<PAGE>   1


RISK FACTORS

CERTAIN RISKS AND LITIGATION RELATING TO NIFEDIPINE  XL

      In May 1997, one of the Company's collaborators, Mylan, filed an ANDA with
the FDA for the 30 mg dosage strength of Nifedipine XL, a generic version of
Procardia XL, a controlled release formulation of nifedipine. Nifedipine XL is
the first product using the Company's TIMERx controlled release technology for
which an ANDA has been filed in the United States. In March 1999, Mylan was
notified that the ANDA had received tentative approval from the FDA. The Company
expects that final marketing approval will not be granted until the legal issues
surrounding the patent dispute have been resolved.

      In an ANDA filing, the FDA generally requires data demonstrating that the
drug formulation is bioequivalent to the branded drug. In addition, under the
Waxman-Hatch Act when an applicant files an ANDA for a generic version of a
brand name product covered by an unexpired patent listed with the FDA, the
applicant must certify to the FDA that such patent will not be infringed by the
applicant's product or that such patent is invalid or unenforceable. Notice of
such certification must be given to the patent owner and the sponsor of the NDA
for the brand name product.

      Bayer and ALZA own patents listed for Procardia XL, and Pfizer is the
sponsor of the NDA and markets the product. In connection with the ANDA filing,
Mylan certified in May 1997 to the FDA that Nifedipine XL does not infringe
these Bayer or ALZA patents and notified Bayer, ALZA and Pfizer of such
certification. Bayer and Pfizer sued Mylan in the United States District Court
for the Western District of Pennsylvania, alleging that Nifedipine XL infringes
Bayer's patent. The Company


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<PAGE>   2

has been informed by Mylan that ALZA does not believe that the notice given to
it complied with the requirements of the Waxman-Hatch Act, and there can be no
assurance that ALZA will not sue Mylan for patent infringement or take any other
actions with respect to such notice. Mylan has advised the Company that it
intends to contest vigorously the allegations made in the lawsuit. However,
there can be no assurance that Mylan will prevail in this litigation or that it
will continue to contest the lawsuit. If the litigation results in a
determination that Nifedipine XL infringes Bayer's patent, Nifedipine XL could
not be marketed in the United States until such patent expired. An unfavorable
outcome or protracted litigation for Mylan would materially adversely affect the
Company's business, financial condition and results of operations. Delays in the
commercialization of Nifedipine XL could also occur because the FDA will not
grant final marketing approval of Nifedipine XL until a final judgment on the
patent suit is rendered in favor of Mylan by the district court, or in the event
of an appeal, by the court of appeals, or until 30 months (or such longer or
shorter period as the court may determine) have elapsed from the date of Mylan's
certification, whichever is sooner.

      In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming that
its Procardia XL formulation constituted a unique delivery system and that a
drug with a different release mechanism such as the TIMERx controlled release
system cannot be considered the same dosage form and approved in an ANDA as
bioequivalent to Procardia XL. In August 1997, the FDA rejected Pfizer's
citizen's petition. In July 1997, Pfizer also sued the FDA in the District Court
of the District of Columbia, claiming that the FDA's acceptance of Mylan's ANDA
filing for Nifedipine XL was contrary to the law, based primarily on the
arguments stated in its citizen's petition. Mylan and the Company intervened as
defendants in this suit. In April 1998, the District Court of the District of
Columbia rejected Pfizer's claim, and in May 1998, Pfizer appealed the District
Court's decision. In February 1999, the case was heard in appeals court but no
decision has been rendered. There can be no assurance that the FDA, Mylan and
the Company will prevail in this litigation. An outcome in this litigation
adverse to Mylan and the Company would result in Mylan being required to file a
suitability petition in order to continue the ANDA or to file an NDA with
respect to Nifedipine XL, each of which would be expensive and time consuming.
An adverse outcome also would result in Nifedipine XL becoming ineligible for an
"AB" rating from the FDA. Failure to obtain an AB rating from the FDA would
indicate that for certain purposes Nifedipine XL would not be deemed to be
therapeutically equivalent to the referenced branded drug, would not be fully
substitutable for the referenced branded drug and would not be relied upon by
Medicaid and Medicare formularies for reimbursement. Any such failure would have
a material adverse effect on the Company's business, financial condition and
results of operations. If any of such events occur, Mylan may terminate its
efforts with respect to Nifedipine XL, which would have a material adverse
effect on the Company's business, financial condition and results of operations.

      There can be no assurance that Pfizer will not pursue additional
regulatory initiatives and lawsuits with respect to Procardia XL and Nifedipine
XL.

      Most of the controlled release products that the Company is developing
with its collaborators are generic versions of brand name controlled release
products that are covered by one or more patents. The Company expects its
collaborators will file ANDAs for such product candidates. There can be no
assurance that if ANDAs are filed for any of such products, the owners of the
patents covering the brand name product or the sponsors of the NDA with respect
to the brand name product will not sue or undertake regulatory initiatives to
preserve marketing exclusivity. Any significant delay in obtaining FDA approval
to market the Company's product candidates as a result of litigation, as well as
the expense of such litigation, whether or not the Company or its collaborators
are successful,


                                                                              35
<PAGE>   3

could have a material adverse effect on the Company's business, financial
condition and results of operations.

      In addition to filing an ANDA with respect to the 30 mg dosage strength of
Nifedipine XL, Mylan is conducting full scale bioequivalence studies of the 60
mg and 90 mg dosage strengths of Nifedipine XL. There can be no assurance,
however, that Mylan will file ANDAs with respect to the 60 mg and 90 mg dosage
strengths or that these formulations would be otherwise approvable by the FDA.
The Company is aware that Biovail has filed an ANDA with respect to a 30 mg and
60 mg dosage strength generic version of Procardia XL. Under the Waxman-Hatch
Act, an applicant who files the first ANDA with a certification of patent
invalidity or non-infringement with respect to a product may be entitled to
receive, if such ANDA is approved by the FDA, a 180-day marketing exclusivity (a
180-day delay in approval of other ANDAs for the same drug) from the FDA. There
can be no assurance that the FDA will not approve Biovail's ANDA or another ANDA
filed by another applicant with respect to a different dosage strength prior to
or during Mylan's 180-day marketing exclusivity period, if obtained, for the 30
mg dosage strength of Nifedipine XL.

DEPENDENCE ON COLLABORATIVE AGREEMENTS

      The Company intends to develop and commercialize its TIMERx controlled
release products in collaboration with pharmaceutical companies. The Company is
a party to collaborative agreements with Mylan, Leiras, Sanofi and Endo, among
others. The Company is particularly dependent on its collaboration with Mylan,
which covers three of the Company's products under development. Under its
current collaborative agreements, the Company's collaborators are generally
responsible for conducting full scale bioequivalence studies and clinical
trials, preparing and submitting all regulatory applications and submissions and
manufacturing, marketing and selling the TIMERx controlled release products.

      There can be no assurance that the Company will be able to maintain
existing collaborative arrangements or establish new collaborative arrangements
on acceptable terms, if at all, or that any collaborative arrangements will be
commercially successful. To the extent that the Company is not able to maintain
or establish such arrangements, the Company would be required to undertake
product development and commercialization activities at its own expense, which
would increase the Company's capital requirements or require the Company to
limit the scope of its development and commercialization activities. Moreover,
the Company has limited or no experience in conducting full scale bioequivalence
studies and clinical trials, preparing and submitting regulatory applications
and manufacturing and marketing controlled release products. There can be no
assurance that it could be successful in performing these activities and any
failure to perform such activities could have a material adverse effect on the
Company's business, financial condition and results of operations.

      The Company cannot control the amount and timing of resources that its
collaborative partners devote to the Company's programs or potential products,
which may vary because of factors unrelated to the potential products. If any of
the Company's collaborators breach or terminate their agreements with the
Company or otherwise fail to conduct their collaborative activities in a timely
manner, the preclinical and/or clinical development and/or commercialization of
product candidates will be delayed, and the Company would be required to devote
additional resources to product development and commercialization or terminate
certain development programs. Also, these relationships generally may be
terminated at the discretion of the Company's collaborators, in some cases with
only limited notice to the Company. For instance, Mylan may terminate its
agreements with the Company


                                                                              36
<PAGE>   4

at any time upon 90 days prior written notice under specified circumstances. The
termination of collaborative arrangements could have a material adverse effect
on the Company's business, financial condition and results of operations. There
also can be no assurance that disputes will not arise with respect to the
ownership of rights to any technology developed with third parties. These and
other possible disagreements with collaborators could lead to delays in the
development or commercialization of product candidates or could result in
litigation or arbitration, which could be time consuming and expensive and could
have a material adverse effect on the Company's business, financial condition
and results of operations.

      In addition, the Company's collaborators may develop, either alone or with
others, products that compete with the development and marketing of the
Company's potential products. Competing products of the Company's collaborators
may result in their withdrawal of support with respect to their products under
development using the Company's controlled release technology, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.

UNCERTAINTY OF COMMERCIALIZATION OF TIMERX CONTROLLED RELEASE PRODUCTS

      Products using the Company's TIMERx controlled release technology are in
various stages of development. Except for Cystrin CR, which is being marketed in
Finland, and Slofedipine XL which is being marketed in the U.K., none of the
Company's other TIMERx controlled release products have been commercialized
and the period required to achieve commercialization is uncertain and may be
lengthy, if commercialization is achieved at all. Although in March 1999, Mylan
received a tentative approval on an ANDA filed with the FDA for the 30 mg dosage
strength of Nifedipine XL, no regulatory approval to market Nifedipine XL has
been received, and there can be no assurance as to when or if regulatory
approval will be received. Substantially all the revenues from controlled
release products generated to date have been milestone fees received for
products under development as well as some sales of formulated TIMERx. There can
be no assurance that the Company's controlled release product development
efforts will be successfully completed, that required regulatory approvals will
be obtained or that approved products will be successfully manufactured or
marketed.

HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

      The Company incurred net losses of approximately $3.9 million, $7.3
million and $8.8 million during 1996, 1997 and 1998, respectively. As of
December 31, 1998, the Company's accumulated deficit was approximately $28.5
million. The Company expects net losses to continue at least into early 2000. A
substantial portion of the Company's revenues have been generated from the sales
of the Company's pharmaceutical excipients. The Company's future profitability
will depend on several factors, including the successful commercialization by
the Company and its collaborators of the controlled release products for which
regulatory approval currently is pending or has recently been obtained, the
completion of the development of other pharmaceuticals using the Company's
TIMERx controlled release technology and an increase in sales of its
pharmaceutical excipient products. There can be no assurance that the Company
will achieve profitability or that it will be able to sustain any profitability
on a quarterly basis, if at all.


                                                                              37
<PAGE>   5

INTENSE COMPETITION; RISK OF TECHNOLOGICAL CHANGE

      The pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability of
financing, litigation and other factors. Many of the Company's competitors have
longer operating histories and greater financial, marketing, legal and other
resources than the Company and certain of its collaborators. The Company expects
that it will be subject to competition from numerous other entities that
currently operate or intend to operate in the pharmaceutical industry, including
companies that engage in the development of controlled release technologies. The
Company's TIMERx business faces competition from numerous public and private
companies and their controlled release technologies, including ALZA's oral
osmotic pump (OROS(R)) technology, multiparticulate systems marketed by Elan and
Biovail, traditional matrix systems marketed by SkyePharma, plc and other
controlled release technologies marketed and under development by Andrx
Corporation, among others.

      The Company has concentrated a significant portion of its development
efforts on generic versions of controlled release pharmaceuticals. Typically,
selling prices of immediate release drugs have declined and profit margins have
narrowed after generic equivalents of such drugs are first introduced and the
number of competitive products has increased. Similarly, the success of generic
versions of controlled release products based on the Company's TIMERx technology
will depend, in large part, on the intensity of competition from currently
marketed drugs and technologies that compete with the branded controlled release
pharmaceuticals, as well as the timing of product approvals. Competition may
also arise from therapeutic products that are functionally equivalent but
produced by other methods. In addition, under several of the Company's
collaborative arrangements, the payments due to the Company with respect to the
controlled release products covered by such collaborative arrangements will be
reduced in the event that there are competing generic controlled release
versions of such products.

      The generic drug industry is characterized by frequent litigation between
generic drug companies and branded drug companies. Those companies with
significant financial resources will be more able to bring and defend any such
litigation.

      In its excipients business, the Company competes with a number of large
manufacturers and other distributors of excipient products, many of which have
substantially greater financial, marketing and other resources than the Company.
The Company's principal competitor in this market is FMC Corporation, which
markets its own line of MCC excipient products.

      The pharmaceutical industry is characterized by rapid and substantial
technological change. There can be no assurance that any products incorporating
TIMERx technology will not be rendered obsolete or non-competitive by new drugs,
treatments or cures for the medical conditions the TIMERx-based products are
addressing. Any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results of operations.

NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL

      The Company anticipates that its existing capital resources, together with
the funds available under the Credit Facility and internally generated funds,
will enable it to maintain currently planned operations through early 2000.
However, this expectation is based on the Company's current operating plan,
which could change as a result of many factors, and the Company could require


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<PAGE>   6

additional funding sooner than anticipated. The Company's requirements for
additional capital could be substantial and will depend on many factors,
including the timing and amount of payments received under existing and possible
future collaborative agreements; the structure of any future collaborative or
development agreements; the progress of the Company's collaborative and
independent development projects; revenues from the Company's excipients
business, the costs to the Company of bioequivalence studies for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and the development of manufacturing, marketing
and sales capabilities. The Company has no committed sources of capital other
than the Credit Facility. The Credit Facility contains a number of non-financial
covenants that are applicable to Penwest. Any breach of these covenants by the
Company would constitute a default by the Company under the Credit Facility. In
addition, the Credit Facility provides that a breach by Penford of its guarantee
of the Company's indebtedness under the Credit Facility (which will continue for
a period ending August 31, 2000) or the occurrence of an event of default under
any credit agreement with Penford under which the lender is either the sole or a
participating lender would constitute a default by the Company under the Credit
Facility. Accordingly, the Company will be substantially dependent on Penford in
order to access and maintain the Credit Facility. Any default under the Credit
Facility would have a material adverse effect on the Company's business,
financial condition and results of operations.

      To the extent capital resources are insufficient to meet future
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, if at all. The Credit Facility restricts the
incurrence of additional indebtedness by the Company and provides that the
maximum amount available to Penwest under the Credit Facility (initially $15.0
million) will be reduced by the amount of any net proceeds from any financing
conducted by the Company and that the Company will repay any outstanding amounts
under the Credit Facility in excess of the new maximum amount. To the extent
that additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
unable to comply with its obligations under its collaborative agreements, which
could result in the termination of such collaborative agreements. In addition,
the Company may be required to curtail operations significantly or to obtain
funds through entering into collaboration agreements on unfavorable terms. The
Company's inability to raise capital would have a material adverse effect on the
Company's business, financial condition and results of operations.

UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY RIGHTS

      The Company believes that patent and trade secret protection of its drug
delivery technologies is important to its business and that its success will
depend, in part, on its ability to maintain existing patent protection, obtain
additional patents, maintain trade secret protection and operate without
infringing on the rights of others. The Company has been issued 24 U.S. and 48
foreign patents and one U.S. patent application has been allowed relating
principally to its controlled release drug delivery technology. The issuance of
a patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. There can be no assurance that the Company's patents
or any future patents will prevent other companies from developing similar or
functionally equivalent products or from successfully challenging the validity
of the Company's patents. Furthermore, there can be no assurance that (i) any of
the Company's future processes or products will be patentable; (ii) any pending
or additional patents will be issued in any or all appropriate jurisdictions;
(iii) the Company's processes or products will not infringe upon the patents of
third parties; or (iv) the


                                                                              39
<PAGE>   7

Company will have the resources to defend against charges of patent infringement
or protect its own patent rights against third parties. The inability of the
Company to protect its patent rights or infringement by the Company of the
patent or proprietary rights of others could have a material adverse effect on
the Company's business, financial condition and results of operations.

      Substantial patent litigation exists in the pharmaceutical industry.
Patent litigation generally involves complex legal and factual questions, and
the outcome frequently is difficult to predict. An unfavorable outcome in any
patent litigation affecting the Company could cause the Company to pay
substantial damages, alter its products or processes, obtain licenses and/or
cease certain activities. Even if the outcome is favorable to the Company, the
Company could incur substantial litigation costs. Although the legal costs of
defending litigation relating to a patent infringement claim (unless such claim
relates to TIMERx in which case such costs are the responsibility of the
Company) are generally the contractual responsibility of the Company's
collaborators, the Company could nonetheless incur significant unreimbursed
costs in participating and assisting in the litigation.

      In 1994, the Boots Company PLC ("Boots") filed in the European Patent
Office (the "EPO") an opposition to a patent granted by the EPO to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots has appealed
this decision to the EPO Board of Appeals. There can be no assurance that the
Company will prevail in this matter. An unfavorable outcome could materially
adversely affect the Company's business, financial condition and results of
operations.

      The Company also relies on trade secrets and proprietary knowledge, which
it generally seeks to protect by confidentiality and non- disclosure agreements
with employees, consultants, licensees and pharmaceutical companies. There can
be no assurance, however, that these agreements have or in all cases will be
obtained, that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known by others, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL

      The development, clinical testing, manufacture, marketing and sale of
pharmaceutical products are subject to extensive federal, state and local
regulation in the United States. The Company cannot predict the extent to which
it may be affected by legislative and regulatory actions and developments
concerning various aspects of its operations, its products and the health care
field generally. All new prescription drugs must be approved by the FDA before
they can be introduced into the market in the United States. These approvals are
based on manufacturing, chemistry and control data, as well as safety and
efficacy studies and/or bioequivalence studies. The generation of the required
data is regulated by the FDA and can be time-consuming and expensive without
assurance that the results will be adequate to justify approval.

      After submission of a marketing application, in the form of an NDA or an
ANDA, there can be substantial delays in obtaining FDA approval, including the
need to generate and submit additional data. Data submitted to the FDA is often
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Also, delays or rejections may be encountered during any
stage of the regulatory approval process based upon the failure of clinical data
to demonstrate compliance with, or


                                                                              40
<PAGE>   8

upon the failure of the product to meet, the FDA's requirements for safety,
efficacy and quality; and those requirements may become more stringent due to
changes in regulatory agency policy or the adoption of new regulations. While
the U.S. Food, Drug and Cosmetic Act provides for a 180-day review period, the
FDA commonly takes one to two years to grant final approval to a marketing
application (NDA or ANDA). Further, the terms of approval of any marketing
application, including the labeling content, may be more restrictive than the
Company desires and could affect the marketability of products incorporating the
Company's controlled release technology.

      Most of the controlled release products that the Company is developing
with its collaborators are generic versions of brand name controlled release
products, which require the filing of ANDAs. Certain ANDA procedures for generic
versions of controlled release products are the subject of petitions filed by
brand name drug manufacturers, which seek changes from the FDA in the approval
process for generic drugs. These requested changes include, among other things,
tighter standards for certain bioequivalence studies and disallowance of the use
by a generic drug manufacturer in its ANDA of proprietary data submitted by the
original manufacturer as part of an original new drug application. The Company
is unable to predict at this time whether the FDA will make any changes to its
ANDA procedures as a result of such petitions or any future petitions filed by
brand name drug manufacturers or the effect that such changes may have on the
Company. Any changes in FDA regulations that make ANDA approvals more difficult
could have a material adverse effect on the Company's business, financial
condition and results of operations.

      The FDA also has the authority to revoke or suspend approvals of
previously approved products for cause, to debar companies and individuals from
participating in the drug-approval process, to request recalls of allegedly
violative products, to seize allegedly violative products, to obtain injunctions
to close manufacturing plants allegedly not operating in conformity with current
Good Manufacturing Practices ("cGMPs") and to stop shipments of allegedly
violative products. Such delays or FDA actions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The FDA may seek to subject to pre-clearance requirements products currently
being marketed without FDA approval, and there can be no assurance that the
Company or its third-party manufacturers or collaborators will be able to obtain
approval for such products within the time period specified by the FDA.

      In May 1997, one of the Company's collaborators, Mylan, filed an ANDA with
the FDA for the 30 mg dosage strength of Nifedipine XL, a generic version of
Procardia XL. In March 1999, Mylan received tentative approval of this
application. There can be no assurance that final approval can be obtained, or
be obtained in a timely manner, for such ANDA or for any other applications for
regulatory approval that may be filed.

LIMITED MANUFACTURING CAPABILITY; DEPENDENCE ON SOLE SOURCE SUPPLIERS

      The Company does not have commercial-scale facilities to manufacture its
TIMERx material in accordance with cGMP requirements prescribed by the FDA. To
date, the Company has relied on a large third-party pharmaceutical company,
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer Ingelheim"), for the
bulk manufacture of its TIMERx material for delivery to its collaborators under
an agreement that expired in June 1998. The Company believes that there are a
limited number of manufacturers that operate under cGMP regulations capable of
manufacturing the Company's products. The Company has identified another
third-party manufacturer to manufacture TIMERx


                                                                              41
<PAGE>   9

material and is currently validating such manufacturer's facility and
negotiating the terms under which such manufacturer will manufacture TIMERx
material for the Company. During the fourth quarter of 1998, experimental
batches of TIMERx were run in the facility, and commercial terms were agreed
upon. However, there can be no assurance that the Company will finalize a
manufacturing agreement with such manufacturer or as to the terms of such
manufacturing agreement. In the event that the Company is unable to obtain
contract manufacturing, or obtain such manufacturing on commercially reasonable
terms, it may not be able to commercialize its products as planned. There can be
no assurance that third parties upon which the Company relies for supply of its
TIMERx materials will perform, and any failures by third parties may delay
development or the submission of products for regulatory approval, impair the
Company's collaborators' ability to commercialize products as planned and
deliver products on a timely basis, or otherwise impair the Company's
competitive position, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

      The manufacture of any products by the Company (both TIMERx material and
excipients) is subject to regulation by the FDA and comparable agencies in
foreign countries. Delay in complying or failure to comply with such
manufacturing requirements could materially adversely affect the marketing of
the Company's products and the Company's business, financial condition and
results of operations.

      The Company's TIMERx drug delivery system is a hydrophilic matrix
combining primarily two polysaccharides, xanthan and locust bean gums, in the
presence of dextrose. The Company purchases these gums from a sole source
supplier. Most of the Company's excipients are manufactured from a specialty
grade of wood pulp. Although the Company has qualified alternate suppliers with
respect to these materials, there can be no assurance that interruptions in
supplies will not occur in the future or that the Company will not have to
obtain substitute suppliers. Any of these events could have a material adverse
effect on the Company's ability to manufacture bulk TIMERx for delivery to its
collaborators or to manufacture its excipients, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT

      The commercialization of the controlled release product candidates under
development by the Company and its collaborators depends in part on the extent
to which reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers and other
third party payors, such as health maintenance organizations and managed care
organizations. The generic versions of controlled release products being
developed by the Company and its collaborators may be assigned an AB rating if
the FDA considers the product to be therapeutically equivalent to the branded
controlled release drug. Failure to obtain an AB rating from the FDA would
indicate that for certain purposes the drug would not be deemed to be
therapeutically equivalent, would not be fully substitutable for the branded
controlled release drug and would not be relied upon by Medicaid and Medicare
formularies for reimbursement.

      Third party payors are attempting to control costs by limiting the level
of reimbursement for medical products, including pharmaceuticals. Cost control
initiatives could decrease the price that the Company or any of its
collaborators receive for their drugs and have a material adverse effect on the
Company's business, financial condition and results of operations. Further, to
the extent that cost control initiatives have a material adverse effect on the
Company's collaborators, the Company's


                                                                              42
<PAGE>   10

ability to commercialize its products and to realize royalties may be adversely
affected. Moreover, health care reform has been, and may continue to be, an area
of national and state focus, which could result in the adoption of measures that
adversely affect the pricing of pharmaceuticals or the amount of reimbursement
available from third party payors. There can be no assurance that changes in
health care reimbursement laws or policies will not have a material adverse
effect on the Company's business, financial condition and results of operations.

RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE

      Testing, manufacturing, marketing and selling pharmaceutical products
entail a risk of product liability. The Company faces the risk of product
liability claims in the event that the use of its products is alleged to have
resulted in harm to a patient or subject. Such risks exist even with respect to
those products that are manufactured in licensed and regulated facilities or
that otherwise possess regulatory approval for commercial sale. Product
liability insurance coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. The Company is currently
covered by primary product liability insurance in the amount of $1.0 million per
occurrence and $2.0 million annually in the aggregate on a claims-made basis and
by umbrella liability insurance in excess of $25 million which can also be used
for product liability insurance. This coverage may not be adequate as the
Company develops additional products. As the Company receives regulatory
approvals for products under development, there can be no assurance that
additional liability insurance coverage for any such products will be available
in the future on acceptable terms, if at all. The Company's business, financial
condition and results of operations could be materially adversely affected by
the assertion of a product liability claim.

HAZARDOUS MATERIALS

      The Company's research and development and manufacturing activities
involve the controlled use of chemicals and solvents. Although the Company
believes that its safety procedures for handling, storing and disposing of such
materials and the safety procedures of the third parties who ship such materials
for the Company comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for significant damages and any such liability could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RISK OF LOSS OF "TAX-FREE" TREATMENT OF DISTRIBUTION

      Penwest has received a private letter ruling from the IRS to the effect
that, among other things, the Distribution qualifies as tax-free under Sections
355 and 368 of the Code and that the receipt of shares of Common Stock in the
Distribution will not result in the recognition of income, gain or loss to
Penford's shareholders for federal income tax purposes. The continuing validity
of any such ruling is subject to certain factual representations and
assumptions. Neither Penford nor Penwest is aware of any facts or circumstances
which should cause such representations and assumptions to be untrue. Although
the Tax Allocation Agreement provides that neither Penford nor Penwest is to
take any action inconsistent with, nor fail to take any action required by, the
private letter ruling unless required to do so by law or the other party has
given its prior written consent or, in certain circumstances, a supplemental
ruling permitting such action is obtained, any of the following acts potentially
could render the Distribution taxable: (i) the transfer by Penford or Penwest of
a material


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portion of its assets (other than a transfer of assets in the ordinary course of
business); (ii) the merger of Penford or Penwest with or into another
corporation in a transaction that does not qualify as a tax-free reorganization
under Section 368 of the Code; (iii) the discontinuance by Penford or Penwest or
a material portion of its historical business activities; (iv) the conversion
(or redemption or exchange) of the Common Stock distributed in the Distribution
into or for any other stock, security, property, or cash; (v) the issuance of
additional shares of stock by Penwest pursuant to negotiations, agreements,
plans, or arrangements entered into before the Distribution; (vi) transfers of
stock of Penford and/or Penwest by shareholders of sufficient quantity to cause
the historic shareholders of Penford not to be considered to have maintained
sufficient "continuity of proprietary interest" in one or both of the companies;
and (vii) the acquisition of a 50% or greater interest in Penford and/or Penwest
pursuant to a plan (or deemed to be pursuant to a plan) in existence on the
Distribution Date. If the Distribution were rendered taxable as a result of such
an act, then (x) the corporate-level taxable gain would be recognized by the
consolidated group of which Penford is the parent (y) each of Penford and
Penwest, as a former member of that group, would be severally liable for the
corporate-level tax on such gain when such gain becomes taxable under the
consolidated return regulations, and (z) except in the case of an acquisition
described in clause (vii) of the preceding sentence, each holder of common stock
who received shares of Common Stock in the Distribution would be treated as
having received a taxable dividend in an amount equal to the fair market value
of the Common Stock received (assuming that Penford had sufficient current or
accumulated "earnings and profits"). Penford and Penwest have agreed to
indemnify each other with respect to any tax liability resulting from their
respective failures to comply with such provisions. These indemnification
obligations do not extend to shareholders of Penford.



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