporation
2981 Route 22
Patterson, NY  12563-9970

Dear Sirs:

                         RE:   Establishment of Revolving Term Credit Facility
                               in Favor of Penwest Pharmaceuticals Co.

               The Bank of Nova Scotia (the "Bank") is pleased to advise that,
subject to your acceptance, the Bank will make available to Penwest
Pharmaceuticals Co., a Washington corporation (such corporation being the
"Borrower") the revolving term credit facility described in this agreement (the
"Credit Agreement") upon the following terms and conditions:

CREDIT                A revolving term credit (the "Credit") in the amount of 
FACILITIES            US$15,000,000 (the "Commitment Amount") under which are
                      available U.S. dollar advances (each availment thereunder
                      being an "Availment").

BOOKING               Portland Branch
POINT                 888 S.W. Fifth Avenue, Suite 750
                      Portland, Oregon 97204-2098
                      (the "Branch")

PURPOSES              To fund working capital and general corporate purposes,
                      including capital expenditures.

CREDIT                Commencing on the date that Penford Corporation, a 
AVAILMENTS            Washington corporation  ("Penford"),  ceases to own any of
                      the common stock of the Borrower, the Borrower may obtain
                      U.S. dollar advances under the Credit by the Borrower
                      selecting in respect of each such advance one of the
                      interest options as follows:

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To:  Penwest Pharmaceuticals Co.                                          Page 2

                      (1)    Base Rate Advances in a minimum amount of
                             US$100,000 and in whole multiples of US$10,000:
                             Alternate Base Rate.

                      (2)    LIBOR Advances in whole multiples of US$1,000,000:
                             LIBO Rates (Reserve Adjusted) for 1, 2, or 3 month
                             LIBOR Periods, plus 1.25% per annum.

                      A LIBOR Period for a LIBOR Advance may not extend beyond
                      the termination date of the Credit.

                      The Borrower may convert from a LIBOR Advance to a Base
                      Rate Advance (a "Base Rate Conversion") or from a Base
                      Rate Advance to a LIBOR Advance (a "LIBOR Conversion");
                      provided that a Base Rate Conversion may only be made on
                      the expiry of the applicable LIBOR Period.

                      LIBOR Advances, LIBOR Conversions and renewals of LIBOR
                      Periods are offered subject to the availability to the
                      Bank of appropriate LIBO Rate quotations.

FACILITY              Upon the Borrower's execution of this Credit Agreement,
FEE                   the Borrower shall pay in respect of the Credit a
                      non-refundable facility fee of US$60,000.

COMMIT-               The Borrower shall pay, on the last Business Day of each 
MENT FEE              calendar quarter and on the final maturity of the Credit,
                      a commitment fee of 0.325% per annum, computed on the
                      unused portion of the Commitment Amount as it may be
                      reduced from time to time, calculated daily in arrears on
                      the basis of a 360-day year for the actual number of days
                      elapsed from the date of the Borrower's execution of this
                      Credit Agreement. The Borrower shall be entitled to cancel
                      all or any of the unused portion of the Commitment Amount
                      at such time without penalty on not less than 30 days'
                      written notice to the Bank and upon payment of all accrued
                      commitment fees to such date of cancellation, whereupon
                      the Commitment Amount shall be permanently reduced
                      accordingly.

MATURITY &            The Credit shall revolve and may be drawn down until 
REDUCTION OF          August 31, 2000 when all amounts then outstanding or 
COMMITMENT            accrued in respect of such Credit shall be due and
AMOUNT                payable; provided, however, that prior to such maturity
                      date, the Commitment Amount shall be permanently reduced
                      by the net proceeds ("Securities Proceeds") to the
                      Borrower of any sale by the Borrower or any subsidiary of
                      the Borrower of securities (as the term "securities" is
                      defined in Section 2(1) of the Securities Act of 1933, as

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To:  Penwest Pharmaceuticals Co.                                          Page 3

                      amended), except the sale of securities to plan
                      participants pursuant to the Borrower's 401(k) plan or
                      equity incentive plans. Reduction of the Commitment Amount
                      to zero shall terminate the Credit, and all amounts then
                      outstanding or accrued in respect of the Credit shall be
                      due and payable. The Borrower shall give the Bank written
                      notice of the receipt of any Securities Proceeds on the
                      Business Day that the Borrower receives such Securities
                      Proceeds.

CALCULATION           Determination of Rates. "Alternate Base Rate" means a 
& PAYMENT             variable interest rate per annum (as shall be in effect
                      from time to time) (rounded to the nearest 1/100 of 1%)
                      equal to the greater of: (a) the annual rate of interest
                      announced from time to time by the Bank in the United
                      States through the Branch as its "Base Rate"; and (b) the
                      Federal Funds Effective Rate plus 1/2 of 1% per annum. The
                      "Federal Funds Effective Rate" means, for any period, a
                      fluctuating interest rate per annum equal, for each day
                      during such period, to the weighted average of the rates
                      on overnight federal funds transactions with members of
                      the Federal Reserve System arranged by Federal Funds
                      brokers as published for such day (or, if such day is not
                      a Business Day, for the next preceding Business Day) by
                      the Federal Reserve Bank of New York or, for any day on
                      which such rate is not so published for such day by the
                      Federal Reserve Bank of New York, the average of the
                      quotations for such day for such transactions received by
                      the Bank from three Federal Funds brokers of recognized
                      standing selected by the Bank. If for any reason the Bank
                      shall have determined (which determination shall be
                      conclusive, absent manifest error) that it is unable to
                      ascertain the Federal Funds Effective Rate for any reason,
                      including without limitation, the inability or failure of
                      the Bank to obtain sufficient bids or publications in
                      accordance with the terms hereof, the rate announced by
                      the Bank through the Branch as its "Base Rate" shall be
                      the Alternate Base Rate until the circumstances giving
                      rise to such inability no longer exist.

                      The Alternate Base Rate is not necessarily intended to be
                      the lowest rate of interest determined by the Bank in
                      connection with extensions of credit. Changes in the rate
                      of interest on any Advances maintained as Base Rate
                      Advances will take effect simultaneously with each change
                      in the Alternate Base Rate. The Bank will give notice
                      promptly to the Borrower of changes in the Alternate Base
                      Rate.

                      The "LIBO Rate (Reserve Adjusted)" for each LIBOR Period
                      (being the applicable interest period chosen by the
                      Borrower for a LIBOR Advance) means a rate per annum
                      (rounded upwards, if necessary, to the nearest 1/16 of 1%)
                      determined pursuant to the following formula:

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To:  Penwest Pharmaceuticals Co.                                          Page 4

                            LIBO Rate      =              LIBO Rate
                       (Reserve Adjusted)      -------------------------------
                                               1.00 - LIBOR Reserve Percentage

                      The LIBO Rate (Reserve Adjusted) for any LIBOR Period
                      shall be determined by the Bank on the basis of the LIBOR
                      Reserve Percentage in effect and the applicable LIBO Rate
                      on the second Business Day prior to the commencement of
                      such LIBOR Period. The "LIBO Rate" for each LIBOR Period
                      means the rate of interest per annum at which the Bank is
                      offered deposits by prime banks in the London interbank
                      market, as at 11:00 a.m. (London, England time), on the
                      second Business Day prior to the commencement of such
                      LIBOR Period, in an amount of U.S. dollars similar to the
                      amount of the applicable LIBOR Advance for a deposit
                      period comparable to such LIBOR Period. "LIBOR Reserve
                      Percentage" means, relative to any LIBOR Period, the
                      reserve percentage (expressed as a decimal) equal to the
                      maximum aggregate reserve requirements (including all
                      basic, emergency, supplemental, marginal and other
                      reserves and taking into account any transitional
                      adjustments or other scheduled changes in reserve
                      requirements) specified by the Board of Governors of the
                      Federal Reserve System and then applicable to assets or
                      liabilities consisting of and including "Eurocurrency
                      Liabilities", as currently defined in Regulation D of the
                      Board of Governors of the Federal Reserve System, having a
                      term approximately equal or comparable to such LIBOR
                      Period.

                      Interest Calculation and Payment. Interest computed with
                      reference to the Alternate Base Rate shall accrue from day
                      to day for the actual number of days elapsed and shall be
                      calculated and payable monthly, not in advance, on the
                      last day of each calendar month, or on the next preceding
                      Business Day if the last day of the month is not a
                      Business Day. Interest computed with reference to a LIBO
                      Rate (Reserve Adjusted) shall accrue from day to day for
                      the actual number of days elapsed and shall be calculated
                      and payable at the end of the applicable LIBOR Period.
                      Interest computed with reference to the Alternate Base
                      Rate shall be calculated on the basis of a 365/366-day
                      year, but interest computed with reference to a LIBO Rate
                      (Reserve Adjusted) shall be calculated on the basis of a
                      year of 360 days.

                      LIBOR Periods. The Borrower shall designate the LIBOR
                      Period to apply to each LIBOR Advance in its notice of any
                      drawdown of such advance, any LIBOR Conversion, and any
                      renewal of an existing LIBOR Period, provided that, upon
                      failure of the Borrower to give notice of any such
                      designation, when applicable, as required under this
                      Credit Agreement, the Bank may either convert the affected
                      LIBOR Advance to a Base Rate 

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To:  Penwest Pharmaceuticals Co.                                          Page 5

                      Advance or designate a substitute LIBOR Period which will
                      apply to such advance for the purpose of determining the
                      interest rate with respect to same.

                      Default of Payment. Amounts not paid when due in respect
                      of a Base Rate Advance shall bear interest at the rate
                      applicable thereto, plus 2% per annum. Amounts not paid
                      when due in respect of a LIBOR Advance may be deemed a
                      Base Rate Advance by the Bank and the Bank may so convert
                      such advance. Any other unpaid monetary obligation of the
                      Borrower arising under this Credit Agreement shall be
                      deemed to be an amount not paid when due in respect of a
                      Base Rate Advance, as applicable. Interest payable under
                      this paragraph shall accrue from day to day for the actual
                      number of days elapsed and shall be calculated and payable
                      upon demand. The rights of the Bank under this paragraph
                      shall continue to apply from the date of such default for
                      so long as such default shall continue, both before and
                      after demand and judgment.

REPAYMENTS            The Borrower may make without penalty any repayment or
                      prepayment of a Base Rate Advance in a minimum amount of
                      US$100,000 and in a whole multiple of US$10,000. The
                      Borrower may make any repayment of a LIBOR Advance in a
                      minimum amount of US$1,000,000 and in a whole multiple of
                      US$1,000,000, but any repayment in respect of a LIBOR
                      Advance may be made only on the last day of the LIBOR
                      Period for such Advance. If at any time the sum of the
                      aggregate outstanding principal amount of all Availments
                      exceeds the Commitment Amount (as it may be reduced from
                      time to time), the Borrower shall immediately upon notice
                      from the Bank make a mandatory prepayment of the
                      Availments in an aggregate amount equal to such excess.

SECURITY              As continuing security for the present and future 
                      indebtedness and liability of the Borrower to the Bank
                      hereunder, the Borrower shall cause to be executed and
                      delivered in favor of the Bank irrevocable guarantees by
                      Penford and Penford subsidiary, Penford Products Co., a
                      Delaware corporation ("Penford Products"), in form and
                      substance satisfactory to the Bank (each a "Guarantee"),
                      of the Borrower's obligations under this Credit Agreement.
                      Each Guarantee shall include the guarantor's agreement to
                      cause to be executed and delivered in favor of the Bank an
                      irrevocable guarantee of the Borrower's obligations under
                      this Credit Agreement by any material subsidiary of the
                      guarantor hereafter formed, which guarantee shall also be
                      in form and substance satisfactory to the Bank. As used in
                      this Credit Agreement, a "material subsidiary" of Penford
                      or Penford Products shall mean a subsidiary which owns
                      assets

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To:  Penwest Pharmaceuticals Co.                                          Page 6


                      with a value equal to ten percent (10%) or more of the
                      value of the consolidated assets of Penford and its
                      subsidiaries.

REPRESEN-             The Borrower represents and warrants that:
TATIONS AND
WARRANTIES            (1)    the Borrower is a corporation duly incorporated and
                             organized and validly subsisting under the laws of
                             the state of Washington and is duly qualified,
                             registered or licensed in all jurisdictions where
                             such qualification, registration or licensing is
                             required; the Borrower has all requisite capacity,
                             power and authority to own, hold under license or
                             lease its properties, to carry on its business as
                             now conducted and to otherwise enter into, and
                             carry out the transactions contemplated by, this
                             Credit Agreement.

                      (2)    all necessary action has been taken to authorize
                             the execution, delivery and performance of this
                             Credit Agreement by the Borrower, and this Credit
                             Agreement is a legal, valid and binding obligation
                             of the Borrower, enforceable against the Borrower
                             by the Bank in accordance with its terms; it is not
                             contrary to any contractual restriction binding on
                             the Borrower; and the Borrower's execution and
                             delivery of the same neither requires a third party
                             consent nor would entitle any third party to
                             accelerate any debt owing to it.

                      (3)    the execution, delivery and performance of this
                             Credit Agreement and the consummation of the
                             transactions contemplated herein do not and will
                             not conflict with, result in any breach or
                             violation of, or constitute a default under, the
                             terms, conditions or provisions of any law,
                             regulation, judgment, decree or order binding on or
                             applicable to the Borrower or by which the Borrower
                             benefits or to which any of its property is subject
                             or of any material agreement, lease, license,
                             permit or other instrument to which the Borrower is
                             a party or is otherwise bound or by which the
                             Borrower benefits or to which any of its property
                             is subject and do not require the consent or
                             approval of any other party or any governmental
                             body, agency or authority.

                      (4)    except as set forth in a disclosure letter provided
                             to the Bank, there are no actions, suits,
                             inquiries, claims or proceedings (whether or not
                             purportedly on behalf of the Borrower) pending or
                             threatened against or affecting the Borrower before
                             any government, parliament, legislature, regulatory
                             authority, agency, commission, board or court or
                             before any private arbitrator, mediator or referee

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To:  Penwest Pharmaceuticals Co.                                          Page 7


                             which in any case or in the aggregate may result in
                             any material adverse change:

                             (i)      in the condition, financial or otherwise,
                                      of the Borrower or any of its assets; or

                             (ii)     in the ability of the Borrower to perform
                                      its obligations under this Credit
                                      Agreement, or in the ability of the Bank
                                      to enforce any of such obligations.

                      (5)    the Borrower is not in violation of any mortgage,
                             franchise, license, judgment, decree, order,
                             statute, ordinance, rule or regulation relating in
                             any way to it, to the operation of its business or
                             to its property or assets and which would result in
                             a material adverse change in its condition,
                             financial or otherwise, and the Borrower has all
                             necessary licenses, permits and consents to operate
                             its businesses where they are currently being
                             operated.

                      (6)    no event has occurred which constitutes or which,
                             with giving of notice, lapse of time or both, would
                             constitute a material default under or in respect
                             of any material agreement or instrument in respect
                             of indebtedness to which the Borrower is a party or
                             to which any of its property or assets may be
                             subject.

                      (7)    the Borrower has not:

                             (i)      admitted its inability to pay its debts
                                      generally as they become due or failed to
                                      pay its debts generally as they become
                                      due;

                             (ii)     filed an assignment or petition in
                                      bankruptcy or a petition to take advantage
                                      of any insolvency statute;

                             (iii)    made an assignment for the benefit of its
                                      creditors;

                             (iv)     consented to the appointment of a receiver
                                      of the whole or any substantial part of
                                      its assets;

                             (v)      filed a petition or answer seeking a
                                      reorganization, arrangement, adjustment or
                                      composition under applicable bankruptcy
                                      laws or any other applicable state or
                                      federal law or statute; or

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To:  Penwest Pharmaceuticals Co.                                          Page 8


                             (vi)     been adjudged by a court having
                                      jurisdiction a bankrupt or insolvent, nor
                                      has a decree or order of a court having
                                      jurisdiction been entered for the
                                      appointment of a receiver, liquidator,
                                      trustee or assignee in bankruptcy with
                                      such decree or order having remained in
                                      force and undischarged or unstayed for a
                                      period of 60 days.

                      (8)    any Employee Pension Benefits Plans, as defined in
                             the Employee Retirement Income Security Act of
                             1974, as amended ("ERISA"), of the Borrower meet,
                             as of the date of this Credit Agreement, the
                             minimum funding standards of 29 U.S.C. Section 1082
                             (Section 302 of ERISA), and no Reportable Event or
                             Prohibited Transaction, as defined in ERISA, has
                             occurred with respect to any Employee Benefit Plan
                             of the Borrower, as defined in ERISA.

                      (9)    The Borrower has conducted a comprehensive review
                             and assessment of the Borrower's computer
                             applications and made inquiry of the Borrower's key
                             suppliers, vendors and customers with respect to
                             the "year 2000 problem" (that is, the risk that
                             computer applications may not be able to properly
                             perform date-sensitive functions after December 31,
                             1999) and, based on that review and inquiry, the
                             Borrower does not believe the year 2000 problem
                             will result in a material adverse change in the
                             financial condition or business prospects of the
                             Borrower.

                      All of the representations and warranties of the Borrower
                      contained herein shall survive the execution and delivery
                      of this Credit Agreement notwithstanding any investigation
                      made at any time by or on behalf of the Bank.

CONDITIONS TO         Initial Drawdown. The right of the Borrower to obtain the 
UTILIZATION           initial  drawdown hereunder is subject to the conditions
                      precedent that the Bank has received, in form and 
                      substance satisfactory to it:

                      (1)    a duly certified resolution of the Board of
                             Directors of the Borrower authorizing the Borrower
                             to execute, deliver and perform its obligations
                             under this Credit Agreement and any other agreement
                             or instrument required by this Credit Agreement,
                             together with executed copies of such
                             documentation;

                      (2)    a certificate of a senior officer of the Borrower
                             setting forth the specimen signature of the
                             individual authorized to sign this Credit
                             Agreement;

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To:  Penwest Pharmaceuticals Co.                                          Page 9


                      (3)    a certificate of the Secretary of State of
                             Washington, dated within 30 days of the date of
                             this Credit Agreement, attesting to the continued
                             corporate existence of the Borrower in that state;

                      (4)    a copy of the by-laws of the Borrower and all
                             amendments thereto, certified as a true copy by a
                             senior officer of the Borrower;

                      (5)    a duly certified resolution of Penford authorizing
                             Penford to execute and deliver its Guarantee and to
                             perform its obligations under its Guarantee,
                             together with executed copies of such
                             documentation;

                      (6)    a certificate of a senior officer of Penford
                             setting forth the specimen signature of the
                             individual authorized to sign its Guarantee;

                      (7)    a duly certified resolution of Penford Products
                             authorizing Penford Products to execute and deliver
                             its Guarantee and to perform its obligations under
                             its Guarantee, together with executed copies of
                             such documentation;

                      (8)    a certificate of a senior officer of Penford
                             Products setting forth the specimen signature of
                             the individual authorized to sign its Guarantee;

                      (9)    such supporting and other certificates and
                             documentation as the Bank may reasonably request;

                      (10)   favorable opinions of counsel, in form and
                             substance satisfactory to the Bank, concerning the
                             validity and enforceability of agreements and
                             instruments to be delivered to the Bank with
                             respect to the Credit and concerning any other
                             matter about which the Bank may reasonably request
                             an opinion of counsel;

                      and, in addition, that:

                      (11)   Penford and Penford Products shall have duly
                             executed and delivered their respective Guarantees;

                      (12)   no Event of Default shall have occurred and be
                             continuing, and the Bank shall have received a
                             certificate of the Borrower so certifying to the
                             Bank.

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To:  Penwest Pharmaceuticals Co.                                         Page 10


                      (13)   no material adverse change in the financial
                             condition or business prospects of the Borrower
                             shall have occurred since the preparation of the
                             Borrower's December 31, 1997 financial statements.

                      (14)   no material adverse change in the financial
                             condition or business prospects of Penford shall
                             have occurred since the preparation of Penford's
                             August 31, 1997 financial statements.

                      Each Utilization. The right of the Borrower to obtain at
                      any time any drawdown of an Availment (including the
                      initial drawdown) or any conversion from one Availment to
                      another or any renewal of a LIBOR Period hereunder (each a
                      "Utilization") is subject to the further conditions
                      precedent that at the time of such Utilization:

                      (1)    in the case where such Utilization is a drawdown,
                             no event or circumstance has occurred and is
                             continuing, or would result from the making of such
                             Utilization, which constitutes an Event of Default
                             or would constitute an Event of Default but for the
                             requirement that notice be given or time elapse, or
                             both, or, which when considered by itself or
                             together with other past or then existing events or
                             circumstances, constitutes or would constitute a
                             material adverse change in the business prospects
                             or financial condition of the Borrower; and

                      (2)    the representations and warranties of the Borrower
                             contained in this Credit Agreement shall be true
                             and correct in all material respects at the date of
                             such Utilization as if such representations and
                             warranties were made on such date.

NOTICE                The Borrower shall give to the Bank, through the Bank's
                      subsidiary, Scotiabanc, Inc., Suite 2700, 600 Peachtree
                      Street, N.E., Atlanta, Georgia 30308, three Business Days'
                      notice of each Utilization or repayment in respect of a
                      LIBOR Advance and same Business Day's notice of each
                      Utilization or repayment in respect of any other type of
                      Availment. To be deemed given on a Business Day, a notice
                      must be delivered to the Bank on or before 9:00 a.m.,
                      Portland, Oregon time, on the Business Day. As used in
                      this Credit Agreement, a "Business Day" means any day
                      other than a Saturday, or a Sunday, or a day that banks
                      are lawfully closed for business in Portland, Oregon,
                      Atlanta, Georgia, or New York, New York, or, if in respect
                      of a LIBOR Advance, any other day on which transactions
                      cannot be carried out by and between banks in the London
                      interbank market.

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To:  Penwest Pharmaceuticals Co.                                         Page 11


                      Any notice or communication shall be deemed to have been
                      given to a party hereunder when given in accordance with
                      the provisions of Exhibit A attached hereto. Each notice
                      or communication given by a party hereunder shall be
                      binding on it and shall not be revocable without the other
                      party's consent.

PAYMENTS              All payments or disbursements made or required to be made
                      hereunder shall be in U.S. dollars in immediately
                      available funds as follows:

                      (1)    in the case of disbursements to the Borrower, to
                             such account as the Borrower shall from time to
                             time designate in writing to the Bank;

                      (2)    with respect to all amounts owed to the Bank, on
                             the due date, not later than 12:00 noon Portland,
                             Oregon time, by paying the Bank of Nova Scotia, New
                             York Agency, through the Fed Wire in Federal Funds
                             using ABA no. 026002532, for further credit to the
                             Loan Servicing Interbranch Account (Portland),
                             Account No.
                             6102-32;

                      or in such other manner as any party may from time to time
                      notify the other.

COVENANTS             Except for the transactions described in that certain Form
                      10 filed with the United States Securities and Exchange
                      Commission on June 22, 1998, or as otherwise permitted by
                      the Bank, which permission shall not be unreasonably
                      withheld, the Borrower hereby covenants, until the
                      Borrower has fulfilled all of its obligations under this
                      Credit Agreement:

                      (1)    not to permit a material change in the
                             organizational structure or operations of the
                             Borrower;

                      (2)    to promptly notify the Bank of the occurrence of
                             any event or circumstance which constitutes an
                             Event of Default, or would constitute an Event of
                             Default but for the requirement that notice be
                             given or time elapse or both, and to provide to the
                             Bank a detailed statement of the steps, if any,
                             being taken to cure or remedy such default;

                      (3)    to maintain the Borrower's existence as a
                             corporation under the laws of the state of
                             Washington and to have the Borrower qualified 

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To:  Penwest Pharmaceuticals Co.                                         Page 12


                             and remain duly qualified to carry on business and
                             own property in each jurisdiction in which such
                             qualification is necessary in view of the
                             Borrower's business and operations;

                      (4)    to conduct the Borrower's business in the ordinary
                             course and in such a manner so as to comply in all
                             material respects with all applicable laws and
                             regulations and so as to preserve and protect, to
                             the extent consistent with the conduct of the
                             Borrower's business in the ordinary course, the
                             Borrower's property and assets and the earnings,
                             income and profits therefrom; to perform all
                             obligations incidental to any trust imposed upon
                             the Borrower by statute and to ensure that any
                             breaches of the said obligations and the
                             consequences of any such breach shall be promptly
                             remedied;

                      (5)    to pay or cause to be paid all taxes, rates,
                             government fees and dues levied, assessed or
                             imposed upon the Borrower and upon its property or
                             assets or any part thereof, as and when the same
                             become due and payable, save and except when and so
                             long as the validity or amount of any such taxes,
                             rates, fees, dues, levies, assessments or imposts
                             is being contested in good faith by proper legal
                             proceedings, and shall deliver to the Bank, when
                             requested, the receipts and vouchers establishing
                             such payment;

                      (6)    to keep proper books of account and records
                             covering all of the Borrower's business and affairs
                             on a current basis and to permit a representative
                             of the Bank to inspect the Borrower's books of
                             account, records and documents and to make copies
                             therefrom during reasonable business hours and upon
                             reasonable notice;

                      (7)    if the Borrower changes its name, to promptly
                             notify the Bank in writing of the details of such
                             change;

                      (8)    to promptly notify the Bank of any action, suit,
                             inquiry, claim or proceeding (collectively, a
                             "Proceeding"), whether or not purportedly on behalf
                             of the Borrower, commenced or threatened against or
                             affecting the Borrower before any government,
                             parliament, legislature, regulatory authority,
                             agency, commission, board or court or before any
                             private arbitrator, mediator or referee, if such
                             Proceeding would cause the aggregate potential
                             liability of the Borrower with respect to all
                             Proceedings pending against the Borrower to exceed
                             US$500,000, or if such Proceeding or the aggregate
                             of such Proceeding and all other Proceedings

<PAGE>   13
To:  Penwest Pharmaceuticals Co.                                         Page 13


                             pending against the Borrower might result in any
                             material adverse change:

                             (i)      in the condition, financial or otherwise,
                                      of the Borrower; or

                             (ii)     in the ability of the Borrower to perform
                                      its obligations under this Credit
                                      Agreement, or in the ability of the Bank
                                      to enforce any of such obligations;

                      (9)    not to create, incur, assume or suffer to exist any
                             security interest, mortgage, pledge, hypothecation,
                             assignment, deposit arrangement, encumbrance, lien
                             (statutory or otherwise), charge against or
                             interest in property to secure payment of a debt or
                             performance of an obligation or other priority or
                             preferential arrangement of any kind or nature
                             whatsoever (collectively, "Liens") upon any of its
                             property, revenues or assets, whether now owned or
                             hereafter acquired, except:

                             (i)      Liens for taxes, assessments or other
                                      governmental charges or levies not at the
                                      time delinquent or thereafter payable
                                      without penalty or being diligently
                                      contested in good faith by appropriate
                                      proceedings and for which adequate
                                      reserves in accordance with GAAP shall
                                      have been set aside on its books;

                             (ii)     Liens of carriers, warehousemen,
                                      mechanics, materialmen and landlords
                                      incurred in the ordinary course of
                                      business for sums not overdue or being
                                      diligently contested in good faith by
                                      appropriate proceedings and for which
                                      adequate reserves in accordance with GAAP
                                      shall have been set aside on its books;

                             (iii)    Liens incurred in the ordinary course of
                                      business in connection with worker's
                                      compensation, unemployment insurance or
                                      other forms of governmental insurance or
                                      benefits, or to secure performance of
                                      tenders, statutory obligations, leases and
                                      contracts (other than for borrowed money)
                                      entered into in the ordinary course of
                                      business or to secure obligations on
                                      surety or appeal bonds;

                             (iv)     judgment Liens in existence less than 30
                                      days after the entry thereof or with
                                      respect to which execution has been

<PAGE>   14
To:  Penwest Pharmaceuticals Co.                                         Page 14


                                      stayed or the payment of which is covered
                                      in full (subject to a customary
                                      deductible) by insurance maintained with
                                      responsible insurance companies; and

                             (v)      Liens on property used or to be used by
                                      the Borrower in the ordinary course of
                                      business, securing payment of all or part
                                      of the purchase price thereof, provided
                                      that such Liens are limited to the
                                      property so purchased and additions and
                                      improvements thereto and proceeds thereof;

                      (10)   not to create, incur, assume or suffer to exist or
                             otherwise become or be liable in respect of any
                             indebtedness, other than, without duplication, the
                             following:

                             (i)      indebtedness in respect of the Credit; and

                             (ii)     unsecured indebtedness incurred in the
                                      ordinary course of business (including
                                      open accounts extended by suppliers on
                                      normal trade terms in connection with
                                      purchases of goods and services and up to
                                      an aggregate of US$2,000,000 of letters of
                                      credit reimbursement liability, but
                                      excluding other indebtedness incurred
                                      through the borrowing of money or
                                      contingent liabilities) including, without
                                      limitation, accrued expenses, taxes
                                      payable, accrued environmental
                                      liabilities, deferred employment benefits
                                      and deferred income taxes, to the extent
                                      incurred in the ordinary course of
                                      business;

                             provided, however, that no indebtedness otherwise
                             permitted by clauses (i) or (ii) shall be permitted
                             if, after giving effect to the incurrence thereof,
                             any Default shall have occurred and be continuing;

                      (11)   not to purchase or develop any real property
                             without the prior written consent of the Bank;

                      (12)   not to declare, pay or make any dividend or
                             distribution (in cash, property or obligations) on
                             any shares of any class of capital stock (now or
                             hereafter outstanding) of the Borrower or on any
                             warrants, options or other rights with respect to
                             any shares or any class of capital stock (now or
                             hereafter outstanding) of the Borrower (other than
                             dividends or distributions payable in its common
                             stock or warrants to purchase its common stock or

<PAGE>   15
To:  Penwest Pharmaceuticals Co.                                         Page 15


                             splitups or reclassifications of its stock into
                             additional or other shares of its common stock) or,
                             except as permitted in clause (20) below, to
                             repurchase any common stock or other equity
                             securities of the Borrower or its subsidiaries;

                      (13)   not to make or assume any loan or make any advance
                             of money to any officer, director or employee of
                             the Borrower other than advances to employees for
                             expenses made in the ordinary course of business;

                      (14)   not to liquidate or dissolve, consolidate with, or
                             merge into or with, any other corporation, or
                             purchase or otherwise acquire all or substantially
                             all of the assets of any Person (or of any division
                             thereof) except

                             (i)      any subsidiary of the Borrower may
                                      liquidate or dissolve voluntarily into,
                                      and may merge with and into, the Borrower
                                      or any other subsidiary of the Borrower so
                                      long as, after giving effect thereto, the
                                      Borrower is a surviving corporation, and
                                      the assets or stock of any subsidiary of
                                      the Borrower may be purchased or otherwise
                                      acquired by the Borrower or any other
                                      subsidiary of the Borrower; and

                             (ii)     so long as no Event of Default has
                                      occurred and is continuing or would occur
                                      after giving effect thereto, the Borrower
                                      or any of its subsidiaries may purchase
                                      all or substantially all of the assets of
                                      any Person, or acquire such Person by
                                      merger; provided, however, that after
                                      giving effect to any such merger the
                                      Borrower or its subsidiary party thereto
                                      is the surviving corporation.

                      As used in this Credit Agreement, "Person" means any
                      natural person, corporation, partnership, limited
                      liability company, firm, association, or trust;

                      (15)   not to sell, lease, contribute or otherwise convey,
                             or grant options, warrants or other rights with
                             respect to, any or all of its assets (including
                             accounts receivable and capital stock of
                             subsidiaries) to any Person, unless such sale,
                             transfer, lease, contribution or conveyance or
                             grant is made in the ordinary course of its
                             business. For purposes of this covenant, the
                             license of the intellectual property or other
                             technology of the Borrower as part of

<PAGE>   16
To:  Penwest Pharmaceuticals Co.                                         Page 16


                             collaborations or otherwise shall be deemed made in
                             the ordinary course of business;

                      (16)   not to enter into, or cause, suffer or permit to
                             exist any arrangement or contract with any of its
                             other Affiliates unless such arrangement or
                             contract is fair and equitable to the Borrower and
                             is an arrangement or contract of the kind which
                             would be entered into by a prudent Person in the
                             position of the Borrower with a Person which is not
                             one of its Affiliates. As used in this Credit
                             Agreement, "Affiliate" means any other Person
                             which, directly or indirectly, controls, is
                             controlled by or is under common control with the
                             Borrower, other than Penford or its subsidiaries. A
                             Person shall be deemed to be "controlled by" any
                             other Person if such other Person possesses,
                             directly or indirectly, power (i) to vote 15% or
                             more of the securities (on a fully diluted basis)
                             having ordinary voting power for the election of
                             directors or managing general partners; or (ii) to
                             direct or cause the direction of the management and
                             policies of such Person whether by contract or
                             otherwise;

                      (17)   not to take part in any dissolution or
                             reorganization or in any similar proceeding or
                             arrangement;

                      (18)   not to use any part of the proceeds of the Credit
                             to purchase or carry "margin stock" as defined in
                             Regulation U of the Board of Governors of the
                             Federal Reserve System;

                      (19)   not to purchase or redeem any of the capital stock
                             of the Borrower, except for the purchase of common
                             stock of the Borrower to be held in the Borrower's
                             401(k) plan where the purchase price of such stock
                             does not exceed US$200,000 in the aggregate in any
                             calendar year;

                      (20)   not to make, incur, assume or suffer to exist any
                             investment in any other Person, except:

                             (i)      Cash Equivalent Investments;

                             (ii)     in the ordinary course of business,
                                      investments made in connection with the
                                      establishment or maintenance by the
                                      Borrower of research and development
                                      collaborations;

<PAGE>   17
To:  Penwest Pharmaceuticals Co.                                         Page 17


                             (iii)    without duplication, investments permitted
                                      as indebtedness pursuant to clause (10) of
                                      this section;

                             (iv)     in the ordinary course of business,
                                      investments by the Borrower in any of its
                                      subsidiaries, or by any such subsidiary in
                                      any of its subsidiaries or any other
                                      subsidiary, by way of contributions to
                                      capital or loans or advances; and

                             (v)      other investments in an aggregate amount
                                      at any time not to exceed US$2,000,000
                                      minus any losses on such investments;

                             provided, however, that no investment otherwise
                             permitted by clause (ii), (iii), or (iv) shall be
                             permitted to be made if, immediately before or
                             after giving effect thereto, any Event of Default
                             shall have occurred and be continuing. As used in
                             this Credit Agreement, "Cash Equivalent Investment"
                             means , at any
                             time:

                             (i)      any obligation, maturing not more than one
                                      year after such time, issued or guaranteed
                                      by the United States government;

                             (ii)     municipal notes or note funds rated at the
                                      time of purchase, SP-1/A-1 or SP-2/A-2 by
                                      Standard & Poor's Ratings Group or VMIG1
                                      or VMIG2 by Moody's Investors Service,
                                      Inc.; municipal bonds or bond funds rated
                                      at the time of purchase, AAA or AA by
                                      Standard & Poor's Ratings Group or Aaa or
                                      Aa by Moody's Investors Service, Inc.; or
                                      money market funds rated at the time of
                                      purchase, A-1 by Standard & Poor's Ratings
                                      Group or P-1 by Moody's Investors Service,
                                      Inc.;

                             (iii)    commercial paper, maturing not more than
                                      nine months from the date of issue, which
                                      is issued by (x) a corporation (other than
                                      an Affiliate of any Obligor) organized
                                      under the laws of any state of the United
                                      States or of the District of Columbia and
                                      rated at least A-2 by Standard & Poor's
                                      Ratings Group or at least P-2 by Moody's
                                      Investors Service, Inc., or (y) the Bank;
                                      or
<PAGE>   18
To:  Penwest Pharmaceuticals Co.                                         Page 18


                             (iv)     any certificate of deposit or bankers
                                      acceptance, maturing not more than one
                                      year after such time, which is issued by
                                      either (i) a commercial banking
                                      institution that is a member of the
                                      Federal Reserve System and has a combined
                                      capital and surplus and undivided profits
                                      of not less than US$500,000,000, or (ii)
                                      the Bank.

EVENTS OF             Upon the occurrence and continuation of any Event of
DEFAULT               Default, the Bank may terminate the Credit and/or 
                      demand payment of all indebtedness and liability
                      outstanding and accrued thereunder to the date of demand
                      and proceed to take such steps as it deems fit including
                      proceedings to realize under any security it holds in that
                      respect.

                      An Event of Default shall occur if:

                      (1)    the Borrower fails to pay any amount of principal,
                             interest, fees or other amounts within three
                             Business Days of when due under this Credit
                             Agreement; or

                      (2)    the Borrower breaches any of its covenants
                             hereunder and such breach of covenant (other than a
                             covenant to pay) continues for ten Business Days or
                             more after notice to remedy same; provided,
                             however, that in the event that such breach cannot
                             reasonably be cured within ten Business Days after
                             notice to remedy same, the failure to cure such
                             breach within the ten Business Day cure period
                             shall not constitute an Event of Default if:

                             (i)      substantial progress is made to cure such
                                      breach within the ten Business Day cure
                                      period;

                             (ii)     cure is completed as soon as possible
                                      after the ten Business Day cure period;
                                      and

                             (iii)    the passage of the ten Business Day cure
                                      period will not jeopardize the ability of
                                      the Bank to collect all sums due or to
                                      become due to the Bank; or

                      (3)    the Borrower makes any representation or warranty
                             hereunder which is incorrect in any material
                             respect when made and a cure is not effected within
                             ten Business Days or more after notice to remedy
                             same; provided, however, that in the event that
                             such cure cannot reasonably be effected within ten
                             Business Days after notice 

<PAGE>   19
To:  Penwest Pharmaceuticals Co.                                         Page 19


                             to remedy same, the failure to cure within the ten
                             Business Day cure period shall not constitute an
                             Event of Default if:

                             (i)      substantial progress is made to effect a
                                      cure within the ten Business Day cure
                                      period;

                             (ii)     cure is completed as soon as possible
                                      after the ten Business Day cure period;
                                      and

                             (ii)     the passage of the ten Business Day cure
                                      period will not jeopardize the ability of
                                      the Bank to collect all sums due or to
                                      become due to the Bank; or

                      (4)    the Borrower admits in writing its inability to pay
                             its debts generally; fails to pay a material amount
                             of any of its indebtedness when due and such
                             failure continues after any applicable grace period
                             specified in any agreement or instrument relating
                             to such indebtedness (provided, however, that the
                             failure to pay indebtedness in connection with the
                             Borrower's purchase of goods or services in the
                             ordinary course of business shall, if the Borrower
                             disputes such indebtedness in good faith, not be an
                             Event of Default hereunder for a period of 45 days
                             after the expiration of the applicable grace period
                             specified in any agreement or instrument relating
                             to such indebtedness); permits any material default
                             under any agreement or instrument relating to its
                             indebtedness, or any other event, to occur and to
                             continue after any applicable grace period
                             specified in such agreement or instrument and the
                             effect of such default or event is to accelerate
                             the maturity of a material amount of such
                             indebtedness; is the subject of (i) a voluntary
                             bankruptcy proceeding, or (ii) an involuntary
                             bankruptcy proceeding which is not dismissed within
                             60 days; or, becomes subject to any proceeding
                             seeking liquidation, rearrangement, relief of
                             creditors or the appointment of a receiver or
                             trustee over, or any judgment or order which has or
                             might have a material and adverse effect on, any
                             substantial part of its property; or

                      (5)    any course of action is undertaken by the Borrower
                             which is intended to result in, or would result (in
                             the reasonable opinion of the Bank) in the transfer
                             of all or substantially all of the assets of the
                             Borrower; or

<PAGE>   20
To:  Penwest Pharmaceuticals Co.                                         Page 20


                      (6)    any person (as the term "person" is defined in the
                             Securities Exchange Act of 1934, as amended (the
                             "Exchange Act")), or two or more persons acting in
                             concert, acquires beneficial ownership (within the
                             meaning of Rule 13d-3 of the Securities and
                             Exchange Commission under the Exchange Act) of
                             one-third (1/3) or more of the outstanding shares
                             of voting stock of the Borrower; or

                      (7)    the Borrower is dissolved; or

                      (8)    Penford or Penford Products at any time breaches
                             any agreement, covenant or warranty under its
                             Guarantee and such breach is not cured within the
                             time specified for cure under the Guarantee or
                             waived by the Bank, or the Guarantee fails to
                             remain in full force and effect; or

                      (9)    an event of default occurs and is continuing under
                             any credit agreement with Penford under which the
                             Bank is either the sole lender or a participating
                             lender, provided, however, that in no event shall a
                             default caused solely by a change in control of
                             Penford be deemed an Event of Default under this
                             Credit Agreement; or

                      (10)   a material Reportable Event or Prohibited
                             Transaction, as defined in ERISA, occurs and is
                             continuing or a material accumulated funding
                             deficiency is incurred within the meaning of ERISA,
                             or a material liability to the Pension Benefit
                             Guaranty Corporation occurs and is continuing
                             which, in the opinion of independent Certified
                             Public Accountants of recognized standing selected
                             by the Borrower, will have a material adverse
                             financial effect on the financial condition of the
                             Borrower.

GAAP                  Any accounting terms used and not specifically defined
                      herein shall be construed in accordance with Generally
                      Accepted Accounting Principles as established by the
                      Financial Accounting Standards Board ("GAAP"),
                      consistently applied, and except as may be otherwise
                      provided herein all financial data and statements
                      submitted pursuant to this Credit Agreement shall be
                      prepared in accordance with such principles.

INDEMNITY             If the introduction or implementation of or any change in
PROVISIONS            or in the interpretation of, or any change in its 
                      application to the Borrower of, any law or any regulation
                      or guideline issued by any central bank or other
                      governmental authority (whether or not having the force of
                      law), including, without limitation, any reserve or
                      special deposit requirement 

<PAGE>   21
To:  Penwest Pharmaceuticals Co.                                         Page 21


                      or any tax (other than tax on the Bank's general income)
                      or any capital requirement, has due to the Bank's
                      compliance the effect, directly or indirectly, of (i)
                      increasing the cost to the Bank of performing its
                      obligations hereunder; (ii) reducing any amount received
                      or receivable by the Bank or its effective return
                      hereunder; or (iii) causing the Bank to make any payment
                      or to forgo any return based on any amount received or
                      receivable by the Bank hereunder, then upon demand from
                      time to time the Borrower shall pay such amount as shall
                      compensate the Bank for any such cost, reduction, payment
                      or foregone return. The Borrower shall further indemnify
                      the Bank for all costs, losses and expenses incurred by
                      the Bank in connection with the early termination of any
                      LIBOR Period and agrees that the Bank shall have no
                      liability to the Borrower for any reason in respect of any
                      Availment other than on account of the Bank's negligence
                      or wilful misconduct. Any certificate of the Bank in
                      respect of the foregoing which presents the calculations
                      relied upon by the Bank in reasonable detail will be
                      conclusive and binding upon the Borrower, except for
                      manifest error, provided that the Bank shall determine the
                      amounts owing to it in good faith using any reasonable
                      averaging and attribution methods.

INDEMNITY FOR         The Borrower hereby represents and warrants that the
ENVIRON-              Borrower's businesses and assets and those of its
MENTAL                subsidiaries are operated in material compliance with
HAZARDS               applicable Environmental Laws and that no enforcement 
                      action in respect thereof is threatened or pending, and
                      the Borrower covenants to and to cause its subsidiaries to
                      continue to so operate. If at any time the Bank has
                      reasonable grounds for believing that the Borrower or one
                      of its subsidiaries is not complying with applicable
                      Environmental Laws then the Bank may request that the
                      Borrower permit the Bank to conduct inspections, audits
                      and appraisals of all or any of the records, business and
                      assets of the Borrower and each of its subsidiaries, with
                      the Bank to be indemnified by the Borrower for reasonable
                      costs that it may incur with respect to such inspections,
                      audits and appraisals if any material violation of
                      applicable Environmental Laws is identified. The Borrower
                      shall not unreasonably withhold its consent to such
                      inspections, audits and appraisals, provided that
                      negotiations between the Borrower and the Bank have been
                      conducted which have resulted in the Bank and the Borrower
                      reaching agreement as to what constitute reasonable costs
                      for such inspections, audits or appraisals. If the Bank is
                      required to expend any funds in compliance with applicable
                      Environmental Laws, or court orders in respect thereof,
                      the Borrower shall indemnify the Bank in respect of such
                      expenditures as if an advance had been made to the
                      Borrower under this Credit Agreement for such purpose. For
                      purposes of this Credit Agreement, "Environmental Laws"
                      means the Comprehensive

<PAGE>   22
To:  Penwest Pharmaceuticals Co.                                         Page 22


                      Environmental Response, Compensation and Liability Act of
                      1980 (42 U.S.C. Section 9601 et seq., as amended), the
                      Resource, Conservation and Recovery Act (42 U.S.C. Section
                      6901 et seq., as amended), and similar federal, state,
                      local and other statutes, ordinances, laws, rules and
                      regulations in connection with environmental conditions,
                      health and safety.

REPORTING             The Borrower covenants to provide to the Branch, to the
                      attention of Corporate Banking:

                      (1)    audited annual financial statements of the Borrower
                             within 120 days of each of its fiscal year-ends;

                      (2)    unaudited quarterly financial statements of the
                             Borrower within 60 days of the end of each of the
                             first three quarters of each of the Borrower's
                             fiscal years;

                      (3)    audited, annual, consolidated financial statements
                             of Penford within 120 days of the end of each of
                             Penford's fiscal years

                      (4)    within 60 days of the end of each of the first
                             three quarters of each of the Borrower's fiscal
                             years and within 120 days of each of the Borrower's
                             fiscal year-ends, a certificate of a senior officer
                             of the Borrower that the officer has no knowledge
                             of any Event of Default, or of any event which,
                             with notice or lapse of time, would constitute an
                             Event of Default; and

                      (5)    such other information as the Bank may reasonably
                             request.

WITHHOLDING           All payments due hereunder shall be made free from any
TAXES & LEVIES        withholding tax or levy (such taxes and levies, other than
                      taxes on the general income of the Bank, being the
                      "Taxes"). The Borrower shall pay any Taxes in addition to
                      such payments or shall indemnify the Bank for amounts paid
                      by the Bank in respect of any Taxes and shall obtain and
                      deliver to the Bank receipts in respect thereof.

EXPENSES              All reasonable fees and out-of-pocket expenses of the
                      Bank, including without limitation the Bank's reasonable
                      attorney fees, in respect of preparation and enforcement
                      of this Credit Agreement or any other agreement or
                      instrument relating to the Credit, inspection and
                      investigation costs, and other like administrative costs
                      incurred during the currency of this Credit Agreement will
                      be for the account of the Borrower. In the event
                      litigation is commenced by a party hereto to enforce or
                      interpret any provision of this Credit Agreement, the
                      prevailing party in such litigation

<PAGE>   23
To:  Penwest Pharmaceuticals Co.                                         Page 23


                      shall be entitled to receive, in addition to all other
                      sums and relief, its reasonable costs and attorney fees,
                      incurred both at and in preparation for trial and any
                      appeal or review, such amount to be set by the court(s)
                      before which the matter is heard. The Borrower also agrees
                      to pay any reasonable attorney fees incurred by the Bank
                      in connection with any bankruptcy or similar proceedings
                      wherein the Borrower is the debtor.

EVIDENCE OF           The Borrower acknowledges that the actual recording of 
INDEBTEDNESS          interest, fees and other amounts due with respect to the
                      Credit under this Credit Agreement in an account of the
                      Borrower maintained by the Bank in respect thereof and
                      payments made under the Credit in accordance with this
                      Credit Agreement shall constitute, except for obvious
                      error, conclusive evidence of the Borrower's indebtedness
                      and liability from time to time under this Credit
                      Agreement in respect of the Credit; provided that the
                      failure of the Bank to record same in such account shall
                      not affect the obligation of the Borrower to pay or repay
                      such indebtedness and liability in accordance with this
                      Credit Agreement.

USURY                 The provisions of this Credit Agreement shall be subject
RESTRAINTS            to any applicable law, regulation, order, rule or 
                      direction ("Usury Restraint") which prohibits or restricts
                      the charging, receipt or retention of interest or other
                      amounts at the rates and amounts set forth herein (the
                      "Stated Rate") in excess (the "Excess") of the maximum
                      rates or amount (the "Maximum Rate") stipulated in the
                      Usury Restraint. The provisions of this Credit Agreement
                      shall not require the payment or permit the collection of
                      interest in excess of the Maximum Rate from time to time.
                      If the Bank complies (whether or not required to do so at
                      law) with such Usury Restraint, then, to the extent
                      permitted by law, a subsequent reduction in the Stated
                      Rate below the Maximum Rate shall be deemed not to reduce
                      the Stated Rate below the Maximum Rate until the total
                      amount of interest and other amounts earned and retained,
                      measured by a dollar amount, equals the amount of interest
                      and other amounts which would have been earned and
                      retained hereunder, inclusive of the Excess, measured by a
                      dollar amount, if the Stated Rate had not been held at the
                      Maximum Rate or any amount had not been refunded to the
                      Borrower.

SEVERABILITY          The invalidity or unenforceability of any particular
                      provision of this Credit Agreement shall not affect any
                      other provision herein and the Agreement shall be
                      construed as if the invalid or unenforceable provision had
                      been omitted.

ASSIGNABILITY         The Borrower may not assign this Credit Agreement. The
                      Bank, with the Guarantor's approval, which approval shall
                      not be unreasonably withheld,

<PAGE>   24
To:  Penwest Pharmaceuticals Co.                                         Page 24


                      may assign or grant participation in its rights and
                      obligations hereunder, with each such assignee or
                      participant to be entitled to rely on the section headed
                      INDEMNITY PROVISIONS as set out above, provided, however,
                      that no assignment or participation shall increase the
                      liability of the Borrower for Taxes, indemnity or any
                      other amount payable by the Borrower to the Bank hereunder
                      over that for which the Borrower would be obligated in the
                      absence of such assignment or participation. The Bank may
                      also pledge its rights (but not its obligation to make the
                      advances under the Credit) under this Credit Agreement
                      and/or its advances hereunder to a Federal Reserve Bank in
                      support of borrowings made by the Bank from such Federal
                      Reserve Bank.

GOVERNING LAW         This Credit Agreement shall be construed in accordance 
& JURISDICTION        with the law of the state of Oregon and for the purpose of
                      any legal actions or proceedings brought by the Bank in
                      respect of the same, the Borrower hereby irrevocably
                      submits to the non-exclusive jurisdiction of any state or
                      federal court of such state and acknowledge its competence
                      and the convenience and propriety of the venue and agree
                      to be bound by any judgment thereof and not to seek, and
                      hereby waive, any review of such judgments by the courts
                      of any other jurisdiction. IN ANY ACTION OR PROCEEDING
                      RELATING TO THIS CREDIT AGREEMENT, THE BORROWER WAIVES ANY
                      AND ALL RIGHTS TO TRIAL THEREOF BY JURY.

<PAGE>   25
To:  Penwest Pharmaceuticals Co.                                         Page 25


UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US AFTER
OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE. THE TERM "US" MEANS THE BANK.

          Please indicate your acceptance of this Credit Agreement by signing
and returning the enclosed duplicate copy of this letter on or before July 2,
1998.

                                                 Yours truly,

                                                 THE BANK OF NOVA SCOTIA


                                                 by: /s/ PATRIK G. NORRIS
                                                     ---------------------------
                                                     Patrik G. Norris, Officer

Accepted this 2nd day of
July, 1998

Penwest Pharmaceuticals Co.,
a Washington corporation


By:    /s/ JENNIFER L. GOOD
       ------------------------------------
Name:  Jennifer L. Good
       ------------------------------------
Title: V.P. Finance & Chief Finance Officer
       ------------------------------------
<PAGE>   26
                          EXHIBIT A TO CREDIT AGREEMENT

                                     NOTICE

      Any notice or communication given under the Credit Agreement to which this
Exhibit is attached shall be deemed to have been given

      (1)   in the case of notice or communication to the Borrower, (i) upon
            facsimile transmission to facsimile no. 914-878-3498 (confirming
            telephone no. 914-878-8381), Attention: Jennifer L. Good, or to such
            other facsimile number of which the Bank notifies the Borrower
            pursuant to this Exhibit; provided that transmission is confirmed by
            the sender's facsimile machine, or (ii) upon delivery in writing to
            the Borrower, Attention: Jennifer L. Good, at its address as noted
            on page 1 of the Credit Agreement, or at such other address of which
            the Borrower notifies the Bank pursuant to this Exhibit;

      (2)   in the case of notice or communication to the Bank with respect to
            administrative or operational issues, (i) upon facsimile
            transmission to the Scotiabanc, Inc., facsimile no. 404-888-8998
            (confirming telephone no. 404-877-1563), Attention: Ms. Hilma
            Gabbidon, or to such other facsimile number of which the Bank
            notifies the Borrower pursuant to this Exhibit; provided that
            transmission is confirmed by the sender's facsimile machine, or (ii)
            upon delivery in writing to the Scotiabanc, Inc., Attention: Ms.
            Hilma Gabbidon, at Suite 2700, 600 Peachtree Street, N.E., Atlanta,
            Georgia 30308, or at such other address of which the Bank notifies
            the Borrower pursuant to this Exhibit; and

      (3)   in the case of notice or communication to the Bank with respect to
            credit issues, (i) upon facsimile transmission to the Branch,
            facsimile no. 503-222-5502 (confirming telephone no. 503-222-3148),
            Attention: Patrik G. Norris, or to such other facsimile number of
            which the Bank notifies the Borrower pursuant to this Exhibit;
            provided that transmission is confirmed by the sender's facsimile
            machine, or (ii) upon delivery in writing to the Branch at its
            address as noted on page 1 of the Credit Agreement or at such other
            address of which the Bank notifies the Borrower pursuant to this
            Exhibit.

Notice or communication to the Scotiabanc, Inc. hereunder to be effective on a
certain Business Day must, unless otherwise provided in the Credit Agreement, be
given prior to 11:00 a.m. Atlanta, Georgia time on that Business Day. Notice or
communication to the Branch hereunder to be effective on a certain Business Day
must, unless otherwise provided in the Credit Agreement, be given prior to 
11:00 a.m. Portland, Oregon time on that Business Day.