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                                                                    Exhibit 10.3

                           PENWEST PHARMACEUTICALS CO.

                           DEFERRED COMPENSATION PLAN

                            Effective August 1, 1998

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                                TABLE OF CONTENTS

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ARTICLE I--PURPOSE.........................................................................     1

 1.1 Purpose...............................................................................     1
 1.2 Effective Date........................................................................     1

ARTICLE II--DEFINITIONS....................................................................     1

 2.1 Account...............................................................................     1
 2.2 Base Annual Salary....................................................................     1
 2.3 Beneficiary...........................................................................     1
 2.4 Board.................................................................................     1
 2.5 Bonus.................................................................................     1
 2.6 Change in Control.....................................................................     2
 2.7 Committee.............................................................................     2
 2.8 Compensation..........................................................................     2
 2.9 Corporation...........................................................................     2
 2.10 Deferral Commitment..................................................................     2
 2.11 Deferral Period......................................................................     3
 2.12 Determination Date...................................................................     3
 2.13 Director.............................................................................     3
 2.14 Early Retirement Date................................................................     3
 2.15 Elective Deferred Compensation.......................................................     3
 2.16 Executive............................................................................     3
 2.17 Fees.................................................................................     3
 2.18 Financial Hardship...................................................................     3
 2.19 Interest.............................................................................     3
 2 20 Normal Retirement Date...............................................................     4
 2.21 Participant..........................................................................     4
 2.22 Participation Agreement..............................................................     4
 2.23 Plan.................................................................................     4
 2.24 Plan Benefit.........................................................................     4
 2.25 Plan Year............................................................................     4
 2.26 Prior Plan...........................................................................     4
 2.27 Retirement...........................................................................     4
 2.28 Termination..........................................................................     4

ARTICLE III--ELIGIBILITY AND DEFERRAL COMMITMENTS..........................................     5

 3.1 Eligibility and Participation.........................................................     5
 3.2 Deferral Election.....................................................................     5
 3.3 Modification of Deferral Commitment...................................................     5
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                                TABLE OF CONTENTS

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ARTICLE IV--DEFERRED COMPENSATION ACCOUNT..................................................     6

 4.1 Account...............................................................................     6
 4.2 Interest; Determination of Accounts...................................................     6
 4.3 Statement of Account..................................................................     6

ARTICLE V--PLAN BENEFITS...................................................................     6

 5.1 Plan Benefit..........................................................................     6
 5.2 Commencement of Payments..............................................................     7
 5.3 Form of Benefit Payment...............................................................     7
 5.4 Hardship Distributions................................................................     8
 5.5 Accelerated Distribution..............................................................     8
 5.6 Golden Parachute Payments.............................................................     8
 5.7 Withholding on Benefit Payments.......................................................     8
 5.8 Valuation and Settlement..............................................................     9
 5.9 Payment to Guardian...................................................................     9

ARTICLE VI--BENEFICIARY DESIGNATION........................................................     9

 6.1 Beneficiary Designation...............................................................     9
 6.2 Changes to Designation................................................................     9
 6.3 Change in Marital Status..............................................................     9
 6.4 No Beneficiary Designation............................................................    10
 6.5 Effect of Payment.....................................................................    10

ARTICLE VII--ADMINISTRATION................................................................    10

 7.1 Committee; Duties.....................................................................    10
 7.2 Agents................................................................................    11
 7.3 Binding Effect of Decisions...........................................................    11
 7.4 Indemnity of Committee................................................................    11

ARTICLE VIII--CLAIMS PROCEDURE.............................................................    11

 8.1 Claim.................................................................................    11
 8.2 Denial of Claim.......................................................................    11
 8.3 Review of Claim.......................................................................    11
 8.4 Final Decision........................................................................    12

ARTICLE IX--AMENDMENT AND TERMINATION OF THE PLAN..........................................    12

 9.1 Amendment.............................................................................    12
 9.2 Corporation's Right to Terminate......................................................    12
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                                TABLE OF CONTENTS

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ARTICLE X--MISCELLANEOUS...................................................................    13

 10.1 Unfunded Plan........................................................................    13
 10.2 Unsecured General Creditor...........................................................    13
 10.3 Trust Fund...........................................................................    13
 10.4 Nonassignability.....................................................................    14
 10.5 Not a Contract of Employment.........................................................    14
 10.6 Protective Provisions................................................................    14
 10.7 Governing Law........................................................................    14
 10.8 Validity.............................................................................    14
 10.9 Notice...............................................................................    14
 10.10 Successors..........................................................................    15
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                          PENWEST PHARMACEUTICALS CO.

                           DEFERRED COMPENSATION PLAN

                               ARTICLE I--PURPOSE

1.1   PURPOSE

      Penwest Pharmaceuticals Co. (the "Corporation") adopts this Deferred
Compensation Plan (the "Plan") to provide current tax planning opportunities as
well as supplemental funds for Retirement or death for certain employees and
Directors of the Corporation. It is intended that the Plan will aid in
attracting and retaining employees and Directors of exceptional ability by
providing them with this benefit.

1.2   EFFECTIVE DATE

      The Plan shall be effective as of August 1, 1998.

                            ARTICLE II--DEFINITIONS

      For purposes of this Plan, the following terms shall have the meanings
indicated, unless the context clearly indicates otherwise:

2.1   ACCOUNT

      "Account" means the record maintained by the Corporation for each
Participant in accordance with Article IV with respect to any deferral of
Compensation or Fees pursuant to this Plan.

2.2   BASE ANNUAL SALARY

      "Base Annual Salary" means the annual compensation payable to an
Executive, excluding bonuses and monkish compensation.

2.3   BENEFICIARY

      "Beneficiary" means the person, persons or entity designated under Article
VI to receive any Plan Benefits payable after a Participant's death.

2.4   BOARD

      "Board" means the Board of Directors of Penwest Pharmaceuticals Co. or any
successor thereto.

2.5   BONUS

      "Bonus" means the compensation derived under the Corporation's management
incentive program and payable in any year in a lump sum to an Executive.

PAGE 1 - DEFERRED COMPENSATION PLAN

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2.6   CHANGE IN CONTROL

      A Change in Control shall have occurred if:

            (a)   Any Person is or becomes the beneficial owner, directly or
      indirectly, of securities of the Corporation representing more than fifty
      percent (50%) of the voting power of the outstanding Voting Stock,

            (b)   The effective date of a merger, consolidation, reorganization
      or dissolution in which the Corporation is not the surviving entity, or

            (c)   During any period of two (2) consecutive years, individuals
      who constitute the Board of Directors of the Corporation at the beginning
      of any such period cease for any reason to constitute at least a majority
      thereof, unless the election, or the nomination for election by the
      Corporation's shareholders, of each new director was approved by a vote of
      at least two-thirds (2/3) of the directors then still in office who were
      directors of the Corporation at the beginning of such period. "Person"
      means an individual, firm, corporation or other entity, together with all
      Affiliates and Associates of such Person, but shall not include the
      Corporation, any subsidiary of the Corporation or any employee benefit
      plan of the Corporation. "Affiliate" and "Associate" shall have the
      respective meanings ascribed to such terms in Rule 12b-2 of the Securities
      Exchange Act of 1934, as amended. "Voting Stock" means the common stock of
      the Corporation and any other shares entitled to vote for the election of
      directors of the Corporation.

2.7   COMMITTEE

      "Committee" means the committee appointed to administer the Plan pursuant
to Article VII.

2.8   COMPENSATION

      "Compensation" means the following, determined before reduction for
amounts deferred under this Plan:

            (a)   For an Executive, the total Base Annual Salary and Bonus
      remuneration payable by the Corporation to the Executive for services.

            (b)   For a Director, all of the fees payable by the Corporation for
      service on the Board.

2.9   CORPORATION

      "Corporation" means Penwest Pharmaceuticals Co., a Washington corporation,
or any successor thereto, and any corporations or other entities affiliated with
or subsidiary to it that may be selected by the Board.

2.10  DEFERRAL COMMITMENT

      "Deferral Commitment" means a Base Annual Salary Deferral Commitment or a
Bonus Deferral Commitment made by an Executive or a Fee Deferral Commitment made
by a Director pursuant to Article III and for which a Participation Agreement
has been submitted by the Executive or Director to the Committee.

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2.11  DEFERRAL PERIOD

      "Deferral Period" means the period during which a Participant has elected
to defer a portion of his Compensation. The Deferral Period shall be a Plan
Year.

2.12  DETERMINATION DATE

      "Determination Date" means the last day of each calendar month.

2.13  DIRECTOR

      "Director" means a member of the Board.

2.14  EARLY RETIREMENT DATE

      "Early Retirement Date" means the date on which a Participant terminates
employment with Employer, the earlier of the date on or after such Participant's
attainment of age fifty-five (55) and completion of twenty (20) Years of Service
or age sixty-two (62) and completion of ten (10) Years of Service, but prior to
the Participant's Normal Retirement Date.

2.15  ELECTIVE DEFERRED COMPENSATION

      "Elective Deferred Compensation" means the amount of Compensation or Fees
that the Executive or Director elects to defer pursuant to a Deferral
Commitment.

2.16  EXECUTIVE

      "Executive" means one of a select group of management or highly
compensated employees of the Corporation, as designated by the Committee and
approved by the Board for participation in the Plan.

2.17  FEES

      "Fees" means Board meeting, committee meeting, annual retainer and
committee chairmanship fees.

2.18  FINANCIAL HARDSHIP

      "Financial Hardship" means a severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant or
of a dependent of the Participant, loss of the Participant's property due to
casualty, or other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of the Participant. Financial Hardship
shall be determined by the Committee on the basis of information supplied by the
Participant in accordance with the standards set forth by the Committee.

2.19  INTEREST

      "Interest" means the monthly equivalent of an annual yield that is three
(3) percentage points higher than the annual yield on thirty (30) year Long Term
Government Securities for the preceding month, as published by the Federal
Reserve Board (or any successor thereto), or, if such index is no

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longer published, a substantially similar index selected by the Board. At no
time shall the Interest Rate be less than six percent (6%) annually.

2.20  NORMAL RETIREMENT DATE

      "Normal Retirement Date" means the date on which a Participant terminates
employment with Employer on or after such Participant's attainment of age
sixty-five (65).

2.21  PARTICIPANT

      "Participant" means an Executive or Director who has elected to defer
Compensation or Fees during any Deferral Period.

2.22  PARTICIPATION AGREEMENT

      "Participation Agreement" means the agreement submitted by an Executive or
Director to the Committee prior to the beginning of the Deferral Period, with
respect to one (1) or more Deferral Commitments made for such Deferral Period.

2.23  PLAN

      "Plan" means this Deferred Compensation Plan as amended from time to time.

2.24  PLAN BENEFIT

      "Plan Benefit" means the Deferred Compensation Account benefit payable to
a Participant as calculated pursuant to Article IV and payable under Sections
5.1 through 5.5.

2.25  PLAN YEAR

      "Plan Year" means the fiscal year of the Corporation.

2.26  PRIOR PLAN

      "Prior Plan" means the PENWEST, LTD. Deferred Compensation Plan.

2.27  RETIREMENT

      "Retirement" means:

            (a)   For an Executive, termination from service on or after the
      Early Retirement Date or Normal Retirement Date. The Committee, in its
      sole discretion, may deem any separation from service as a Retirement.

            (b)   For a Director, termination from service on the Board at or
      after age seventy (70).

2.28  TERMINATION

      Termination means:

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            (a)   For an Executive, leaving employment with the Corporation
      prior to Retirement.

            (b)   For a Director, leaving the Board prior to Retirement.

               ARTICLE III--ELIGIBILITY AND DEFERRAL COMMITMENTS

3.1   ELIGIBILITY AND PARTICIPATION

            (a)   Eligibility. The Committee shall specify the name of each
      Executive and Director who shall be entitled to participate in the Plan as
      of the next succeeding Plan Year. These names shall be submitted to the
      Board for approval. Once designated eligible, an Executive may participate
      in the Plan each year until such time, if any, that the Committee
      determines that the Executive's employment status no longer deserves
      reward through participation in the Plan. Notwithstanding that
      determination, no account shall be paid out until Retirement or
      Termination.

            (b)   Participation. An eligible individual may elect to participate
      in the Plan with respect to any Deferral Period by submitting a
      Participation Agreement to the Committee by the fifteenth day of the month
      immediately preceding the beginning of the Deferral Period.

            (c)   Part-Year Participation. When an individual first becomes
      eligible to participate during a Deferral Period, a Participation
      Agreement may be submitted to the Committee within thirty (30) days
      following notification of the individual of eligibility to participate,
      which will be effective only with regard to Compensation earned following
      such submission.

3.2   DEFERRAL ELECTION

            (a)   Election by Executive. The Executive may elect to defer
      receipt of a certain whole percentage or flat dollar amount, up to fifty
      percent (50%), of the Base Annual Salary and a certain whole percentage or
      flat dollar amount, up to one hundred percent (100%), of any Bonus payable
      to him or her as an employee of the Corporation for the next Plan year;
      provided, however, that any such election to defer shall apply only with
      respect to Base Annual Salary or any Bonus payable to the Executive by the
      Corporation prior to the Executive's termination of employment for any
      reason.

            (b)   Election by Director. A Director may elect to defer receipt of
      a certain whole percentage or flat dollar amount, up to one hundred
      percent (100%), of Fees for the next Plan year.

            (c)   Minimum Deferral. Total deferrals by a Participant in a year
      must be fifteen hundred dollars ($1,500) or more. In any partial first
      year of participation, no minimum deferral shall be required.

3.3   MODIFICATION OF DEFERRAL COMMITMENT

      Deferral Commitments shall be irrevocable except that the Committee may,
in its sole discretion, reduce the amount to be deferred or waive the remainder
of the Deferral Commitment upon a finding that the Participant has suffered a
Financial Hardship. A finding of Financial Hardship shall not limit a
Participant's ability to participate in succeeding Deferral Periods. In the
event a Participant

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becomes disabled under the Penwest Pharmaceuticals Co. Long-Term Disability
Plan, deferrals will be immediately suspended.

                   ARTICLE IV--DEFERRED COMPENSATION ACCOUNT

4.1   ACCOUNT

      The Corporation shall establish on its books a separate account for each
Participant who elects to defer Compensation under the Plan, and shall credit to
the account of each Participant the Elective Deferred Compensation. The credit
shall be entered on the Corporation's books of account at the time that
Compensation or Fees not deferred are paid to the Participant. On the effective
date of the Plan or the date the Participant becomes an employee of the
Corporation, if later, each Participant shall have an Account balance equal to
the amounts held for the Participant pursuant to the Prior Plan. Any withholding
of taxes or other amounts with respect to Deferred Compensation that is required
by state, federal, or local law shall be withheld from the Participant's
corresponding nondeferred compensation to the maximum extent possible and the
remaining amount shall reduce the amount credited to the Participant's Account.

4.2   INTEREST; DETERMINATION OF ACCOUNTS

      Each Participant's Account as of each Determination Date shall consist of
the balance of the Participant's Account as of the immediately preceding
Determination Date, plus the Participant's Elective Deferred Compensation
credited and any Interest earned, minus the amount of any distributions made,
since the immediately preceding Determination Date. Interest earned shall be
calculated as of each Determination Date based upon the average daily balance of
the Account since the preceding Determination Date and shall be credited to the
Participant's Account at that time.

4.3   STATEMENT OF ACCOUNT

      A report shall be issued by the Corporation to each Participant setting
forth his or her Account balance under the Plan as of the immediately preceding
Determination Date as soon as practicable after the close of each Plan Year or
such other time as the Committee deems appropriate.

                            ARTICLE V--PLAN BENEFITS

5.1   PLAN BENEFIT

      The Corporation shall pay Plan Benefits pursuant to this Article V equal
to the Participant's Account to each Participant who terminates employment for
any reason.

            (a)   Early Withdrawals. A Participant's Account may be distributed
      to the Participant before Termination of employment or service on the
      Board as follows:

                  (i)   Early Withdrawals. A Participant may elect in a
            Participation Agreement to withdraw all or any portion of the amount
            deferred by that Participation Agreement as of a date specified in
            the election. Such date shall not be sooner than seven (7) years
            after the date the Deferral Period commences. The amount withdrawn
            shall not exceed the amount of Compensation deferred, without
            Interest.

PAGE 6 - DEFERRED COMPENSATION PLAN

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                  (ii)  Form of Payment. Withdrawals shall be paid in a lump sum
            and shall be charged to the Participant's Account as a distribution.

            (b)   Retirement and Termination Benefits. If an Executive
      terminates employment with Corporation, or if a Director terminates
      service on the Board, for any reason except death, Corporation shall pay
      the Participant benefits equal to the balance in the Account.

            (c)   Death Benefit.

                  (i)   Pretermination. If a Participant dies while employed by
            Corporation or serving on the Board, Corporation shall pay to the
            Participant's Beneficiary benefits equal to the balance in the
            Account. The benefit shall be paid in the form elected by the
            Participant in the form of payment designation, or, if no such
            election is on file, in a lump sum.

                  (ii)  Posttermination. If a Participant dies following the
            Participant's Retirement or Termination of employment with
            Corporation or service on the Board, Corporation shall pay the
            Participant's Beneficiary benefits equal to the balance, if any, in
            the Account. Payments shall continue to be made in the same form as
            those made to the Participant prior to death.

5.2   COMMENCEMENT OF PAYMENTS

      Payment of any Deferred Compensation Account benefits under the Plan shall
be made as of, or commence as of, the earlier of:

            (a)   A date elected by the Participant as specified in the
      applicable Participation Agreement between the Corporation and the
      Participant; or

            (b)   The settlement date as provided in Section 5.8.

5.3   FORM OF BENEFIT PAYMENT

      At the time the Participant elects to defer Compensation, the Participant
shall also elect the form of benefit payment. The Participant may elect a
different form of benefit payment for payments made due to either Retirement,
Termination prior to Retirement or Termination within twenty-four (24) months
following a Change in Control.

            (a)   Alternative Forms. Alternative forms of benefit payment are:

                  (i)   In equal annual installments, the number of such
            installments not to exceed ten (10), as designated by the
            Participant;

                  (ii)  In a single sum payment; or

                  (iii) In a combination of partial lump sum payment, and
            balance in installments, not to exceed ten (10) years.

PAGE 7 - DEFERRED COMPENSATION PLAN

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            Such election shall be irrevocable.

            (b)   Small Accounts. If the Participant's Account is under five
      thousand dollars ($5,000) on the valuation date, the benefit shall be paid
      in a lump sum.

            (c)   Installments. If payment is by installments, the amount of the
      installments shall be redetermined each year on the twelve (12) month
      anniversary of the valuation date based upon the remaining Account
      balance, the remaining number of installments and Interest equal to the
      rate in effect as of the preceding month.

5.4   HARDSHIP DISTRIBUTIONS

      Notwithstanding the foregoing provisions of this Article V, payment from
the Participant's Deferred Compensation Account may be made to the Participant
or a Beneficiary following the death of a Participant in the sole discretion of
the Committee by reason of Financial Hardship. A payment based upon Financial
Hardship of the Participant may not exceed the amount required to meet the
immediate financial need created by the hardship and not reasonably available
from other sources of the Participant. Any resumption of the Participant's
deferrals under the Plan shall be made only at the election of the Participant
in accordance with Article III herein.

5.5   ACCELERATED DISTRIBUTION

      Notwithstanding any other provision of the Plan, within twenty-four (24)
months following a Change in Control or at any time following Retirement or
Termination of employment or service on the Board, a Participant shall be
entitled to receive, upon written request to the Committee, a lump sum
distribution equal to ninety percent (90%) of the vested Account balance as of
the Determination Date immediately preceding the date on which the Committee
receives the written request. The remaining balance of ten percent (10%) shall
be forfeited by the Participant. A Participant who receives a distribution under
this Section 5.5 shall not participate in the Plan for twelve (12) calendar
months following the election. The amount payable under this Section shall be
paid in a lump sum within sixty-five (65) days following the receipt of the
notice by the Committee from the Participant. Following the death of the
Participant, the designated Beneficiary may, at any time, request an
accelerated distribution under this Section.

5.6   GOLDEN PARACHUTE PAYMENTS

      If any benefit payable under this Plan would constitute an excess
parachute payment under Section 280G of the Internal Revenue Code of 1986, or
any successor provision, the amount payable shall be increased to the extent
necessary to result in the Participant's receiving the same net amount after all
applicable taxes have been paid as the net after-tax amount the Participant
would have received if the benefit had not been subject to additional taxes due
to being treated as an excess parachute payment.

5.7   WITHHOLDING ON BENEFIT PAYMENTS

      The Corporation shall withhold from payments made hereunder any taxes
required to be withheld from such payments under federal, state or local law.
However, a Beneficiary may elect not to have withholding for federal income tax
purposes pursuant to Section 3405(a)(2) of the Internal Revenue Code, or any
successor provision thereto.

PAGE 8 - DEFERRED COMPENSATION PLAN

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5.8   VALUATION AND SETTLEMENT

      The last day of the month following the month of Retirement, Termination
or death shall be the valuation date. If a lump sum is elected, the amount of
the lump sum shall be based on the value of the Participant's Account on the
valuation date. If a combination of lump sum and installments is elected, the
lump sum will be paid on the settlement date and installments will commence on
the twelve (12) month anniversary of the valuation date. If installment payments
are elected, the amount of the installment payments shall be based on the value
of the Participant's Account on the valuation date. The date on which
installment payments commence shall be the settlement date. The settlement date
shall be no more than thirty-five (35) days after the valuation date. All
payments shall be made as of the first day of the month.

5.9   PAYMENT TO GUARDIAN

      If a Plan benefit is payable to a minor or a person declared incompetent
or to a person incapable of handling the disposition of property, the Committee
may direct payment of such Plan benefit to the guardian, legal representative or
person having the care and custody of such minor, incompetent or person. The
Committee may require proof of incompetency, minority, incapacity or
guardianship as it may deem appropriate prior to distribution of the Plan
benefit. Such distribution shall completely discharge the Committee and the
Corporation from all liability with respect to such benefit.

                      ARTICLE VI--BENEFICIARY DESIGNATION

6.1   BENEFICIARY DESIGNATION

      Each Participant shall have the right, at any time, to designate any
person or persons or an entity as his Beneficiary or Beneficiaries (both primary
as well as secondary) to whom benefits under this Plan shall be paid in the
event of a Participant's death prior to complete distribution of the benefits
due under the Plan. Each Beneficiary Designation shall be in written form
prescribed by the Committee and will be effective only when filed with the
Committee during the Participant's lifetime. Designation by a married
Participant of a Beneficiary other than the Participant's spouse shall not be
effective without spousal execution of a written consent acknowledging the
effect of the designation unless such consent cannot be obtained because the
spouse cannot be located.

6.2   CHANGES TO DESIGNATION

      Any Beneficiary designation may be changed by the Participant without the
consent of the previously named Beneficiary by the filing of a new designation
with the Committee subject to the spousal consent required in Section 6.1 above.
The filing of a new Beneficiary designation shall cancel all designations
previously filed, unless the designation clearly indicates that such designation
controls the account attributable to deferrals made during the election period
in which the designation is filed.

6.3   CHANGE IN MARITAL STATUS

      If the Participant's marital status changes after the Participant has
designated a Beneficiary, the following shall apply:

PAGE 9 - DEFERRED COMPENSATION PLAN

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            (a)   If the Participant is married at death but was unmarried when
      the designation was made, the designation shall be void unless the spouse
      has consented to it in the manner prescribed above.

            (b)   If the Participant is unmarried at death but was married when
      the designation was made:

                  (i)   The designation shall be void if the spouse was named as
            Beneficiary.

                  (ii)  The designation shall remain valid if a nonspouse
            Beneficiary was named.

            (c)   If the Participant was married when the designation was made
      and is married to a different spouse at death, the designation shall be
      void unless the new spouse has consented to it in the manner prescribed
      above.

6.4   NO BENEFICIARY DESIGNATION

      If any Participant fails to designate a Beneficiary in the manner provided
above, if the designation is void, or if the Beneficiary designated by a
deceased Participant dies before the Participant or before complete distribution
of the Participant's benefits, the Participant's Beneficiary shall be the person
in the first of the following classes in which there is a survivor:

            (a)   The Participant's surviving spouse;

            (b)   The Participant's children in equal shares, except that if any
      of the children predecease the Participant but leave issue surviving,
      then such issue shall take by right of representation the share the
      parent would have taken if living;

            (c)   The Participant's estate.

6.5   EFFECT OF PAYMENT

      The payment to the deemed Beneficiary shall completely discharge the
Corporation's obligations under this Plan.

                          ARTICLE VII--ADMINISTRATION

7.1   COMMITTEE; DUTIES

      This Plan shall be administered by an administrative Committee consisting
of three persons. The Committee shall have such powers and duties as may be
necessary to discharge its responsibilities. These powers shall include, but not
be limited to, interpretation of the Plan provisions, determination of amounts
due to any Participant, the rights of any Participant or Beneficiary under this
Plan, the right to require any necessary information from any Participant,
determine the amounts credited to Participant's Account and Interest earned, and
any other activities deemed necessary or helpful.

PAGE 10 - DEFERRED COMPENSATION PLAN

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7.2   AGENTS

      The Committee may, from time to time, employ other agents and delegate to
them such administrative duties as it sees fit, and may from time to time
consult with counsel who may be counsel to the Corporation.

7.3   BINDING EFFECT OF DECISIONS

      The decision or action of the Committee in respect of any question arising
out of or in connection with the administration, interpretation and application
of the Plan and the rules and regulations promulgated hereunder shall be final
and conclusive and binding upon all persons having any interest in the Plan.

7.4   INDEMNITY OF COMMITTEE

      To the extent permitted by applicable law, the Corporation shall
indemnify, hold harmless and defend the members of the Committee against any and
all claims, loss, damage, expense or liability arising from any action or
failure to act with respect to this Plan, on account of such member's service on
the Committee, except in the case of gross negligence or willful misconduct.

                         ARTICLE VIII--CLAIMS PROCEDURE

8.1   CLAIM

      Any person claiming a benefit, requesting an interpretation or ruling
under the Plan, or requesting information under the Plan shall present the
request in writing to the Committee, which shall respond in writing as soon as
practicable.

8.2   DENIAL OF CLAIM

      If the claim or request is denied, the written notice of denial shall
state:

            (a)   The reasons for denial, with specific reference to the Plan
      provisions on which the denial is based,

            (b)   A description of any additional material or information
      required and an explanation of why it is necessary, and

            (c)   An explanation of the Plan's claims review procedure.

8.3   REVIEW OF CLAIM

      Any person whose claim or request is denied or who has not received a
response within thirty (30) days may request review by notice given in writing
to the Committee. The claim or request shall be reviewed by the Committee who
may, but shall not be required to, grant the claimant a hearing. On review, the
claimant may have representation, examine pertinent documents, and submit issues
and comments in writing.

PAGE 11 - DEFERRED COMPENSATION PLAN

<PAGE>

8.4   FINAL DECISION

      The decision on review shall normally be made within sixty (60) days. If
an extension of time is required for a hearing or other special circumstances,
the claimant shall be notified and the time limit shall be one hundred twenty
(120) days. The decision shall be in writing and shall state the reasons and the
relevant Plan provisions. All decisions on review shall be final and bind all
parties concerned.

               ARTICLE IX--AMENDMENT AND TERMINATION OF THE PLAN

9.1   AMENDMENT

      The Board may at any time amend the Plan in whole or in part provided,
however, that no amendment shall be effective to decrease or restrict the amount
credited to any Account maintained under the Plan as of the date of amendment.
Changes in the definition of "Interest" shall be subject to the following
restrictions:

            (a)   Notice. A change shall not become effective before the first
      day of the Plan Year which follows the adoption of the amendment and at
      least thirty (30) days' written notice of the amendment to the Executive.

            (b)   Change in Control. Any change in the definition of Interest
      after a Change in Control shall apply only to those amounts credited to
      the Executive's Account after the Change in Control.

9.2   CORPORATION'S RIGHT TO TERMINATE

      The Board may at any time partially or completely terminate the Plan if,
in its judgment, the tax, accounting, or other effects of the continuance of the
Plan, or potential payments thereunder, would not be in the best interests of
the Corporation.

            (a)   Partial Termination. The Board may partially terminate the
      Plan by instructing the Committee not to accept any additional Deferral
      Commitments. In the event of such a partial termination, the Plan shall
      continue to operate and be effective with regard to Deferral Commitments
      entered into prior to the effective date of such partial termination.

            (b)   Complete Termination. The Board may completely terminate the
      Plan by instructing the Committee not to accept any additional Deferral
      Commitments, and terminate all ongoing Deferral Commitments. In the event
      of such a complete termination, the Plan shall cease to operate and, prior
      to a Change in Control, the Committee shall pay out to each Participant
      the balance in his Account in equal annual installments amortized over the
      period listed below based on the Account balance at the time of such
      complete termination:

<TABLE>
<CAPTION>
APPROPRIATE ACCOUNT BALANCE               PAYOUT PERIOD
---------------------------               -------------
<S>                                       <C>
Less than $10,000                           2 Years
$10,000 but less than $50,000               5 Years
More than $50,000                           10 Years
</TABLE>

PAGE 12 - DEFERRED COMPENSATION PLAN

<PAGE>

            Interest earned on the unpaid balance in the Participant's Account
      shall be the applicable Interest rate on the Determination Date
      immediately preceding the effective date of such complete termination.

            Upon Plan termination prior to a Change in Control, any Participant
      who is retired and receiving installment payments will receive the account
      balance in a lump sum.

            After a Change in Control, the benefits shall be paid to each
      Participant in the form elected by each Participant.

                           ARTICLE X--MISCELLANEOUS

10.1  UNFUNDED PLAN

      This Plan is intended to be an unfunded plan maintained primarily to
provide deferred compensation benefits for a select group of "management or
highly-compensated employees" within the meaning of Sections 201, 301, and 401
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and therefore to be exempt from the provisions of Parts 2, 3 and 4 of Title I of
ERISA. Accordingly, the Plan shall terminate and no further benefits shall
accrue hereunder in the event it is determined by a court of competent
jurisdiction or by an opinion of counsel that the Plan constitutes an employee
pension benefit plan within the meaning of Section 3(2) of ERISA which is not so
exempt. In the event of a termination under this Section 10.1, all ongoing
Deferral Commitments shall terminate, no additional Deferral Commitments will be
accepted by the Committee, and the amount of each Participant's Account balance
shall be distributed to such Participant at such time and in such manner as the
Committee, in its sole discretion, determines.

10.2  UNSECURED GENERAL CREDITOR

      Participants and their Beneficiaries, heirs, successors and assigns shall
have no legal or equitable rights, interest or claims in any property or assets
of the Corporation, nor shall they be Beneficiaries of, or have any rights,
claims or interests in any life insurance policies, annuity contracts or the
proceeds therefrom owned or which may be acquired by the Corporation. Except as
may be provided in Section 10.3, such policies, annuity contracts or other
assets of the Corporation shall not be held under any trust for the benefit of
the Participants, their Beneficiaries, heirs, successors or assigns, or held in
any way as collateral security for the fulfilling of the obligations of the
Corporation under this Plan. Any and all of the Corporation's assets and
policies shall be, and remain, the general, unpledged, unrestricted assets of
the Corporation. The Corporation's obligation under the Plan shall be that of an
unfunded and unsecured promise to pay money in the future.

10.3  TRUST FUND

      The Corporation shall be responsible for the payment of all benefits
provided under the Plan. At its discretion, the Corporation may establish one
(1) or more trusts, with such trustees as the Board may approve, for the purpose
of providing for the payment of such benefits. Although such trust or trusts may
be irrevocable, the assets thereof shall be subject to the claims of all the
Corporation's creditors in the event of insolvency. To the extent any benefits
provided under the Plan are actually paid from any such trust, the Corporation
shall have no further obligation with respect thereto, but to the extent not so
paid, such benefits shall remain the obligation of, and shall be paid by, the
Corporation.

PAGE 13 - DEFERRED COMPENSATION PLAN

<PAGE>

10.4  NONASSIGNABILITY

      Neither a Participant nor any other person shall have the right to
commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of actual receipt the
amounts, if any, payable hereunder, or any part thereof, which are, and all
rights to which are, expressly declared to be unassignable and nontransferable.
No part of the amounts payable shall, prior to actual payment, be subject to
seizure or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.

10.5  NOT A CONTRACT OF EMPLOYMENT

      The terms and conditions of this Plan shall not be deemed to constitute a
contract of employment between the Corporation and the Participant, and the
Participant (or the Participant's Beneficiary) shall have no rights against the
Corporation except as may otherwise be specifically provided herein. Moreover,
nothing in this Plan shall be deemed to give a Participant the right to be
retained in the service of the Corporation or to interfere with the right of the
Corporation to discipline or discharge the Participant at any time.

10.6  PROTECTIVE PROVISIONS

      A Participant will cooperate with the Corporation by furnishing any and
all information requested by the Corporation, in order to facilitate the payment
of benefits hereunder, and by taking such physical examinations as the
Corporation may deem necessary and taking such other actions as may be requested
by the Corporation.

10.7  GOVERNING LAW

      The provisions of this Plan shall be construed and interpreted according
to the laws of the State of New York, except as preempted by federal law.

10.8  VALIDITY

      If any provision of this Plan shall be held illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining parts
hereof, but this Plan shall be construed and enforced as if such illegal and
invalid provisions had never been inserted herein.

10.9  NOTICE

      Any notice or filing required or permitted to be given to the Committee
under the Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, to any member of the Committee or the Secretary of
the Corporation. Such notice shall be deemed given as of the date of delivery
or, if delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification. Mailed notice to the Committee shall
be directed to the Corporation's address. Mailed notice to a Participant or
Beneficiary shall be directed to the individual's last known address in the
Corporation's records.

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<PAGE>

10.10 Successors

      The provisions of this Plan shall bind and inure to the benefit of the
Corporation and its successors and assigns. The term successors as used herein
shall include any corporate or other business entity which shall, whether by
merger, consolidation, purchase or otherwise acquire all or substantially all of
the business and assets of the Corporation, and successors of any such
corporation or other business entity.

                                        PENWEST PHARMACEUTICALS CO.

                                    By: /s/ Tod R. Hamachek
                                        ----------------------------
                                        Its Chairman and Chief Executive Officer

                                    Dated: 06-20-02

PAGE 16 - DEFERRED COMPENSATION PLAN

<PAGE>

                           PENWEST PHARMACEUTICALS CO.

                           DEFERRED COMPENSATION PLAN

                                 AMENDMENT NO. 1

      WHEREAS, Penwest Pharmaceuticals Co. (the "Company") adopted the Penwest
Pharmaceuticals Co. Deferred Compensation Plan (the "Plan") effective as of
August 1, 1998; and

      WHEREAS, Plan earnings are based on the annual yield on thirty (30) year
government securities; and

      WHEREAS, the government ceased issuing thirty (30) year securities in
February 2002; and

      WHEREAS, the Company desires to base earnings on the Moody's Average
Corporate Bond Yield Index; and

      WHEREAS, pursuant to Section 9.1 of the Plan, the Board has the authority
to amend the Plan.

      NOW, THEREFORE, the Plan is amended as follows:

      FIRST: Section 2.19 of the Plan is amended in its entirety as follows:

2.19  INTEREST

      "Interest" means the monthly equivalent of an annual yield that is two (2)
percentage points higher than the annual yield of the Moody's Average Corporate
Bond Yield Index for the preceding month as published by Moody's Investor
Service, Inc. (or any successor thereto), or, if such index is no longer
published, a substantially similar index selected by the Board. At no time shall
the Interest rate be less than six percent (6%) annually.

      SECOND: Except as amended herein, all other Plan provisions shall remain
in full force and effect.

      IN WITNESS WHEREOF, the Board has caused this Amendment to be executed
effective on this 5th day of September 2002.

                                        PENWEST PHARMACEUTICALS CO.

                                    By: /s/ Jennifer L. Good
                                        ----------------------------------
                                        Its Chief Financial Officer

                                    Dated: 9-5-02

AMENDMENT NO. 1                                                           AMD\66