Document:

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                                                                   Exhibit 10.18

                              AMENDED AND RESTATED

                          STRATEGIC ALLIANCE AGREEMENT

                                 BY AND BETWEEN

                           PENWEST PHARMACEUTICALS CO.

                                       AND

                            ENDO PHARMACEUTICALS INC.

                            DATED AS OF APRIL 2, 2002

                         ------------------------------

         THE CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT
REQUEST IN ACCORDANCE WITH RULE 24b-2 OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS AMENDED. REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN ***.
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                                TABLE OF CONTENTS

<TABLE>
<S>                                                                          <C>
1.  Definitions.............................................................   1
2.  [INTENTIONALLY OMITTED.]................................................   2
3.  Certification Period(s).................................................   2
    3.1  Covenants..........................................................   2
    3.2  Communication & Access.............................................   2
    3.3  Reports............................................................   2
    3.4  Supply.............................................................   2
    3.5  U.S. Certification Budget; Election Not to Continue Participation..   2
    3.6  Rest of the World..................................................   4
    3.7  Certification Reconciliations......................................   4
4.  Marketing Period........................................................   5
    4.1  Endo Covenants.....................................................   5
    4.2  Penwest Covenants..................................................   5
    4.3  Rest of the World..................................................   6
    4.4  TIMERx Supply; Invoices During the Marketing Period................   6
    4.5  Royalties; Recoupment of Certification Excess......................   7
    4.6  Reduction in Royalties.............................................   7
    4.7  Timing of Royalty Payments.........................................   8
    4.8  Records; Audits....................................................   9
    4.9  Rate of Exchange for Non-U.S. Royalties............................   9
5.  Term and Termination....................................................   9
    5.1  Term...............................................................  10
    5.2  Receipt of Non-Approvable Letter...................................  10
    5.3  Mutual Agreement...................................................  10
    5.4  Unfavorable or Inconclusive Results................................  10
    5.5  Termination of Participation in a Certification Period.............  10
    5.6  Termination of an Exclusivity Period for Failure to Meet
         Minimum Net Realization Levels.....................................  11
    5.7  Failure to Launch or Discontinuation of Active Marketing...........  11
    5.8  Material Breaches..................................................  11
    5.9  Endo's Bankruptcy; Insolvency......................................  12
    5.10 Penwest's Bankruptcy; Insolvency...................................  12
    5.11 Survival...........................................................  12
6.  Ownership and Licenses..................................................  12
    6.1  Retention of Ownership; Inventorship;  Assignment..................  12
    6.2  Filing and Prosecution of Patents..................................  13
    6.3  Licenses Granted...................................................  13
    6.4  Exclusivity........................................................  14
    6.5  Licenses as to Product Technology..................................  15
    6.6  Endo's License to TIMERx...........................................  15
    6.7  Endo's Continuing License..........................................  15
</TABLE>

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<TABLE>
<S>                                                                          <C>
    6.8  Penwest's Continuing License.......................................  17
    6.9  License to Improvement Technology..................................  19
    6.10 License to Endo Test and Regulatory Data...........................  20
    6.11 License to Penwest Test and Regulatory Data........................  20
    6.12 Marking of the Product.............................................  21
7.  Supply of TIMERx; Oxymorphone...........................................  21
    7.1  Sales of TIMERx....................................................  21
    7.2  Quality Control Testing............................................  21
    7.3  Non-Conforming Shipments...........................................  21
    7.4  Failure to Supply TIMERx...........................................  22
    7.5  Failure to Supply Oxymorphone ADS or Finished Product..............  23
    7.6  Access.............................................................  24
    7.7  TIMERx Ordering Process............................................  25
    7.8  Estimates of TIMERx................................................  25
    7.9  Actual TIMERx Supply...............................................  25
    7.10 Notifications; Governmental Inspections............................  25
    7.11 Manufacturing Agreements...........................................  26
8.  Use of Trademarks.......................................................  27
    8.1  Benefit of Trademarks..............................................  27
    8.2  Protection of Trademarks...........................................  27
    8.3  Acknowledgement of Ownership of Trademarks.........................  27
    8.4  Prior Approval of Use of Trademarks................................  28
9.  Representations, Warranties and Indemnities.............................  28
    9.1  Mutual Authorization Representations...............................  28
    9.2  Penwest Representations............................................  28
    9.3  Mutual Licenses, Permits and Authorizations Representations........  29
    9.4  Disclaimer.........................................................  29
    9.5  Penwest's Indemnification of Endo..................................  29
    9.6  Endo's Indemnification of Penwest..................................  30
    9.7  Limitation on Indemnification......................................  30
    9.8  Procedure..........................................................  31
    9.9  No Liability.......................................................  31
10. Confidentiality and Non-Solicitation....................................  32
    10.1 Confidentiality; Exceptions........................................  32
    10.2 Public Announcements...............................................  33
    10.3 Non-Solicitation...................................................  33
11. Infringement............................................................  33
    11.1 Notice of Infringement.............................................  33
    11.2 Non-Covered Infringement...........................................  34
    11.3 Penwest's Institution of Suit......................................  34
    11.4 Joint Suits........................................................  34
    11.5 Endo's Institution of Suit.........................................  34
    11.6 Abandonment of Suit................................................  34
    11.7 Patent Enforcement Litigation......................................  35
</TABLE>

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<TABLE>
<S>                                                                          <C>
12. Escalation Procedures...................................................  35
13. Arbitration.............................................................  36
14. Miscellaneous...........................................................  37

Exhibits
Definitions Exhibit.........................................................  40
Exhibit 1.17 - Trademarks...................................................  52
Exhibit 1.28 - Accounting and Attribution Standards and Principals..........  53
Exhibit 1.32 - Penwest Patents..............................................  56
Exhibit 6.1 - Certain Jointly Filed Provisional Patent Applications.........  58
</TABLE>

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                              AMENDED AND RESTATED

                          STRATEGIC ALLIANCE AGREEMENT

         THIS AGREEMENT is entered into as of the 2nd day of April, 2002 (the
"Restatement Date"), by and between Penwest Pharmaceuticals Co. ("Penwest"), a
Washington corporation with its principal place of business at 2981 Route 22,
Patterson, New York 12563, and Endo Pharmaceuticals Inc., a Delaware corporation
with its principal place of business at 100 Painters Drive, Chadds Ford,
Pennsylvania 19317 ("Endo").

         WHEREAS, Penwest and Endo are party to that certain Strategic Alliance
Agreement, dated as of September 17, 1997 (the "Old Agreement");

         WHEREAS, in light of changes that have occurred at both Penwest and
Endo since the execution of the Old Agreement, Penwest and Endo now wish to
amend and restate the Old Agreement in its entirety;

         WHEREAS, Penwest has developed an extended-release agent covered by one
or more patents, patent applications, know-how and other proprietary technology,
which agent Penwest markets under the name and mark "TIMERx(R)" ("TIMERx");

         WHEREAS, Endo manufactures and markets the product marketed under the
name "Numorphan(R)", having as an active drug substance oxymorphone HCl
("Oxymorphone") and has developed know-how and other proprietary technology with
respect thereto;

         WHEREAS, the parties, pursuant to the Old Agreement, have co-developed
a product combining Oxymorphone and TIMERx, which product is a solid-dosage
extended-release pharmaceutical for oral administration in humans in one or more
dosage strengths and which product is referred to by the parties as "EN 3202";

         WHEREAS, the parties desire to provide for the further development and
commercialization of EN 3202 as provided herein; and

         WHEREAS, Endo desires to contract for a supply of TIMERx for use in the
manufacture of EN 3202, and Penwest is willing to supply the same provided that
Endo agrees to obtain all of its and its Affiliates' and sublicensees'
requirements of TIMERx from Penwest as provided herein;

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

1.       Definitions. Certain terms used herein are defined in Sections 1.1
         through 1.44 of the Definitions Exhibit attached hereto and
         incorporated herein by this reference.

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2.       [INTENTIONALLY OMITTED.]

3.       Certification Period(s).

         3.1      Covenants. Each of Penwest and Endo will exert its Best
                  Commercial Efforts: (i) to perform the respective
                  Certification Tasks allotted to it; (ii) to do so in
                  accordance with the applicable Certification Budget; and (iii)
                  to assist and to cooperate as requested with the other party's
                  Best Commercial Efforts to do the same as to its own
                  Certification Tasks.

         3.2      Communication & Access. Each party will, promptly and
                  throughout the term of this Agreement, provide to the other
                  party all necessary or useful information in or coming into
                  its possession or reasonably available to it to support the
                  achievement of the Certification Tasks. Notwithstanding
                  anything else to the contrary contained herein, nothing shall
                  require either party to disclose confidential information for
                  which such party has an obligation of confidentiality to a
                  third party, but each party will exert its Best Commercial
                  Efforts to bring to the attention of the Alliance Committee
                  any such third party restrictions as may be relevant to its
                  role hereunder.

         3.3      Reports. Each Project Contact will be available throughout
                  each Certification Period to answer any reasonable questions
                  from the other party's Project Contact, as appropriate.

         3.4      Supply. During each Certification Period in which it is
                  participating, Endo shall provide Oxymorphone and related
                  materials reasonably required to support the applicable
                  Certification Tasks, and Penwest shall provide all Formulated
                  TIMERx reasonably required therefor, all as shall be more
                  fully described in the applicable Certification Tasks adopted
                  by Committee Action. The costs of such materials will be
                  treated as among the parties' respective expenditures pursuant
                  to the applicable Certification Budget, using for this purpose
                  the Formulated TIMERx Price as to the TIMERx and the
                  Oxymorphone Price as to the Oxymorphone. Where, as permitted
                  hereunder, a party is not participating in a Certification
                  Period, it will sell such materials to the participating party
                  pursuant to Section 6.8.4 hereof or Article 7 hereof, as
                  applicable, and the price paid therefor shall be treated as
                  part of the buyer's expenditures pursuant to the applicable
                  Certification Budget.

         3.5      U.S. Certification Budget; Election Not to Continue
                  Participation. The parties hereby agree that the Alliance
                  Committee, by Committee Action, shall on an annual basis
                  approve the U.S. Certification Budget for the next
                  twelve-month period. The parties hereby further agree that
                  each party will share equally the total costs of each entire
                  Certification Budget for the U.S. Certification Period
                  regardless of which party is allocated one or more of the
                  relevant Certification Tasks, subject to Section 5.5 hereof.
                  If at any time, one party but not the other

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                  desires to spend sums or devote resources not covered by a
                  particular U.S. Certification Budget to complete Certification
                  Tasks, then, upon such party giving notice to the other party
                  under Section 5.5 hereof, the following shall apply (in
                  addition to the provisions of Section 5.5 hereof):

                  3.5.1    The party that does not participate further in such
                           U.S. Certification Period shall not be required to
                           contribute to the reconciliations for the costs of
                           such Certification Period under Section 3.7 hereof.
                           Rather, a Certification Excess shall be established
                           with respect to the Product in the U.S., which shall
                           equal the sums such party would have paid under
                           Section 3.7 hereof for such costs, had it fully
                           participated in such Certification Period, but did
                           not pay due to its election under this Section.

                  3.5.2    If Endo is the party electing not to participate
                           further in such U.S. Certification Period, then
                           Section 6.8 hereof shall apply and the other
                           provisions of this Agreement shall remain in effect
                           in accordance with their terms and the terms of
                           Section 6.8; provided, however, that, if a
                           Certification Excess exists pursuant to Section 3.5.1
                           hereof (where Endo is the non-participating party),
                           Penwest shall pay Endo proportionately less than the
                           Applicable Percentage of the relevant Net Realization
                           from the Product in the U.S., until Penwest has
                           thereby recouped the amount of such Certification
                           Excess. (That is, for example, if the total resources
                           devoted by both Endo and Penwest to such
                           Certification Period is *** in this example, and
                           Penwest bore *** and Endo bore *** of that total
                           prior to Endo's making its election not to
                           participate further, and if the Applicable Percentage
                           is 50%, then Penwest would pay Endo *** of the Net
                           Realization from the Product in the U.S. until
                           Penwest had thereby recouped the *** total
                           Certification Excess, which would occur in this
                           example when the total of such Net Realization
                           reaches ***.)

                  3.5.3    If Penwest is the party electing not to participate
                           further in such U.S. Certification Period, then
                           Section 6.7 shall apply and the other provisions of
                           this Agreement shall remain in effect in accordance
                           with their terms and the terms of Section 6.7;
                           provided, however, that, if a Certification Excess
                           exists pursuant to Section 3.5.1 hereof (where
                           Penwest is the non-participating party), Endo shall
                           pay Penwest proportionately less than the Applicable
                           Percentage of the relevant Net Realization from the
                           Product in the U.S., until Endo has thereby recouped
                           the amount of such Certification Excess. (That is,
                           for example, if the total resources devoted by both
                           Endo and Penwest to such Certification Period is ***
                           in this example, and Endo bore *** and Penwest bore
                           *** of that total prior to Penwest's making its

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                           election not to participate further, and if the
                           Applicable Percentage is 50%, then Endo would pay
                           Penwest *** of the Net Realization from the Product
                           in the U.S. until Endo had thereby recouped the ***
                           total Certification Excess, which would occur in this
                           example when the total of such Net Realization
                           reaches ***.)

         3.6      Rest of the World. A Certification Period with respect to any
                  nation other than the U.S. may be instituted from time to time
                  by Committee Action, and shall be so instituted if: (i) a
                  party hereto so requests as to such nation and (ii) Committee
                  Action determines that there is a reasonable likelihood that
                  Approval for the Product will be obtained in such nation. The
                  parties hereby agree that the Alliance Committee, by Committee
                  Action, shall on an annual basis approve the Certification
                  Budget with respect to each such Certification Period for the
                  next twelve-month period following the institution thereof.

                  3.6.1    If both parties elect to participate fully in such
                           Certification Period, each party will share equally
                           the total costs of the entire Certification Budget
                           relating thereto, regardless of which party is
                           allocated one or more of the relevant Certification
                           Tasks, unless both parties have consented in writing
                           to an alternative arrangement.

                  3.6.2    If a party hereto not requesting such Certification
                           Period elects not to participate therein, it shall do
                           so by written notice to the other party given within
                           90 days of the request by the requesting party for
                           such Certification Period (whether or not such
                           Certification Period has been instituted by Committee
                           Action prior to such election).

                  3.6.3    A party that does not fully participate in such
                           Certification Period shall not be required to
                           contribute to the reconciliations for the costs of
                           such Certification Period under Section 3.7 hereof.
                           Rather, a Certification Excess shall be established
                           with respect to the Product in the relevant nation,
                           which shall equal the sums such party would have
                           borne or paid under Sections 3.6.1 and 3.7 hereof,
                           had it participated in such Certification Period, but
                           did not pay due to its election under this section.
                           In such event, any Certification Excess shall be
                           treated as described in Section 3.5.2 or 3.5.3
                           hereof, as applicable.

         3.7      Certification Reconciliations. Except as otherwise provided in
                  this Section 3.7, or Sections 3.5 or 5.5 hereof, in order to
                  effect a reconciliation of accounts, Endo shall issue to
                  Penwest a quarterly invoice, issued against records for each
                  such quarter and payable prior to the 30th day following the
                  date of invoice; provided that such invoice shall be
                  accompanied by a written accounting of and copies of
                  supporting invoices for the expenditures, costs and other
                  resources actually devoted by both parties to the
                  Certification Tasks since the last such invoice; provided
                  further that Penwest shall pay Endo one-half (50%) of the
                  amount by

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                  which the expenditures, costs and other resources actually
                  devoted by Endo to the Certification Tasks since the last such
                  invoice exceed such expenditures, costs and other resources
                  actually devoted by Penwest and set forth in, and
                  substantiated by, appropriate documentation reasonably
                  acceptable to Endo (or vice versa if the expenditures, costs
                  and other resources devoted by Penwest exceed those devoted by
                  Endo); provided, however, that following the submission of the
                  NDA with the FDA, all such invoices shall be issued on a
                  monthly basis. Payments shall be sent to the "Remit to"
                  address set forth on the invoice. Penwest shall pay to Endo
                  (or vice versa if Endo is the paying party) a late charge of
                  one and one-half percent (1.5%) per month (or the maximum
                  interest allowable by applicable law, whichever is less) for
                  each invoice past due for more than thirty (30) days from the
                  date of Penwest's receipt of any correct invoice. Should
                  Penwest (or vice versa if Endo is the paying party) dispute
                  any portion of an invoice, it shall not be required to pay any
                  portion of such invoice until such time as the dispute is
                  resolved and Penwest receives a fully corrected invoice;
                  provided that, in such an event, Endo (or vice versa if Endo
                  is the paying party) shall have the option of issuing a new,
                  correct invoice for the portion of the original invoice not in
                  dispute, and Penwest (or vice versa if Endo is the paying
                  party) shall pay such new invoice within the time limits set
                  forth in this Section 3.7. In the event that Endo ceases its
                  participation in a Certification Period as provided herein,
                  then Penwest shall invoice Endo as above and this Section 3.7
                  shall continue to apply, substituting Penwest for Endo and
                  vice versa.

4.       Marketing Period.

         4.1      Endo Covenants. Endo hereby agrees, subject to Sections 3.5
                  and 5.5 hereof, to use its Best Commercial Efforts during the
                  Marketing Period to manufacture, market, promote and sell the
                  Product throughout the United States, once Approval has been
                  obtained therefor in the United States, commencing with any
                  normal and appropriate pre-Approval preparations and a full
                  product launch as soon as practical following such Approval,
                  and to do so in accordance with the applicable Manufacturing
                  and Marketing Plan.

         4.2      Penwest Covenants. If Endo has elected not to participate
                  further in the Certification Period pursuant to Section 3.5 or
                  5.5 hereof, Penwest hereby agrees, subject to Sections 3.5 and
                  5.5 hereof, to use its Best Commercial Efforts during the
                  Marketing Period to manufacture, market, promote and sell the
                  Product throughout the United States or to arrange therefor
                  with appropriate third parties, once Approval has been
                  obtained therefor in the United States, commencing with any
                  normal and appropriate pre-Approval preparations and a full
                  product launch as soon as practical following such Approval,
                  and to do so in accordance with the applicable Manufacturing
                  and Marketing Plan. When considering the establishment of any
                  relationships whereby Penwest would contract for a third party
                  to manufacture, market, promote or sell the Product, Penwest
                  will in good

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                  faith consider using Endo, or a designee of Endo, to conduct
                  such activities where Endo (or such designee) has a
                  demonstrated ability to manufacture, market, promote or sell
                  the Product, as applicable.

         4.3      Rest of the World. With respect to any nation other than the
                  U.S., each of the parties shall, subject to Sections 3.6 and
                  5.5 hereof, use its Best Commercial Efforts either (i) to
                  present to the Alliance Committee a plan (in the form of a
                  Manufacturing and Marketing Plan) for such party's
                  manufacturing, marketing, promoting and selling the Product
                  throughout such nation or (ii) to present to the Alliance
                  Committee an arrangement whereby a third party or third
                  parties will do some or all of the tasks described under
                  clause (i). The Alliance Committee will determine, by
                  Committee Action, which of the approaches (i.e., clause (i)
                  and/or clause (ii), and as to one or both of the parties'
                  approaches so presented) will be most likely to maximize the
                  early market entry and ultimate market success of the Product
                  in the applicable nation; it being understood, however, that
                  the Alliance Committee will give preference, other factors
                  being essentially equal, for marketing, promotion and selling
                  to be conducted by a party hereto or an Affiliate of a party
                  hereto, if any such approach is presented in a timely manner
                  by such party; provided that, in the event that Alliance
                  Committee determines that an approach described by clause (ii)
                  above shall be pursued in the applicable nation, Endo shall
                  take the lead with respect to the negotiations and discussions
                  with the third party or third parties in such nation, with the
                  terms of any agreement so negotiated remaining subject to
                  Alliance Committee approval.

         4.4      TIMERx Supply; Invoices During the Marketing Period.

                  (a)      Supply of Formulated TIMERx by Penwest (or otherwise
                           as provided in Section 7.4 hereof) in accordance with
                           the Specifications is desired by both parties for the
                           technically satisfactory production, regulatory
                           approval, and exploitation of the Product. In
                           accordance with Article 7 hereof (and except as
                           provided in Section 7.4 hereof), Penwest will supply
                           Endo and its Affiliates and sublicensees with
                           sufficient quantities of Formulated TIMERx produced
                           in accordance with the Specifications in compliance
                           with cGMP and all applicable laws and regulations, to
                           meet their requirements for the manufacturing of the
                           Product during the Marketing Period, and Endo shall
                           purchase all of its and its Affiliates' and
                           sublicensees' requirements thereof from Penwest
                           during such period. The price for all Formulated
                           TIMERx sold hereunder shall equal the Formulated
                           TIMERx Price. As provided in Section 1.28 of the
                           Definitions Exhibit, the price of the Formulated
                           TIMERx used in the Product will be one of the
                           deductions applied in the calculation of the Net
                           Realization.

                  (b)      Penwest shall issue to Endo an invoice, issued
                           against records at the same time as, or immediately
                           following, each shipment of Formulated TIMERx

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                           to Endo and payable, subject to this Section 4.4(b),
                           within thirty (30) days after Endo's receipt of such
                           invoice. Payments shall be sent to the "Remit to"
                           address set forth on the invoice. Endo shall pay to
                           Penwest a late charge of one and one-half percent
                           (1.5%) per month (or the maximum interest allowable
                           by applicable law, whichever is less) for each
                           invoice past due for more than thirty (30) days from
                           the date Endo's receipt of any correct invoice.
                           Should Endo dispute any portion of an invoice, it
                           shall not be required to pay any portion of such
                           invoice until such time as the dispute is resolved
                           and Endo receives a fully corrected invoice; provided
                           that, in such an event, Penwest shall have the option
                           of issuing a new, correct invoice for the portion of
                           the original invoice not in dispute, and Endo shall
                           pay such new invoice within the time limits set forth
                           in this Section 4.4.

         4.5      Royalties; Recoupment of Certification Excess. Endo hereby
                  agrees to pay to Penwest Royalties equal to the Applicable
                  Percentage of the relevant Net Realization from all units of
                  the Product sold by Endo and its distributors and licensees in
                  the Territory; provided that any Certification Excess shall be
                  recouped in the manner set forth in Section 3.5 hereof. In the
                  event that Endo ceases its participation (or elects not to
                  participate) in a Certification Period in accordance with this
                  Agreement, Penwest shall then pay to Endo Royalties equal to
                  the Applicable Percentage of Net Realization from all units of
                  the Product sold by Penwest and its distributors and licensees
                  in the Territory; provided that any Certification Excess shall
                  be recouped in the manner set forth in Section 3.5 hereof.

         4.6      Reduction in Royalties.

                  4.6.1    Endo has agreed to make the payments specified in
                           Section 4.5 hereof, which payments shall be deemed
                           allocable one-third for Penwest's anticipated
                           contributions of know-how, resources, time and money,
                           and two-thirds to the licenses contained in Sections
                           6.3.1, 6.5, 6.6, 6.9.2 and 6.11 hereof. Royalties
                           shall be paid in accordance with Section 4.5 hereof,
                           irrespective of whether any Penwest Patents or
                           patents on Penwest Product Technology cover the
                           Product; provided, however, that in the event of an
                           occurrence of a condition set forth in Section 6.7
                           (b) or (c) hereof, but subject (in the case of
                           Section 6.7(c) hereof) to the provisions of Section
                           5.10 hereof, Endo shall be obligated to pay to
                           Penwest only that portion of the Royalties that are
                           allocated to the licenses in Section 6.3.1, 6.5, 6.6,
                           6.9.2 and 6.11 hereof as described above (i.e., the
                           Net Realization in the applicable nation shall be
                           reduced by one-third prior to the calculation of the
                           proportion thereof to be paid to Penwest as Royalties
                           hereunder); and provided further that if there are
                           any Net Realizations from the Product

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                           sold in the United States to which no license to U.S.
                           Penwest Patents or to U.S. Penwest Product Technology
                           Patents (including patent applications, as if patents
                           had issued thereon) is applicable to the making,
                           using, sale, offer for sale, or import thereof, such
                           Net Realizations shall be reduced by one-third prior
                           to the calculation of the proportion thereof to be
                           paid to Penwest as Royalties hereunder. For clarity
                           and without limiting the provisions of Section 5.10,
                           no royalty reduction shall apply as a result of the
                           occurrence of a condition set forth in Section 6.7(a)
                           and, in any case, the maximum royalty reduction under
                           this Section 4.6.1 shall be a one-third reduction,
                           regardless of whether multiple bases for a royalty
                           reduction hereunder occur.

                  4.6.2    In the event that any Royalties are payable by
                           Penwest to Endo hereunder, Penwest has agreed to make
                           the payments specified in Section 4.5 hereof, which
                           payments shall be deemed allocable one-third for
                           Endo's anticipated contributions of know-how,
                           resources, time and money, and two-thirds to the
                           licenses contained in Sections 6.3.2, 6.5, 6.9.1,
                           6.10 and 7.5.1 hereof. Royalties shall be paid in
                           accordance with Section 4.5 hereof, irrespective of
                           whether any Endo Patents or patents on Endo Product
                           Technology cover the Product; provided, however, that
                           in the event of an occurrence of a condition set
                           forth in Section 6.8 (b), (c), (d) or (e) hereof, but
                           subject (in the case of Section 6.8(e) hereof) to the
                           provisions of Section 5.9 hereof, Penwest shall be
                           obligated to pay to Endo only that portion of the
                           Royalties that are allocated to the licenses in
                           Section 6.3.2, 6.5, 6.9.1, 6.10 and 7.5.1 hereof as
                           described above (i.e., the Net Realization in the
                           applicable nation shall be reduced by one-third prior
                           to the calculation of the proportion thereof to be
                           paid to Endo as Royalties hereunder). For clarity and
                           without limiting the provisions of Section 5.9, no
                           royalty reduction shall apply as a result of the
                           occurrence of a condition set forth in Section 6.8(a)
                           and, in any case, the maximum royalty reduction under
                           this Section 4.6.2 shall be a one-third reduction,
                           regardless of whether multiple bases for a royalty
                           reduction hereunder occur.

         4.7      Timing of Royalty Payments. All Royalties shall be due
                  quarterly within 60 days following the end of each calendar
                  quarter for Net Realization in such calendar quarter. Each
                  payment shall be accompanied by a statement of Net Realization
                  for the quarter and the calculation of the Royalties payable
                  hereunder. In addition, within twenty (20) days following the
                  end of each calendar quarter, an estimated statement of Net
                  Realization for the quarter and the calculation of estimated
                  Royalties for such completed quarter payable hereunder shall
                  be provided by the party paying Royalties. All Royalties and
                  all other amounts

                                       8
<PAGE>
                  payable under this Agreement will bear interest at the rate of
                  one and one-half percent (1.5%) per month (or the maximum
                  interest allowable by applicable law, whichever is less), from
                  the thirty-first (31st) day after the date due through the
                  date of payment. Notwithstanding the foregoing, if any
                  adjustments or inaccuracies in the amounts paid or payable are
                  determined by the auditors of either Penwest or Endo in their
                  review of financial results as provided in Section 4.8 hereof,
                  and the other party agrees to such adjustment, such
                  adjustments for the immediately preceding quarter may be
                  reconciled and described in the next due written report and
                  the Royalty payment then next due shall be adjusted to reflect
                  the determination of such auditors and such agreement.

         4.8      Records; Audits. Endo or Penwest, as the case may be, shall
                  keep and shall cause its respective Affiliates and its and
                  their respective sublicensees to keep complete, true and
                  accurate records for the purpose of showing the derivation of
                  all Royalties payable to Penwest or Endo, as the case may be,
                  under this Agreement. Penwest or Endo, as the case may be, or
                  their respective representatives shall have the right to
                  inspect, copy and audit such records at any time during
                  reasonable business hours upon reasonable advance written
                  notice to Endo or Penwest, as the case may be, or any of their
                  respective Affiliates or sublicensees. Information gathered
                  during such an audit shall be held in confidence by the
                  requesting party and its Affiliates, except to the extent any
                  of the exceptions stated in Sections 10.1.1 through 10.1.7
                  hereof apply thereto, and the requesting party's auditors will
                  be required to execute an agreement consistent with this
                  obligation and otherwise reasonably acceptable to the other
                  party hereto. Any such audit shall be at the expense of the
                  requesting party, unless the audit reveals that, with respect
                  to the period under audit, less than 90% (for the first such
                  audit conducted with respect to the Product) or 97% (for any
                  subsequent audits with respect to the Product) of the
                  Royalties due to the requesting party hereunder have been
                  paid, in which event the other party shall pay or reimburse
                  the requesting party for the reasonable expenses of such
                  audit, in addition to the requesting party's other remedies
                  that may be available for such underpayment.

         4.9      Rate of Exchange for Non-U.S. Royalties. All monies due
                  Penwest hereunder shall be paid in United States Dollars to
                  Penwest in Patterson, New York, U.S.A. All monies due Endo
                  hereunder shall be paid in United States Dollars to Endo in
                  Chadds Ford, Pennsylvania, U.S.A. With respect to any
                  Royalties that may become payable hereunder based on Net
                  Realization in nations in the Territory other than the U.S.,
                  the rate of exchange to be used shall be the average
                  commercial rate of exchange for the 30 days preceding the date
                  of payment for the conversion of local currency to United
                  States Dollars as published by The Wall Street Journal (or if
                  it ceases to be published, a comparable publication to be
                  agreed upon by the parties).

5.       Term and Termination.

                                       9
<PAGE>
         5.1      Term. The term of this Agreement shall begin on the Effective
                  Date and shall, unless earlier terminated as provided herein,
                  continue until the last to occur of: (i) the end of the last
                  License Term to expire or be terminated, if any such License
                  Term(s) are in effect on any date determined under clause (ii)
                  below; and (ii) the end of the term of any license under
                  Section 6.7 or 6.8 hereof, if any such license is in effect on
                  any date determined under clause (i) above.

         5.2      Receipt of Non-Approvable Letter. This Agreement may be
                  terminated by mutual agreement of the parties if the FDA
                  issues a non-approvable letter with respect to the Product.

         5.3      Mutual Agreement. This Agreement may be terminated by the
                  mutual agreement of the parties at any time.

         5.4      Unfavorable or Inconclusive Results. This Agreement may be
                  terminated if it is determined by Committee Action that due to
                  unfavorable or inconclusive results to that time, no further
                  efforts are likely to lead to the Approval for the Product in
                  the U.S.

         5.5      Termination of Participation in a Certification Period. Either
                  party may at its option terminate its participation in any
                  Certification Period (including without limitation the U.S.
                  Certification Period) at its election and upon at least 30
                  days' prior written notice to the other party (subject,
                  however, to a continuing duty to contribute as provided herein
                  to the costs of Certification Tasks previously committed prior
                  to such notice), if (x) it determines in good faith that no
                  further efforts are likely to lead to the applicable Approval
                  for the Product or (y) it does not desire to spend further
                  sums or devote further resources to complete the applicable
                  Certification Tasks. In addition, either party may elect not
                  to participate in a Certification Period with respect to a
                  nation other than the U.S. as provided in Section 3.6.2
                  hereof. In any such event, all other terms and conditions of
                  this Agreement shall remain in full force and effect.

                  5.5.1    If the terminating party is Endo, this shall, as to
                           such nation, have the results stated in Section 6.8
                           hereof.

                  5.5.2    If the terminating party is Penwest, this shall, as
                           to such nation, have the results stated in Section
                           6.7 hereof.

                  5.5.3    Any termination pursuant to this Section 5.5 shall
                           have the results set forth in Section 3.5.1 hereof
                           and, in the case of Endo, Section 3.5.2 hereof and,
                           in the case Penwest, Section 3.5.3 hereof; provided
                           that any amounts that are then due and payable shall
                           be paid within sixty (60) days of any termination
                           under this section, or with the next scheduled
                           payment under Section 3.7 hereof (whichever is
                           sooner).

                                       10
<PAGE>
         5.6      Termination of an Exclusivity Period for Failure to Meet
                  Minimum Net Realization Levels. Penwest or Endo, as the case
                  may be, may at its option terminate the Exclusivity Period for
                  the Product in one or more nations in the Territory if Endo or
                  Penwest, as the case may be, fails to meet the Minimum Net
                  Realization levels in such nation under the then-current
                  applicable Manufacturing and Marketing Plan for the Product
                  during any two consecutive calendar years. In such event, all
                  other terms and conditions of this Agreement shall remain in
                  full force and effect.

         5.7      Failure to Launch or Discontinuation of Active Marketing. If
                  Endo or Penwest, as the case may be, fails to launch
                  full-scale marketing of the Product in any nation in the
                  Territory within the time frames specified in the then-current
                  Manufacturing and Marketing Plan therefor, or announces its
                  intention to discontinue active marketing of the Product in
                  such nation, Penwest or Endo, as the case may be, may at its
                  option elect to terminate the License Term for the Product in
                  such nation upon the delivery of written notice to Endo or
                  Penwest, as the case may be. Any such termination of such
                  License Term will have the effect of removing the affected
                  nation(s) from the Territory for the Product and shall have
                  the results stated in Sections 6.8 or 6.7 hereof (as the case
                  may be) with respect to such nation. In such event, all other
                  terms and conditions of this Agreement shall remain in full
                  force and effect.

         5.8      Material Breaches. In the event that either party materially
                  breaches any of the terms, conditions or agreements contained
                  in this Agreement to be kept, observed or performed by it,
                  then the other party may terminate this Agreement, at its
                  option and without prejudice to any of its other legal or
                  equitable rights or remedies, by giving the party that
                  committed the breach (i) in the case of breach of obligations
                  other than the payment of money, 90 days' notice in writing,
                  unless the notified party within such 90-day period shall have
                  cured the breach, and (ii) in the case of breach of an
                  obligation for the payment of money, 30 days' notice in
                  writing, unless the notified party within such 30-day period
                  shall have cured the breach, including any required payment of
                  interest on previously unpaid amounts as set forth herein.

                  5.8.1    If the defaulting party is Endo, a termination under
                           this section shall have the results stated in Section
                           6.8 hereof.

                  5.8.2    If the defaulting party is Penwest, a termination
                           under this section shall have the results stated in
                           Section 6.7 hereof.

                  5.8.3    Any termination pursuant to this Section 5.8 shall
                           have the results set forth in Section 3.5.1 hereof
                           and, in the case of Endo, Section 3.5.2 hereof and,
                           in the case of Penwest, Section 3.5.3 hereof;
                           provided that any amounts that are then due and
                           payable shall be paid within sixty

                                       11
<PAGE>
                           (60) days of any termination under this section, or
                           with the next scheduled payment under Section 3.7
                           hereof (whichever is sooner).

         5.9      Endo's Bankruptcy; Insolvency. If Endo files for protection
                  under federal or state bankruptcy laws, becomes insolvent,
                  makes an assignment for the benefit of creditors, appoints or
                  suffers appointment of a receiver or trustee over its
                  property, files a petition under any bankruptcy or insolvency
                  act or has such petition filed against it, then Sections 6.8,
                  3.5.1 and 3.5.2 hereof shall apply; provided that if any of
                  the foregoing conditions arises as a consequence of actions
                  taken by third parties to which Endo has not acquiesced, then
                  such Sections shall not apply as a consequence of such
                  condition unless such condition persists for more than
                  forty-five (45) days; provided further that if any of the
                  foregoing conditions arises after the end of all Certification
                  Periods or more than one hundred eighty (180) days after Endo
                  has ceased participation in any Certification Period, then
                  Section 6.8.3 shall not apply as a consequence of such
                  condition.

         5.10     Penwest's Bankruptcy; Insolvency. If Penwest files for
                  protection under federal or state bankruptcy laws, becomes
                  insolvent, makes an assignment for the benefit of creditors,
                  appoints or suffers appointment of a receiver or trustee over
                  its property, files a petition under any bankruptcy or
                  insolvency act or has such petition filed against it, then
                  Sections 6.7, 3.5.1 and 3.5.3 hereof shall apply; provided
                  that if any of the foregoing conditions arises as a
                  consequence of actions taken by third parties to which Penwest
                  has not acquiesced, then such Sections shall not apply as a
                  consequence of such condition unless such condition persists
                  for more than forty-five (45) days; provided further that if
                  any of the foregoing conditions arises after the end of all
                  Certification Periods or more than one hundred eighty (180)
                  days after Penwest has ceased participation in any
                  Certification Period, then Section 6.7.3 shall not apply as a
                  consequence of such condition.

         5.11     Survival. Endo's or Penwest's, as the case may be, obligations
                  regarding payment of Royalties accrued as of the date of
                  termination, Penwest's rights under Sections 6.9.1 and 6.10
                  hereof (except if this Agreement is terminated due to an
                  uncured breach on the part of Penwest), and Endo's rights
                  under Sections 6.9.2 and 6.11 (except if this Agreement is
                  terminated due to an uncured breach on the part of Endo), and
                  the provisions of Sections 5, 6.1, 6.5-6.12, 9, 10, 12.2, 13,
                  and 14, hereof shall survive any expiration or termination of
                  this Agreement.

6.       Ownership and Licenses.

         6.1      Retention of Ownership; Inventorship; Assignment. Except as
                  otherwise explicitly transferred as provided herein, each
                  party will, as between it and the other party hereto, retain
                  ownership of any and all inventions, copyrights, trade
                  secrets, patent rights and other technology and rights to the
                  extent conceived or developed solely by its personnel,
                  Affiliates, or contractors (other than the other

                                       12
<PAGE>
                  party hereto). Inventorship for the purposes of this Agreement
                  will be determined under the prevailing U.S. rules and
                  interpretations. Unless otherwise approved by Committee
                  Action, the party primarily responsible for the filing of a
                  PLA shall own such PLA(s). Neither party makes any grant of
                  rights by implication. Notwithstanding the foregoing, Endo
                  hereby assigns to Penwest, its entire, right, title, and
                  interest, if any, in the United States and throughout the
                  world, in any inventions that constitute Penwest Product
                  Technology. Notwithstanding the foregoing, Penwest hereby
                  assigns to Endo, its entire right title and interest, if any,
                  in the United States and throughout the world, in any
                  inventions that constitute Endo Product Technology. Endo and
                  Penwest hereby agree to execute any documents and to perform
                  such other proper acts as the other party may deem reasonably
                  necessary to perfect and/or record the rights transferred in
                  this Section 6.1. For purposes of clarity and notwithstanding
                  anything in this Section 6.1 to the contrary, (i) the parties
                  acknowledge that they have jointly filed the five (5)
                  provisional patent applications set forth in Exhibit 6.1 and
                  (ii) Penwest hereby acknowledges that the inventions claimed
                  in the first three (3) of such provisional patent applications
                  constitute Endo Product Technology and (iii) Endo hereby
                  acknowledges that the inventions claimed in the last two (2)
                  of such provisional patent applications constitute Penwest
                  Product Technology and (iv) the parties hereby acknowledge
                  that the assignments contained in this Section 6.1 pertain to
                  this Endo Product Technology and this Penwest Product
                  Technology, respectively.

         6.2      Filing and Prosecution of Patents. Except as otherwise
                  provided herein, each party shall be responsible, as it shall
                  determine, for the filing and prosecution of any and all
                  patent applications with respect, in whole or in part, to its
                  own intellectual property and for the maintenance of any
                  available patent protection with respect thereto, and Penwest
                  or Endo, as the case may be, will be responsible for the
                  filing and prosecution of any and all Penwest or Endo patent
                  applications with respect to the Penwest Product Technology or
                  the Endo Product Technology, as the case may be, subject to
                  reasonable consultation with the other party and with due
                  regard to reasonable concerns, if any, expressed by either
                  party as to the impact such a filing and prosecution may have
                  on its other rights and technologies; provided, however, that
                  neither party commits that any such patent protection will be
                  available or continuous hereunder but each party shall exert
                  Best Commercial Efforts to secure and to maintain in force the
                  patent protection under the Product Technology Patents.

         6.3      Licenses Granted.

                  6.3.1    Penwest hereby grants to Endo a license under the
                           Penwest Product Technology, the Penwest Patents and
                           Penwest's Confidential Technology disclosed to Endo
                           hereunder to make, have made, use, sell, offer for
                           sale, and import the Product in the Territory. Such

                                       13
<PAGE>
                           license shall be exclusive as to the applicable
                           nation(s) during the Exclusivity Period applicable
                           thereto, and shall otherwise be nonexclusive. Such
                           license does not extend to the making of TIMERx or
                           Formulated TIMERx (which is covered by Section 6.6
                           hereof), but does cover the incorporation of the same
                           into the Product. Except as provided for herein, Endo
                           shall have no right to grant sublicenses under this
                           Section 6.3 without the prior written consent of
                           Penwest, which consent shall not be unreasonably
                           withheld. Penwest will, throughout the License Term,
                           promptly notify Endo of all Penwest Patents referred
                           to in Section 1.32 of the Definitions Exhibit and
                           provide Endo with access to all of the same, solely
                           for use within the scope of the license stated in
                           this section.

                  6.3.2    Endo hereby grants to Penwest a license, with right
                           to sublicense, under any and all Endo Technology and
                           Endo Product Technology to make, have made, use,
                           sell, offer for sale, and import the Product in the
                           Territory; provided, however, that during the
                           Exclusivity Period for the license granted by Penwest
                           to Endo under Section 6.3.1 hereof, such license
                           under Section 6.3.1 will take precedence over the
                           license under this Section 6.3.2. The license under
                           this Section 6.3.2 shall be exclusive to Penwest for
                           an "Exclusivity Period" (as defined in Section 1.20
                           of the Definitions Exhibit, mutatis mutandis for
                           application to patents on Endo Technology and Endo
                           Product Technology and to Endo's Confidential
                           Technology provided to Penwest); provided, however,
                           that if and to the extent that the license granted to
                           Endo under Section 6.3.1 hereof continues after the
                           end of an applicable Exclusivity Period thereunder
                           (whether pursuant to Section 5.6 or otherwise), this
                           license to Penwest under this Section 6.3.2 shall be
                           nonexclusive.

         6.4      Exclusivity. During the term of this Agreement, neither party
                  shall, and hereby represents and warrants that none of its
                  Affiliates shall, develop, attempt to develop, or actively
                  investigate any version, materials, or system for any
                  extended-release oral tablet, oral capsule or other oral solid
                  dosage form product containing Oxymorphone, Oxymorphone
                  metabolites, Oxymorphone derivatives and/or Oxymorphone salts
                  as its only active therapeutic drug substance(s) (or agree or
                  seek to agree with others to do so or any part thereof),
                  unless such activities are with respect to the Certification
                  Period (and subsequent Marketing Period) as to which the other
                  party has elected not to participate, as permitted hereunder.
                  Endo acknowledges that Penwest, for itself and for others,
                  applies, and will seek to apply, TIMERx to other products.
                  Other than as set forth in this Section 6.4, no provision
                  hereof, and no exclusivity hereunder, shall prevent Penwest
                  from so applying TIMERx or Formulated TIMERx, so long as the
                  end product is not the Product for manufacture or sale in the
                  Territory during the

                                       14
<PAGE>
                  Exclusivity Period and is not a solid dosage form product for
                  oral administration containing Oxymorphone (or Oxymorphone
                  metabolites, Oxymorphone derivatives and/or Oxymorphone salts)
                  as its only active therapeutic drug substance(s).

         6.5      Licenses as to Product Technology. In recognition of the
                  parties' cooperative efforts with respect to the Penwest
                  Product Technology and the Endo Product Technology, but
                  without the express or implied grant of any license to any
                  underlying or enabling rights or technology (except as
                  otherwise provided herein), it is agreed that each party and
                  its Affiliates shall have the nonexclusive, worldwide right
                  and license, without the right to sublicense except as
                  otherwise agreed by the parties, such agreement not to be
                  unreasonably withheld, under the Penwest Product Technology
                  and the Endo Product Technology, as the case may be, to make,
                  have made, use, sell, offer for sale, and import the Product
                  in accordance with this Agreement. Each party will promptly
                  notify the other of all relevant Penwest Product Technology or
                  Endo Product Technology, as the case may be, and provide such
                  other party with access to all of the same.

         6.6      Endo's License to TIMERx. Penwest hereby grants to Endo a
                  nonexclusive license under the TIMERx Production Technology to
                  make and have made Formulated TIMERx solely for use in the
                  Product for sale in the Territory with rights of sublicense
                  for purposes of having Formulated TIMERx made in the Territory
                  for use in the Product for sale in the Territory; provided,
                  however, that Endo agrees that it shall not exercise its
                  rights under such license (or grant any sublicenses) except to
                  make and have made Formulated TIMERx for use in the Product
                  during the periods set forth in Section 7.4.4 hereof and the
                  provisions set forth in Sections 7.4.1 through 7.4.3 hereof
                  shall apply.

         6.7      Endo's Continuing License. In the event that (a) Penwest
                  terminates its participation, or elects not to participate, in
                  a Certification Period pursuant to Section 3.5, Section 3.6 or
                  Section 5.5 hereof, (b) Endo terminates this Agreement
                  pursuant to Section 5.8 hereof due to an uncured breach by
                  Penwest, or (c) Section 5.10 hereof becomes applicable, then
                  Penwest's licenses to Endo under Sections 6.3.1, 6.5, 6.6,
                  6.9.2 and 6.11 hereof shall continue with respect to the
                  Product in the relevant nation(s) in the Territory, but with
                  the following changes and adjustments as to such license with
                  respect to the Product in such nation(s):

                  6.7.1    Termination of Endo's License to Penwest. Endo's
                           license to Penwest under Sections 6.3.2 and 7.5.1
                           shall terminate upon the effectiveness of this
                           Section 6.7.

                  6.7.2    Effect on Exclusivity Period. The Exclusivity Period
                           for the license under Section 6.3.1 hereof shall last
                           until the longer of five (5) years commencing with
                           the effective date of the application of this Section
                           6.7 and the date on which there are no more Penwest
                           Product

                                       15
<PAGE>
                           Technology Patents (if any) applicable to the Product
                           in such relevant nation(s) in the Territory (or, as
                           to pending patent applications, that would be so
                           applicable, if they were then issued as patents), and
                           shall thereafter be nonexclusive in such relevant
                           nation(s).

                  6.7.3    Reduction in Royalty Payable to Penwest. Commencing
                           with the effective date of the application of this
                           Section 6.7, the Royalties payable by Endo to Penwest
                           with respect to the licenses under Sections 6.3.1,
                           6.5, 6.6, 6.9.2 and 6.11 hereof shall be reduced
                           solely to the extent contemplated under Section 4.6.1
                           hereof.

                  6.7.4    Supply of TIMERx. Except in the event Endo exercises
                           its license in Section 6.6 hereof, the parties'
                           agreements under Section 4.4 and Article 7 hereof
                           will continue to apply to Endo's and its Affiliates'
                           and sublicensees' requirements of Formulated TIMERx
                           for use in the Product produced pursuant to this
                           Section 6.7 for sale in the relevant nation(s) in the
                           Territory, throughout the life of the license under
                           Section 6.3.1 hereof, as modified pursuant to Section
                           6.7.2 above.

                  6.7.5    As used in this Section 6.7, the "relevant nation(s)
                           in the Territory" shall mean the entire Territory
                           except in cases where the relevant termination
                           referred to above in clauses (a) - (c) relates to one
                           or more, but not all, of the nations in the
                           Territory, in which cases "relevant nation(s) in the
                           Territory" shall mean the nation(s) to which such
                           termination relates.

                  6.7.6    Penwest Intellectual Property Subject to License. The
                           licenses under Sections 6.3.1, 6.5, 6.6, 6.9.2 and
                           6.11 hereof, to the extent applicable pursuant to
                           this Section 6.7, will apply only to the Penwest
                           Patents, the Penwest Product Technology, the Penwest
                           Improvement Technology, the TIMERx Production
                           Technology, the Penwest Test and Regulatory Data and
                           Penwest's Confidential Technology made or discovered
                           prior to expiration of two years following such
                           termination, together with any and all intellectual
                           property and other rights thereto and therein in the
                           relevant nation(s) in the Territory, inclusive of
                           later-issued patents to the extent disclosing the
                           same. Notwithstanding Section 6.9.2 and Sections
                           1.32.2 or 1.32.3 of the Definitions Exhibit, any such
                           technology made or discovered more than two years
                           following such application shall not be licensed to
                           Endo for exploitation with respect to the Product in
                           the relevant nation(s) in the Territory. Penwest
                           will, throughout the term of the license under
                           Section 6.3.1 hereof, to the extent applicable to the
                           Product in the relevant nation(s) in the Territory,
                           promptly notify Endo of all Penwest Patents, Penwest
                           Product Technology, Penwest Improvement Technology,
                           TIMERx

                                       16
<PAGE>
                           Production Technology, and Penwest Test and
                           Regulatory Data and provide Endo with access to all
                           of the same, solely for use within the scope of the
                           licenses under Section 6.3.1, 6.5, 6.6, 6.9.2, and
                           6.11 hereof, to the extent applicable pursuant to
                           this Section 6.7.

                  6.7.7    Consent to Sublicense Not Necessary. The requirement
                           that Endo obtain Penwest's consent to sublicenses
                           under Sections 6.3.1, 6.5 and 6.6 hereof shall not
                           apply.

         6.8      Penwest's Continuing License. In the event that (a) Endo
                  terminates its participation, or elects not to participate, in
                  a Certification Period pursuant to Section 3.5, Section 3.6 or
                  Section 5.5 hereof, (b) Penwest terminates an Exclusivity
                  Period pursuant to Section 5.6 hereof or a License Term
                  pursuant to Section 5.7 hereof, (c) (to the extent specified
                  in Section 4.3 hereof) the acceptance by Committee Action
                  under Section 4.3 hereof of Penwest or its designated third
                  party to pursue the activities described in that section in a
                  specified nation(s) in the Territory, (d) Penwest terminates
                  this Agreement pursuant to Section 5.8 hereof due to an
                  uncured breach by Endo, or (e) Section 5.9 hereof becomes
                  applicable, then Endo's licenses to Penwest under Sections
                  6.3.2, 6.5, 6.9.1, 6.10 and 7.5.1 hereof shall continue with
                  respect to the Product in the relevant nation(s) in the
                  Territory, but with the following changes and adjustments as
                  to such license with respect to the Product in such nation(s):

                  6.8.1    Termination of Penwest's Licenses to Endo. Except
                           where the applicable termination is only of an
                           Exclusivity Period under Section 5.6 hereof, the
                           License Term with respect to the Product in the
                           relevant nation(s) in the Territory affected by such
                           termination shall, for purposes of the licenses
                           granted by Penwest to Endo under Sections 6.3.1
                           hereof and 6.6 hereof, terminate upon the
                           effectiveness of this Section 6.8.

                  6.8.2    Effect on Exclusivity Period. Except where the
                           applicable termination is only of an Exclusivity
                           Period under Section 5.6 hereof, the license under
                           Section 6.3.2 hereof, to the extent applicable to the
                           Product in the relevant nation(s) in the Territory,
                           shall be exclusive within its scope to Penwest for an
                           "Exclusivity Period" (as defined in Section 1.20 of
                           the Definition Exhibit, mutatis mutandis for
                           application to patents on Endo Technology existing as
                           of the Effective Date and to Endo's Confidential
                           Technology provided to Penwest) lasting until the
                           longer of five (5) years commencing with the
                           effective date of the application of this Section 6.8
                           and the date on which there are no more Endo Product
                           Technology Patents (if any) applicable to the Product
                           in such relevant nation(s) in the Territory (or, as
                           to pending patent applications, that would be so
                           applicable, if they were then issued as

                                       17
<PAGE>
                           patents), and shall thereafter be nonexclusive in
                           such relevant nation(s).

                  6.8.3    Reduction in Royalty Payable to Endo. Commencing with
                           the effective date of the application of this Section
                           6.8, the Royalties payable by Penwest to Endo with
                           respect to the licenses under Sections 6.3.2, 6.5,
                           6.9.1, 6.10 and 7.5.1 hereof shall be reduced solely
                           to the extent contemplated under Section 4.6.2
                           hereof.

                  6.8.4    Continuing Assistance of Endo. Throughout the life of
                           the license under Section 6.3.2 hereof, as modified
                           by this Section 6.8, Endo will provide to Penwest and
                           its Affiliates and sublicensees reasonable assistance
                           on commercially reasonable terms for the purposes of
                           developing, testing, certifying, making, using,
                           selling, offering for sale, or importing the Product
                           or any services involving the Product in the relevant
                           nation(s) in the Territory, including without
                           limitation making available to Penwest the benefit of
                           any and all Facilities Certifications to the maximum
                           extent permitted by law. Without limiting the
                           generality of the foregoing, at Penwest's option,
                           Endo will specifically either:

                           (i)      supply Penwest and its Affiliates' and
                                    sublicensees' with sufficient quantities of
                                    the Oxymorphone active drug substance (ADS)
                                    produced in accordance with the
                                    Specifications in compliance with cGMP and
                                    all applicable laws and regulations, to meet
                                    their reasonable requirements for the
                                    manufacturing of the Product. If and to the
                                    extent this clause (i) is effective, Penwest
                                    shall purchase all of its and its
                                    Affiliates' and sublicensees' requirements
                                    thereof for such uses from Endo during such
                                    period. The price for all Oxymorphone ADS
                                    sold hereunder shall equal the applicable
                                    Oxymorphone Price, and shall be payable by
                                    Penwest to Endo within thirty (30) days
                                    after the shipping of the Oxymorphone ADS to
                                    Penwest. As provided in Exhibit 1.28, the
                                    price of the Oxymorphone ADS used in the
                                    Product will be one of the deductions
                                    applied in the calculation of the Net
                                    Realization. The Oxymorphone ADS shall be
                                    provided F.O.B. Garden City, New York, and
                                    all other terms of such supply shall be as
                                    provided in Article 7 hereof, mutatis
                                    mutandis for application to the Oxymorphone
                                    ADS sold by Endo; or

                           (ii)     manufacture and sell, or cause to be
                                    manufactured and sold, to Penwest and its
                                    Affiliates and sublicensees, on commercially
                                    reasonable terms, the finished Product for
                                    sale in the relevant nation(s) in the
                                    Territory and shall deliver the same to the
                                    relevant

                                       18
<PAGE>
                                    nation(s) in the Territory, or otherwise
                                    assist Penwest or its Affiliates or
                                    sublicensees to effect such deliveries.

                                    In the absence of any specific election by
                                    Penwest between clause (i) and (ii), it will
                                    be deemed to have selected clause (ii).
                                    Penwest may, on good cause shown and after
                                    consultation with Endo, reasonably elect to
                                    switch a single time as to the Product in
                                    any relevant nation in the Territory (unless
                                    Endo in its discretion approves subsequent
                                    switches, one way or the other as to the
                                    Product in such relevant nation) from the
                                    course specified in clause (ii) to that in
                                    clause (i), and Endo agrees to reasonably
                                    assist Penwest to be able to make such a
                                    switch. Penwest will, at the reasonable
                                    request of Endo, switch to clause (i) in
                                    those situations in which it is able to do
                                    so without significant harm to its interests
                                    and in which this would be of substantial
                                    benefit to Endo.

                  6.8.5    As used in this Section 6.8, the "relevant nation(s)
                           in the Territory" shall mean the entire Territory
                           except in cases where the relevant termination
                           referred to above in clauses (a) - (e) relates to one
                           or more, but not all, of the nations in the
                           Territory, in which cases "relevant nation(s) in the
                           Territory" shall mean the nation(s) to which such
                           termination relates.

                  6.8.6    Notwithstanding Section 6.9.1 hereof, Endo Technology
                           and Endo Product Technology made or discovered more
                           than two years following such termination shall not
                           be licensed to Penwest for exploitation with respect
                           to the Product in the relevant nation(s) in the
                           Territory. Endo will, throughout the term of the
                           license under Section 6.3.2 hereof, to the extent
                           applicable to the Product in the relevant nation(s)
                           in the Territory, promptly notify Penwest of all
                           existing Endo Technology and Endo Test and Regulatory
                           Data and provide Penwest with access to all of the
                           same, solely for use within the scope of the license
                           under Section 6.3.2 hereof, to the extent applicable
                           pursuant to this Section 6.8.

         6.9      License to Improvement Technology.

                  6.9.1    Subject to Section 6.8.6 hereof, Endo hereby grants
                           to Penwest a worldwide, nonexclusive license, with
                           right to sublicense, under any and all Endo
                           Improvement Technology to make, have made, use, sell,
                           offer for sale, and import any products containing or
                           based upon TIMERx. Such license will be royalty-free
                           except as is otherwise provided herein. Endo will,
                           throughout the term of this Agreement, promptly
                           notify Penwest of all Endo Improvement Technology and

                                       19
<PAGE>
                           provide Penwest with access to all of the same,
                           solely for use within the scope of the license stated
                           in this section.

                  6.9.2    Subject to Section 6.7.6 hereof, Penwest hereby
                           grants to Endo a worldwide, nonexclusive license,
                           with right to sublicense, under any and all Penwest
                           Improvement Technology to make, have made, use, sell,
                           offer for sale, and import any product containing
                           Oxymorphone as an active ingredient. Such license
                           will be royalty-free except as is otherwise provided
                           herein. Penwest will, throughout the term of this
                           Agreement, promptly notify Endo of all Penwest
                           Improvement Technology and provide Endo with access
                           to all of the same, solely for use within the scope
                           of the license stated in this section.

         6.10     License to Endo Test and Regulatory Data. Endo hereby grants
                  Penwest a nonexclusive and royalty-free license, with right to
                  sublicense, under all rights of Endo and its Affiliates and
                  sublicensees in and to the Endo Test and Regulatory Data to
                  use the same for purposes of marketing or complying with
                  governmental requirements of any country (other than with
                  respect to the Product or a product directly competitive with
                  the Product for manufacturing, marketing or use in the
                  Territory during the applicable Exclusivity Period); provided
                  that Penwest will not use any of the same for purposes of
                  marketing or disclosure to the public, to the extent the
                  particular Endo Test and Regulatory Data is then Endo's
                  Confidential Technology, unless Endo has consented thereto,
                  which consent shall not be unreasonably withheld. Endo hereby
                  consents to Penwest's and its sublicensees' cross-referencing,
                  in any PLAs or other regulatory filings made by them within
                  the scope of such license, any PLA filing made or drug master
                  file created by Endo or its Affiliates relating to or
                  containing any of the Endo Test and Regulatory Data. The
                  license under this section shall survive any termination or
                  expiration of the term of this Agreement, except a termination
                  under Section 5.8 hereof due to an uncured breach by Penwest.
                  Endo will, throughout the License Term and solely for use
                  within the scope of the license stated in this section,
                  provide to Penwest on request access to all of the Endo Test
                  and Regulatory Data in or coming into Endo's possession or
                  otherwise reasonably available to it. Notwithstanding anything
                  to the contrary in Section 6.1, Endo will retain ownership in
                  (but Penwest shall have the right to use within the scope of,
                  and as limited by, its licenses thereto under this Section
                  6.10) Endo Test and Regulatory Data and any IND or NDA related
                  to the Product, as well as the foreign equivalents thereof, if
                  applicable.

         6.11     License to Penwest Test and Regulatory Data. Penwest hereby
                  grants Endo a nonexclusive, royalty-free license, with right
                  to sublicense, under all rights of Penwest and its Affiliates
                  in and to the Penwest Test and Regulatory Data to use the same
                  for purposes of complying with governmental requirements, but
                  solely with respect to the Product for marketing or use in the
                  Territory. Penwest hereby

                                       20
<PAGE>
                  consents to Endo's and its sublicensees' cross-referencing, in
                  any PLAs or other regulatory filings made by them within the
                  scope of such license, any PLA filing made or drug master file
                  created by Penwest or its Affiliates relating to or containing
                  any of the Penwest Test and Regulatory Data. The license and
                  rights under this section shall survive any termination or
                  expiration of the term of this Agreement, except a termination
                  under Section 5.8 hereof due to an uncured breach by Endo.
                  Penwest will, throughout the License Term and solely for use
                  within the scope of the license stated in this section,
                  provide to Endo on request access to all of the Penwest Test
                  and Regulatory Data in or coming into Penwest's possession or
                  otherwise reasonably available to it. Notwithstanding anything
                  to the contrary in Section 6.1, Penwest will retain ownership
                  in (but Endo shall have the right to use within the scope of,
                  and as limited by, its licenses thereto under this Section
                  6.11) Penwest Test and Regulatory Data.

         6.12     Marking of the Product. Each party agrees to mark and to have
                  marked by its sublicensees all Product manufactured, used or
                  sold by it or its sublicensees in accordance with the laws of
                  the United States or other applicable nation(s) in the
                  Territory relating to the marking of patented articles with
                  notices of patent.

7.       Supply of TIMERx; Oxymorphone.

         7.1      Sales of TIMERx. All sales of Formulated TIMERx shall be
                  F.O.B. Patterson, New York, and Endo shall bear all
                  transportation, insurance, taxes, duties, and other costs and
                  risks of loss, spoilage and damage associated with the
                  shipping and delivery of Formulated TIMERx to Endo or its
                  Affiliates or sublicensees.

         7.2      Quality Control Testing. Penwest shall perform routine quality
                  control tests with respect to all Formulated TIMERx as
                  required by the FDA, or otherwise as Penwest deems necessary
                  in accordance with its applicable policies, and Penwest will
                  also bear the expenses and fees for filing the Drug Master
                  File for TIMERx with the FDA. No other or special tests by
                  Penwest with respect to the raw materials or Formulated TIMERx
                  will be required, unless and to the extent that Endo
                  establishes that the same are required in order to obtain or
                  maintain a governmental license to market the Product in the
                  Territory. Penwest shall promptly, upon completion of each lot
                  or batch of Formulated TIMERx, deliver to Endo a copy of the
                  record of such test performed on said lot or batch. Endo will
                  perform quality control tests on Formulated TIMERx immediately
                  on receipt at its, or its designee's, facility and advise
                  Penwest within thirty (30) days of any deviations from
                  Specifications.

         7.3      Non-Conforming Shipments. If Endo considers any such shipment
                  not to conform to the applicable Specifications, Endo shall
                  notify Penwest as provided in Section 7.2 hereof and provide
                  Penwest with the relevant analysis. PENWEST'S SOLE OBLIGATION
                  AND ENDO'S EXCLUSIVE REMEDY FOR ANY SUCH NONCONFORMITY SHALL
                  BE AS FOLLOWS:

                                       21
<PAGE>
                           (i)      Penwest shall at its own expense accept
                                    return of any shipment not accepted, or else
                                    reimburse Endo for the cost of disposal or
                                    destruction;

                           (ii)     Penwest shall use its Best Commercial
                                    Efforts to replace the non-conforming
                                    shipment with conforming Formulated TIMERx;
                                    and

                           (iii)    Section 7.4 hereof shall apply if in any
                                    circumstances set out in that Section
                                    Penwest shall be unable to supply
                                    replacement conforming Formulated TIMERx.

         7.4      Failure to Supply TIMERx. If for any reason Penwest fails to
                  supply Endo with its and its Affiliates' and sublicensees'
                  requirements of Formulated TIMERx during the term of this
                  Agreement, Endo shall, AS ENDO'S SOLE AND EXCLUSIVE REMEDY FOR
                  ANY FAILURE TO SUPPLY Formulated TIMERx, be entitled to
                  exercise the rights granted by Penwest in Section 6.6 hereof,
                  and Penwest shall make knowledgeable personnel reasonably
                  available, at Penwest's expense, to consult with Endo, all to
                  the extent necessary to enable Endo, or its designee, to
                  produce TIMERx that would otherwise have been supplied,
                  directly or indirectly, by Penwest hereunder for Endo and its
                  Affiliates and sublicensees in connection with the production
                  of the Product pursuant to this Agreement.

                  7.4.1    The license granted in Section 6.6 hereof shall be
                           royalty-free, it being understood that Endo's actual
                           direct manufacturing costs and allocable indirect
                           costs relating to the manufacture of the Formulated
                           TIMERx will be one of the deductions applied in the
                           calculation of the Net Realization.

                  7.4.2    Endo shall maintain TIMERx Production Technology
                           delivered to Endo pursuant to this section, whether
                           orally or in writing, as Penwest Confidential
                           Technology in accordance with Section 10 hereof and
                           shall use such information and technology only for
                           the purpose of producing Formulated TIMERx for its
                           own use and the use of its Affiliates and
                           sublicensees in connection with this Agreement.

                  7.4.3    Endo acknowledges that, in doing the foregoing,
                           Penwest will not be providing a turnkey operation.
                           Rather, Penwest will only be required to make
                           reasonably available to Endo the best standard of
                           knowledge and information then available to Penwest
                           and directly used in its or its Affiliates
                           manufacture of Formulated TIMERx.

                  7.4.4    A failure to supply giving rise to Endo's rights to
                           use the TIMERx Production Technology to manufacture
                           or have manufactured Formulated TIMERx in accordance
                           with this Section 7.4 shall only be

                                       22
<PAGE>
                           deemed to have occurred if (i) Penwest's failure to
                           supply is a material failure that continues for a
                           period in excess of 90 days from the due date of
                           delivery (regardless of Endo's safety stock of
                           TIMERx), (ii) Endo gives Penwest notice of such
                           material and continuing failure, and (iii) Penwest
                           fails to cure such failure within thirty (30) days
                           after receipt of such notice. Furthermore, Endo shall
                           only be entitled to manufacture or have manufactured
                           Formulated TIMERx in accordance with this Section 7.4
                           under the license granted in Section 6.6 hereof until
                           Penwest has both (1) notified Endo that it is ready,
                           willing and able to supply TIMERx in accordance with
                           this Agreement and (2) successfully supplied TIMERx
                           to meet Endo's orders therefor, up to Endo's
                           forecasted demands, over the next consecutive
                           six-month period.

         7.5      Failure to Supply Oxymorphone ADS or Finished Product. If for
                  any reason Endo fails to supply Penwest with its and its
                  Affiliates' and sublicensees' requirements of Oxymorphone ADS
                  or finished Product as required under Section 6.8.4 hereof,
                  Penwest shall, AS PENWEST'S SOLE AND EXCLUSIVE REMEDY FOR ANY
                  SUCH FAILURE, be entitled to exercise the rights granted by
                  Endo in Section 7.5.1 hereof, and Endo shall make
                  knowledgeable personnel reasonably available, at Endo's
                  expense, to consult with Penwest, all to the extent necessary
                  to enable Penwest, or its designee, to produce Oxymorphone ADS
                  or finished Product that would otherwise have been supplied,
                  directly or indirectly, by Endo hereunder for Penwest and its
                  Affiliates and sublicensees pursuant to Section 6.8.4 hereof.

                  7.5.1    Endo hereby grants to Penwest a nonexclusive license
                           under all of Endo's rights under patents and other
                           technology belonging to Endo or which Endo has a
                           right to practice and sublicense from time to time
                           during the term of this Agreement that directly
                           relate to, are desirable for, or are necessary or
                           useful for the production of, finished Product or
                           Oxymorphone ADS, to make and have made finished
                           Product and Oxymorphone ADS, solely for use in the
                           Product for sale in the Territory, with rights of
                           sublicense for purposes of having finished Product
                           and Oxymorphone ADS made in the Territory for use in
                           the Product for sale in the Territory; provided,
                           however, that Penwest agrees that it shall not
                           exercise its rights under such license (or grant any
                           sublicenses) except to make and have made finished
                           Product and Oxymorphone ADS for use in the Product
                           during the periods set forth in Section 7.5.5.

                  7.5.2    The license granted in Section 7.5.1 shall be
                           royalty-free, it being understood that Penwest's
                           actual direct manufacturing costs and allocable
                           indirect costs relating to the manufacture of the
                           finished

                                       23
<PAGE>
                           Product and Oxymorphone ADS will be one of the
                           deductions applied in the calculation of the Net
                           Realization.

                  7.5.3    Penwest shall maintain the technology delivered to
                           Penwest pursuant to this section, whether orally or
                           in writing, as Endo Confidential Technology in
                           accordance with Section 10 hereof and shall use such
                           information and technology only for the purpose of
                           producing finished Product and Oxymorphone ADS for
                           its own use and the use of its Affiliates and
                           sublicensees in connection with this Agreement.

                  7.5.4    Penwest acknowledges that, in doing the foregoing,
                           Endo will not be providing a turnkey operation.
                           Rather, Endo will only be required to make reasonably
                           available to Penwest the best standard of knowledge
                           and information then available to Endo and directly
                           used in its or its Affiliates' manufacture of the
                           finished Product and Oxymorphone ADS.

                  7.5.5    A failure to supply giving rise to Penwest's rights
                           to manufacture or have manufactured finished Product
                           and Oxymorphone ADS in accordance with this Section
                           7.5 shall only be deemed to have occurred if (i)
                           Endo's failure to supply is a material failure that
                           continues for a period in excess of 90 days from the
                           due date of delivery (regardless of Penwest's safety
                           stock thereof), (ii) Penwest gives Endo notice of
                           such material and continuing failure, and (iii) Endo
                           fails to cure such failure within thirty (30) days
                           after receipt of such notice. Furthermore, Penwest
                           shall only be entitled to manufacture or have
                           manufactured finished Product and Oxymorphone ADS in
                           accordance with this Section 7.5 under the license
                           granted in Section 7.5.1 hereof until Endo has both
                           (1) notified Penwest that it is ready, willing and
                           able to supply Oxymorphone ADS in accordance with
                           this Agreement and (2) successfully supplied
                           Oxymorphone ADS to meet Penwest's orders therefor, up
                           to Penwest's forecasted demands, over the next
                           consecutive six-month period.

         7.6      Access. While Penwest is supplying Formulated TIMERx hereunder
                  to Endo, Penwest shall, after receipt of reasonable prior
                  notice, give duly accredited representatives of Endo access at
                  all reasonable times during regular business hours to the
                  plant in which the Formulated TIMERx is being produced, to
                  ensure production practices creating Formulated TIMERx conform
                  to Specifications. Penwest will exert its Best Commercial
                  Efforts to maintain at all times during the Marketing Period
                  at least two FDA-approved sources for the production of
                  Formulated TIMERx (whether or not inclusive of Penwest's own
                  production facilities). Penwest will exert its Best Commercial
                  Efforts to obtain similar access

                                       24
<PAGE>
                  for Endo to the production facilities of any of Penwest's
                  third-party suppliers of the Formulated TIMERx.

         7.7      TIMERx Ordering Process. Endo shall deliver to Penwest firm
                  written orders stating its (and/or its Affiliates' and
                  sublicensees') requirements for Formulated TIMERx to be used
                  for production of the Product for commercial use or sale no
                  less than three (3) months in advance of the requested
                  delivery date therefor, by giving firm orders at the beginning
                  of each month that creates firm orders during the third
                  following month (the order-submission month and the first and
                  second months following having already been the subject of
                  prior firm orders). All such orders shall be firm and shall
                  not be cancelled or deferred by Endo.

         7.8      Estimates of TIMERx. At least six months before Endo and/or
                  its Affiliates or sublicensees begin production of the Product
                  for commercial use or sale (and in any event not later than
                  concurrently with the submission of the first order for use in
                  the production of the Product intended for commercial sale
                  during the Marketing Period), Endo shall deliver to Penwest a
                  written, non-binding estimate of all requirements of
                  Formulated TIMERx therefor during the following 12 months.
                  Endo will deliver to Penwest updates to such estimates on or
                  before the first day of each January, April, July and October
                  thereafter, which updates may revise estimates previously
                  submitted, and will add estimates for additional months so
                  that each such estimate covers the 8-month period following
                  the end of the firm-order period (that is, the 4th through the
                  11th month after the month in which such estimates are made).

         7.9      Actual TIMERx Supply. Penwest will exert Best Commercial
                  Efforts to supply Endo with all amounts of Formulated TIMERx
                  requested by Endo, but Penwest shall have no obligation to
                  supply Endo with quantities of Formulated TIMERx during any
                  quarter in excess of 125% of the quantity estimated in Endo's
                  estimate for that quarter which estimate was given to Penwest
                  six months prior to the end of such quarter pursuant to
                  Section 7.8 hereof (the Six-Month Estimated Quantity), nor
                  shall Endo order quantities for any quarter less than 75% of
                  the applicable Six-Month Estimated Quantity.

         7.10     Notifications; Governmental Inspections. Each party shall
                  promptly notify the other of any fact, circumstance, condition
                  or knowledge dealing with TIMERx, Formulated TIMERx, or the
                  Product of which the party becomes aware that bears upon the
                  safety or efficacy of TIMERx, Formulated TIMERx, or the
                  Product. Each party shall immediately notify the other of any
                  inspection or audit relating to TIMERx, Formulated TIMERx, or
                  the Product by any governmental regulatory authority in the
                  Territory. If a representative of the governmental authority
                  takes samples in connection with such audit or inspection, the
                  parties shall immediately provide each other, as appropriate,
                  samples from the same batch. The party in receipt of such
                  notice will provide the other party within 72 hours, with
                  copies of

                                       25
<PAGE>
                  all relevant documents, including FDA Forms 482 and 483 (as
                  applicable), warning letters and other correspondence and
                  notifications as such other party may reasonably request.
                  Penwest and Endo agree to cooperate with each other during any
                  inspection, investigation or other inquiry by the FDA or other
                  governmental entity, including providing information and/or
                  documentation, as requested by the FDA, or other governmental
                  entity. To the extent permissible, Penwest and Endo also agree
                  to discuss any responses to observations or notifications
                  received and to give the other party an opportunity to comment
                  on any proposed response before it is made. In the event of
                  disagreement concerning the content or form of such response,
                  Endo shall be responsible for deciding the appropriate form
                  and content of any response with respect to any of its cited
                  activities and Penwest shall be responsible for deciding the
                  appropriate form and content of any response with respect to
                  any of its cited activities. Each party shall inform the other
                  of all comments and conclusions received from the governmental
                  authority.

         7.11     Manufacturing Agreements. In the event that Endo exercises its
                  license rights under Section 6.6, Penwest shall use its Best
                  Commercial Efforts to cause *** to promptly enter into an
                  agreement with Endo to supply Formulated TIMERx to Endo on
                  substantially the same terms and conditions (including those
                  relating to the price of TIMERx) as are contained in the
                  Custom Manufacturing Agreement dated *** between *** and
                  Penwest, as amended through the date of such exercise by Endo
                  (the "*** Manufacturing Agreement"), or any subsequent
                  supplier of Penwest to promptly enter into an agreement with
                  Endo to supply Formulated TIMERx to Endo on substantially the
                  same terms and conditions (including those relating to the
                  price of TIMERx) as those on which such subsequent supplier
                  supplies to Penwest, but only for such duration as Endo is
                  entitled to exercise such license rights. Penwest hereby
                  represents and warrants that a true, correct and complete copy
                  of the current *** Manufacturing Agreement has been provided
                  to Endo and covenants to provide Endo with an updated copy of
                  such agreement promptly in the event the *** Manufacturing
                  Agreement is amended or modified and with a copy of the
                  subsequent supply agreement promptly in the event that Penwest
                  engages any additional or new supplier of TIMERx. In the event
                  that Penwest exercises its license rights under Section 7.5.1,
                  Endo shall use its Best Commercial Efforts to cause *** to
                  promptly enter into an agreement with Penwest to supply
                  Oxymorphone ADS to Penwest on substantially the same terms and
                  conditions (including those relating to the price of the
                  Oxymorphone ADS) as are contained in the Supply Agreement
                  dated as of ***,between *** and Endo, as amended through the
                  date of such exercise by Penwest (the "*** Supply Agreement")
                  and to cause *** to promptly enter into an agreement with
                  Penwest to supply finished Product to Penwest on substantially
                  the same terms and conditions (including those relating to the
                  price of the Product) as are contained in the Master
                  Development and Toll Manufacturing Agreement, dated as of ***
                  between *** and Endo, as amended

                                       26
<PAGE>
                  through the date of such exercise by Penwest (the "***
                  Manufacturing Agreement"), or any subsequent supplier of Endo
                  to promptly enter into an agreement with Penwest to supply
                  finished Product to Penwest on substantially the same terms
                  and conditions (including those relating to the price of the
                  Product) as those on which such subsequent supplier supplies
                  to Endo, but only for such duration as Penwest is entitled to
                  exercise such license rights. Endo hereby represents and
                  warrants that true, correct and complete copies of the ***
                  Supply Agreement and the *** Manufacturing Agreement have been
                  provided to Penwest and covenants to provide Penwest with
                  updated copies of such agreements promptly in the event the
                  *** Supply Agreement or the *** Manufacturing Agreement is
                  amended or modified and with a copy of the subsequent supply
                  agreement promptly in the event that Endo engages any
                  additional or new supplier of the finished Product or
                  Oxymorphone ADS.

8.       Use of Trademarks. Unless prohibited by law, Endo agrees to market the
         Product in conjunction with the appropriate Penwest Trademark(s), and
         as provided in this section, including uses on such packaging, labeling
         and other materials as the Alliance Committee shall reasonably
         determine. The provisions of this Section 8 shall apply, mutatis
         mutandis, to marketing of the Product by Penwest or its designees as
         contemplated under Sections 4.2, 4.3, or 6.8 hereof, with respect to
         the use by Penwest or such designees of the Endo Trademarks.

         8.1      Benefit of Trademarks. Endo acknowledges that all Penwest
                  Trademarks and all rights therein or registrations thereof,
                  worldwide, shall belong exclusively to Penwest. All use of the
                  Penwest Trademarks as contemplated in this Agreement by Endo
                  shall accrue to the benefit of Penwest. Endo shall make no use
                  of any of the Penwest Trademarks except to identify and
                  promote the Product as contemplated hereunder for sale in the
                  Territory. Endo shall not continue using the Penwest
                  Trademarks after termination or expiration of this Agreement,
                  nor after the removal or alteration of any such Penwest
                  Trademark from Exhibit 1.17 hereto, except to complete the
                  sale of inventory of the Product on hand at the time of
                  termination or expiration, or at the time of such removal or
                  alteration.

         8.2      Protection of Trademarks. Endo shall cooperate with Penwest to
                  protect the interest of Penwest in the Penwest Trademarks, and
                  shall neither attempt to register nor authorize others to
                  register any Penwest Trademarks without the prior written
                  consent of Penwest in each instance. Endo shall promptly
                  inform Penwest of any actual or apparent infringement of any
                  Penwest Trademarks or other intellectual properties of Penwest
                  which may come to Endo's attention during the term hereof.

         8.3      Acknowledgement of Ownership of Trademarks. Endo shall use all
                  appropriate notices of trademark status of the Penwest
                  Trademarks, including the "(TM)" designation (or the (R)
                  symbol for registered marks, if any), in all labeling and

                                       27
<PAGE>
                  promotional materials and shall otherwise conform with all
                  policies and notices of Penwest's rights in the marks and for
                  the protection of the Penwest Trademarks, including without
                  limitation the inclusion of an appropriate footnote
                  acknowledging the use of the Penwest Trademark(s) under
                  license. Endo will impose a spatial separation between any
                  Penwest Trademarks and any other names or marks of Endo or any
                  others, and will not otherwise use any of Penwest's names,
                  marks or symbols in any manner that could, whether immediately
                  or over time, create any substantial association between them
                  and the business of Endo.

         8.4      Prior Approval of Use of Trademarks. Samples of the Product
                  and any advertising, promotional materials or packaging
                  related thereto that bear the Penwest Trademarks shall be
                  provided by Endo to Penwest at least thirty (30) days prior to
                  the first use or sale thereof, and at other times upon the
                  request of Penwest. Endo shall not put any of such items into
                  initial use without first obtaining the written approval of
                  Penwest, which approval shall not be unreasonably withheld.
                  Penwest shall at all times have the right to enter into Endo's
                  facilities and/or to take other appropriate methods to check
                  the quality of the Product manufactured or offered by Endo,
                  from time to time during the term of this Agreement. If at any
                  time or times Penwest reasonably determines that the quality
                  of the Product manufactured or offered by Endo, or the
                  packaging or promotional materials therefor, is not suitable
                  for using the Penwest Trademarks or any of them, Penwest, at
                  its option, shall have the right to suspend or prohibit the
                  use of such Penwest Trademark(s); provided that Penwest has
                  given Endo a written notice thereof and a period of 60 days to
                  bring them up to Penwest's standards; provided further,
                  however, that Penwest need not give such opportunity to cure
                  any deficiency that has been the subject of more than two such
                  notices on prior occasions during the preceding twelve months.

9.       Representations, Warranties and Indemnities.

         9.1      Mutual Authorization Representations. Each party represents
                  and warrants to the other that it is duly organized and
                  validly existing under the laws of the state of its
                  organization, that it has the requisite corporate authority to
                  execute and deliver this Agreement and to perform its
                  obligations hereunder, and that the execution and performance
                  of its obligations hereunder are not and will not be in
                  violation of or in conflict with any material obligation it
                  may have to any third party.

         9.2      Penwest Representations.

                  9.2.1    Penwest represents and warrants that any Formulated
                           TIMERx supplied by it to Endo hereunder for use in
                           the Product, at the point of delivery:

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<PAGE>
                           (i)      will conform to the Specifications in effect
                                    as of the order date therefor; and

                           (ii)     to Penwest's current knowledge, without
                                    undertaking any special investigation, will
                                    not infringe upon the intellectual property
                                    rights of any third party.

                  9.2.2    Penwest represents and warrants that it has all
                           right, title and interest in the Penwest Patents and
                           is authorized to grant the licenses granted herein.

         9.3      Mutual Licenses, Permits and Authorizations Representations.
                  Each party represents and warrants to the other that it has
                  obtained, and will at all times during the term of this
                  Agreement hold and comply with, all licenses, permits and
                  authorizations necessary to perform this Agreement and to
                  test, manufacture, market, export, and import the Product,
                  Oxymorphone, or Formulated TIMERx to be so tested,
                  manufactured, marketed, exported or imported by it as provided
                  herein, as now or hereafter required under any applicable
                  statutes, laws, ordinances, rules and regulations of the
                  United States and any applicable foreign, state, and local
                  governments and governmental entities, including without
                  limitation all Facilities Certifications (as to Endo).

         9.4      Disclaimer. THE FOREGOING WARRANTIES ARE IN LIEU OF, AND THE
                  PARTIES EACH DISCLAIM, ALL OTHER WARRANTIES, EXPRESS, IMPLIED
                  OR ARISING BY LAW, INCLUDING WITHOUT LIMITATION ANY IMPLIED
                  WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
                  PURPOSE, AND NON- INFRINGEMENT. NOTHING IN THIS AGREEMENT
                  SHALL BE CONSTRUED AS A REPRESENTATION OR WARRANTY (i) BY
                  PENWEST AS TO THE PATENTABILITY, VALIDITY, OR SCOPE OF ANY
                  PENWEST PATENTS, PENWEST'S CONFIDENTIAL TECHNOLOGY, TIMERx
                  PRODUCTION TECHNOLOGY, PENWEST TEST AND REGULATORY DATA, OR
                  PENWEST PRODUCT TECHNOLOGY, NOR AS TO THE UTILITY, EFFICACY,
                  NONTOXICITY, SAFETY OF TIMERx OR THE PRODUCT; OR (ii) BY ENDO
                  AS TO THE PATENTABILITY, VALIDITY, OR SCOPE OF ANY ENDO
                  TECHNOLOGY, ENDO TEST AND REGULATORY DATA, OR ENDO PRODUCT
                  TECHNOLOGY, NOR AS TO THE UTILITY, EFFICACY, NONTOXICITY,
                  SAFETY OR APPROPRIATENESS OF ANY PRODUCTS MADE THEREFROM.

         9.5      Penwest's Indemnification of Endo. Penwest shall indemnify,
                  defend and hold Endo and its Affiliates and sublicensees
                  harmless from any and all third-party claims to the extent
                  arising from, in connection with, based upon, by reason of, or
                  relating in any way to:

                                       29
<PAGE>
                  9.5.1    any claim, action or damages arising out of any
                           alleged infringement by reason of the manufacture,
                           use or sale by Endo of the Product to the extent such
                           infringement would apply as well to the manufacture,
                           sale or distribution of TIMERx alone;

                  9.5.2    Penwest's contributions to the formulation or
                           development of the Product and the Specifications
                           therefor hereunder; provided, however, that matters
                           of infringement of third party rights or intellectual
                           properties shall be included under this clause only
                           to the extent the same are covered by Section 9.5.1
                           hereof or are within Penwest's knowledge, without
                           undertaking any special investigation, and of which
                           Penwest failed to inform Endo within 30 days
                           following the later of the Effective Date or
                           Penwest's first obtaining such knowledge;

                  9.5.3    any failure of the Formulated TIMERx manufactured by
                           Penwest or its alternate supplier (but not by Endo
                           under Section 7.4 hereof), as delivered to Endo
                           hereunder for use in the Product, to conform to the
                           Specifications;

                  9.5.4    any failure of Penwest to comply with its obligation
                           under Section 7.10 hereof to notify Endo of any
                           information coming into Penwest's possession and
                           bearing on the safety of TIMERx or the Product, and
                           not arising from any other aspect of the Product or
                           its formulation, development, supply, production,
                           manufacture, sale, delivery, distribution or use, nor
                           from any act, omission or contribution of Endo with
                           respect to the Product, or with respect to the
                           Formulated TIMERx following its delivery to Endo
                           hereunder; or

                  9.5.5    the supply, production, manufacture, sale, use,
                           delivery or distribution of the Product by Penwest,
                           its Affiliates or sublicensees, in the event that
                           Penwest supplies, produces, manufactures, sells,
                           uses, delivers or distributes the Product hereunder.

         9.6      Endo's Indemnification of Penwest. Endo shall indemnify,
                  defend and hold Penwest harmless from any and all third-party
                  claims to the extent arising from, in connection with, based
                  upon, by reason of, or relating in any way to, the
                  formulation, development, supply, production, manufacture,
                  sale, delivery, distribution or use of the Product by Endo,
                  its Affiliates or sublicensees, except for any matters which
                  are covered by Penwest's indemnities under Section 9.5 hereof.

         9.7      Limitation on Indemnification. Notwithstanding anything to the
                  contrary set forth elsewhere herein, neither Endo nor Penwest
                  shall be obligated to indemnify the other party for claims or
                  liabilities to the extent arising from such other party's, or

                                       30
<PAGE>
                  its Affiliates', sublicensees' or assigns', negligence,
                  intentional misconduct, or breach of its duties, obligations,
                  warranties or representations set forth herein.

         9.8      Procedure. Whenever indemnification is provided for a party
                  under this Agreement, such right of indemnification shall
                  extend also to the indemnified party's Affiliates, officers,
                  directors, shareholders, successors, assigns, agents,
                  employees, and insurers to the extent the same become subject
                  to such claim in such capacity. The party seeking
                  indemnification shall provide the indemnifying party with
                  written notice of any claim or action within ten (10) days of
                  its receipt thereof, and shall afford the indemnifying party
                  the right to control the defense and settlement of such claim
                  or action. The party seeking indemnification shall provide
                  reasonable assistance to the indemnifying party in the defense
                  of such claim or action. If the defendants in any such action
                  include both Endo and Penwest, and either party concludes that
                  there may be legal defenses available to it which are
                  different from, additional to, or inconsistent with, those
                  available to the other, that party shall have the right to
                  select separate counsel to participate in the defense of such
                  action on its behalf, and such party shall bear the cost and
                  expense of such separate defense, unless and to the extent the
                  parties otherwise agree, or it is determined through
                  arbitration hereunder that such costs and expense are or were
                  required to be indemnified by the other party hereunder and
                  are or were required to be incurred separately due to such
                  different, additional, or inconsistent defenses. Should the
                  indemnifying party determine not to defend such claim or
                  action, the other party shall have the right to maintain the
                  defense of such claim or action and the indemnifying party
                  agrees to provide reasonable assistance to it in the defense
                  of such claim or action and to bear the reasonable cost and
                  expense of such defense (including attorneys' and experts'
                  fees and expenses). Neither party shall settle any such claim
                  or action in a way that prejudices or adversely impacts the
                  other party to this Agreement without the prior approval of
                  such other party (which approval shall not be unreasonably
                  withheld).

         9.9      No Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY
                  CONTAINED IN THIS AGREEMENT (OTHER THAN FOR: BREACHES OF
                  SECTION 9.3 HEREOF; INDEMNITIES UNDER SECTIONS 9.5 AND 9.6
                  HEREOF FOR PATENT INFRINGEMENT OR FOR HARM TO PERSONS OR
                  TANGIBLE PROPERTY; AND BREACHES OF SECTION 10 HEREOF), NEITHER
                  PARTY SHALL UNDER ANY CIRCUMSTANCES BE LIABLE FOR ANY THIRD
                  PARTY CLAIMS OR FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT OR
                  SPECIAL DAMAGES, INCLUDING ANY LOST PROFITS OR SAVINGS,
                  ARISING FROM ANY BREACH OF WARRANTY OR THE PERFORMANCE OR
                  BREACH OF ANY OTHER PROVISION OF THIS AGREEMENT OR THE USE OR
                  INABILITY TO USE TIMERx, THE PRODUCT, PENWEST PATENTS,
                  PENWEST'S CONFIDENTIAL TECHNOLOGY, TIMERx PRODUCTION
                  TECHNOLOGY,

                                       31
<PAGE>
                  PENWEST TEST AND REGULATORY DATA, PENWEST PRODUCT TECHNOLOGY,
                  CONFIDENTIAL ENDO TECHNOLOGY, ENDO TEST AND REGULATORY DATA,
                  OR ENDO PRODUCT TECHNOLOGY, OR ANY CLAIMS ARISING IN TORT,
                  PERSONAL INJURY, OR PRODUCT LIABILITY, EVEN IF SUCH PARTY HAS
                  BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

10.      Confidentiality and Non-Solicitation.

         10.1     Confidentiality; Exceptions. In the course of performance
                  under this Agreement or during the discussions leading
                  thereto, a party may disclose, or may have disclosed, to the
                  other confidential information belonging to such party in
                  writing, orally, by demonstration or sample or otherwise,
                  which information is marked or stated in writing to be
                  confidential or trade secret information, or where the
                  circumstances of the disclosure and/or the nature of the
                  information otherwise reasonably give notice of the
                  confidential character of the information. All such
                  confidential information of a party shall be maintained in
                  confidence by the other and will not be used by the other
                  party for any purpose except as authorized hereunder. Each
                  party shall exercise, and shall cause its Affiliates,
                  sublicensees, and consultants to exercise, a reasonable degree
                  of care and at least the same degree of care as it uses to
                  protect its own confidential information of similar nature to
                  preserve the confidentiality of such information of the other
                  party. Each party shall safeguard such information against
                  disclosure to third parties, including without limitation
                  employees and persons working or consulting for such party
                  that do not have an established, current need to know such
                  information for purposes authorized under this Agreement. This
                  obligation of confidentiality does not apply to information
                  and material:

                  10.1.1   that were properly in the possession of the receiving
                           party, without any restriction on use or disclosure,
                           prior to receipt from the other party;

                  10.1.2   that are at the time of disclosure hereunder in the
                           public domain by public use, publication, or general
                           knowledge;

                  10.1.3   that become general or public knowledge through no
                           fault of the receiving party or its Affiliates
                           following disclosure hereunder;

                  10.1.4   that are properly obtained by the receiving party
                           from a third party not under a confidentiality
                           obligation to the disclosing party hereto;

                  10.1.5   that are documented to have been independently
                           developed by or on behalf of the receiving party
                           without the assistance of the confidential
                           information of the other party;

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<PAGE>
                  10.1.6   that consist merely of an idea for the combination of
                           one or more active drug ingredients with an extended
                           release agent such as TIMERx; or

                  10.1.7   to the extent the same are required to be disclosed
                           by order of any court or governmental authority;
                           provided, however, that the receiving party shall use
                           its Best Commercial Efforts to give the disclosing
                           party prior notice of any such disclosure so as to
                           afford the disclosing party a reasonable opportunity
                           to seek, at the expense of the disclosing party, such
                           protective orders or other relief as may be available
                           in the circumstances.

         10.2     Public Announcements. Neither party shall make any public
                  announcement or other publication regarding this Agreement
                  (whether as to the existence or terms hereof) or the
                  development work or project hereunder or the results thereof
                  without the prior, written consent of the other party, which
                  consent shall not be unreasonably withheld; provided that the
                  foregoing shall not prohibit any disclosure which, in the
                  opinion of counsel to the disclosing party, is required by any
                  applicable law or by any competent governmental authority. In
                  no event shall either party make any disclosure of any such
                  results before a patent application has been filed with
                  respect thereto, except upon the prior written approval of the
                  other party.

         10.3     Non-Solicitation. Each of Penwest and Endo agrees that during
                  the License Term, neither of them will directly or indirectly
                  solicit or encourage any employee or consultant of the other
                  to leave or terminate such employment or consultancy for any
                  reason, including without limitation, becoming employed or
                  otherwise engaged in any capacity by such party (or any person
                  or entity associated with such party, whether or not an
                  Affiliate), nor will it assist others in doing so.

11.      Infringement. The provisions of this Section 11 shall apply, mutatis
         mutandis, to the Endo Product Technology Patents, with Endo being
         substituted for Penwest and vice versa.

         11.1     Notice of Infringement. Penwest shall promptly inform Endo of
                  any suspected infringement of any of the Penwest Patents or
                  Penwest Product Technology Patents or the infringement or
                  misappropriation of the TIMERx Production Technology or
                  Penwest Product Technology by a third party, to the extent
                  such infringement or misappropriation involves the
                  manufacture, use or sale of the Product or a substitutable or
                  directly competitive product in the Territory ("Covered
                  Infringement"). Endo shall promptly inform Penwest of any
                  suspected infringement of any of the Penwest Patents or
                  Penwest Product Technology Patents or infringement or
                  misappropriation of the TIMERx Production Technology or
                  Penwest Product Technology of which Endo is aware, whether or
                  not the same involves a Covered Infringement.

                                       33
<PAGE>
         11.2     Non-Covered Infringement. If the suspected infringement or
                  misappropriation does not involve a Covered Infringement,
                  Penwest may take, or refrain from taking, any action it
                  chooses, with or without notice to Endo, and Endo shall have
                  no right to take any action with respect to such suspected
                  infringement or misappropriation, nor to any recoveries with
                  respect thereto. If the suspected infringement or
                  misappropriation involves a Covered Infringement, Penwest
                  shall, as soon as possible and in no event more than twenty
                  (20) days of the first notice referred to in Section 11.1
                  hereof, inform Endo whether or not Penwest intends to
                  institute suit against such third party with respect to a
                  Covered Infringement. Endo will not take any steps toward
                  instituting suit against any third party involving a Covered
                  Infringement until Penwest has informed Endo of its intention
                  pursuant to the previous sentence.

         11.3     Penwest's Institution of Suit. If Penwest notifies Endo that
                  it intends to institute suit against a third party with
                  respect to a Covered Infringement, and Endo does not agree to
                  join in such suit as provided in Section 11.4 hereof, Penwest
                  may bring such suit on its own and shall in such event bear
                  all costs of, and shall exercise all control over, such suit.
                  Penwest may, at its expense, bring such action in the name of
                  Endo and/or cause Endo to be joined in the suit as a
                  plaintiff. In such suit, recoveries, if any, whether by
                  judgment, award, decree or settlement, shall belong solely to
                  Penwest.

         11.4     Joint Suits. If Penwest notifies Endo that it desires to
                  institute suit against such third party with respect to a
                  Covered Infringement, and Endo notifies Penwest within 30 days
                  after receipt of such notice that Endo desires to institute
                  suit jointly, the suit shall be brought jointly in the names
                  of both parties and all costs thereof shall be borne equally
                  to the extent applicable to the Covered Infringement.
                  Recoveries, if any, whether by judgment, award, decree or
                  settlement, shall (to the extent attributable to the Covered
                  Infringement), after the reimbursement of each of Penwest and
                  Endo for its share of the joint costs in such action, be
                  shared equally between Penwest and Endo.

         11.5     Endo's Institution of Suit. If Penwest notifies Endo that it
                  does not intend to institute suit against such third party
                  with respect to a Covered Infringement, Endo may institute
                  suit on its own. Endo shall bear all costs of, and shall
                  exercise all control over, such suit. Recoveries, if any,
                  whether by judgment, award, decree or settlement, shall belong
                  solely to Endo; provided however that, after reimbursement of
                  Endo for its costs in such action, any portion of such net
                  recoveries that constitutes the equivalent of, or damages or
                  payments in lieu of, a royalty measured by the defendants
                  sales, shall belong solely to Endo.

         11.6     Abandonment of Suit. Should either Penwest or Endo commence a
                  suit under the provisions of this Section 11 and thereafter
                  elect to abandon the same, it shall give timely notice to the
                  other party hereto, who may, if it so desires, be joined as a

                                       34
<PAGE>
                  plaintiff in the suit (or continue as such if it is already
                  one) and continue prosecution of such suit; provided, however,
                  that the sharing of expenses and any recovery of such suit
                  shall be as may be determined for that situation by Committee
                  Action.

         11.7     Patent Enforcement Litigation. Notwithstanding the foregoing,
                  in the event that the parties are notified of (1) the filing
                  by a third party of an abbreviated new drug application
                  ("ANDA") with the FDA (or the FDA's acceptance of an ANDA)
                  relating to the Product or (2) a third party certifying
                  against a the patents covering the Product that are listed in
                  the FDA's "Orange Book", then the parties shall cooperate
                  fully with respect to any ensuing patent enforcement
                  litigation. The costs incurred relating to such suit(s) shall
                  be addressed in the definitions of Formulated TIMERx Price and
                  Oxymorphone Price.

12.      Escalation Procedures.

         12.1     The parties intend that, to the maximum extent practicable,
                  they shall reach decisions hereunder cooperatively through the
                  deliberations of the Alliance Committee and by consent of its
                  members as described in Section 1.10.1 of the Definition
                  Exhibit. In cases in which that does not occur (other than as
                  to a question of patent validity or as to a matter left to the
                  discretion of a party hereunder), either party may institute
                  an Escalation Procedure in which a proposed Committee Action
                  approved by at least two members of the Alliance Committee, is
                  provided in writing to each party's Escalation Officer. Such
                  Escalation Officers shall discuss the proposed Committee
                  Action, and shall meet with respect thereto if either of them
                  believes a meeting or meetings to be useful. If the Escalation
                  Officers do not resolve the matter by either approving the
                  proposed Committee Action (whether or not in a revised form)
                  or agreeing to reject it, within thirty (30) days (or such
                  lesser or longer period as they may agree is a useful period
                  for their discussions), then either of them may institute a
                  formal mediation of such matter pursuant to Section 12.2
                  hereof.

         12.2     Any dispute or difference (other than as to a question
                  relating to patent validity or as to a matter left to the
                  discretion of a party hereunder), between the parties arising
                  out of or in connection with this Agreement, including without
                  limitation a disagreement over a proposed Committee Action,
                  that cannot be resolved by the consent of the Escalation
                  Officer of each party shall be referred to mediation before
                  any party resorts to arbitration, litigation, or other dispute
                  resolution procedure. Unless the parties agree otherwise, the
                  mediation will be conducted in accordance with The CPR
                  Mediation Procedure for Business Disputes (Revised 1998) of
                  the CPR Institute for Dispute Resolution by a mediator who has
                  had both training and experience as a mediator of general
                  corporate and commercial matters. If the parties cannot agree
                  on a mediator, then the mediator will be selected by the
                  President of the CPR Institute for Dispute Resolution in

                                       35
<PAGE>
                  accordance with the criteria set forth in the preceding
                  sentence. Within thirty days after the selection of the
                  mediator, the parties and their respective attorneys will meet
                  with the mediator for one mediation session of at least four
                  hours. If the dispute cannot be settled during such mediation
                  session or during any mutually agreed continuation of such
                  session, any party to this Agreement may give to the mediator
                  and the other party to this Agreement written notice declaring
                  the mediation process at an end, and such dispute will be
                  resolved by arbitration pursuant to Section 13 hereof. All
                  discussions pursuant to this section will be confidential and
                  will be treated as compromise and settlement discussions.
                  Nothing said or disclosed, and no document produced, in the
                  course of such discussions which is not independently
                  discoverable may be offered or received as evidence or used
                  for impeachment or for any other purpose in any arbitration or
                  litigation. The costs of any mediation pursuant to this
                  section will be shared equally by the parties to this
                  Agreement. Each party to this Agreement acknowledges receipt
                  of a copy of The CPR Model Mediation Procedure for Business
                  Disputes (Revised 1998) of the CPR Institute for Dispute
                  Resolution. The use of mediation will not be construed under
                  the doctrines of laches, waiver or estoppel to affect
                  adversely the rights of either party, and in particular either
                  party may seek a preliminary injunction or other interim
                  judicial relief at any time if in its judgment such action is
                  necessary to avoid irreparable damage.

13.      Arbitration. Should the parties fail to reach agreement with respect to
         a dispute or difference (other than as to a question relating to patent
         validity or as to a matter left to the discretion of a party
         hereunder), between the parties arising out of or in connection with
         this Agreement, including without limitation a disagreement over a
         proposed Committee Action, through the aforesaid mediation or
         otherwise, then the dispute or difference will be determined by
         arbitration in New York City in accordance with the Non-Administered
         Arbitration Rules & Commentary (Amended 1993) of the CPR Institute for
         Dispute Resolution by a tribunal of three independent and impartial
         arbitrators, one of which will be appointed by each of Endo and
         Penwest, and the third of which shall have had both training and
         experience as an arbitrator of general corporate and commercial matters
         and who shall be, and for at least ten years shall have been, a
         partner, shareholder or member in a highly respected law firm
         headquartered in the United States. If the parties to this Agreement
         cannot agree on the third arbitrator, then the third arbitrator will be
         selected by the President of the CPR Institute for Dispute Resolution
         in accordance with the criteria set forth in the preceding sentence;
         provided that no person who served as a mediator pursuant to Section
         12.2 hereof with respect to such dispute may be selected by the
         President of the CPR Institute for Dispute Resolution as an arbitrator
         pursuant to this section. The tribunal may decide any issue as to
         whether, or as to the extent to which, any dispute is subject to the
         arbitration and other dispute resolution provisions in this Agreement.
         The tribunal must base its award on the provisions of this Agreement
         and must render its award in a writing, which must include an
         explanation of the reasons for such award. Any arbitration pursuant to
         this section will be governed by the substantive laws of the State of
         New York applicable to contracts

                                       36
<PAGE>
         made and to be performed in that state, without regard to conflicts of
         law rules, and by the arbitration law of the Federal Arbitration Act (9
         U.S.C. Sec. 1 et seq.), and judgment upon the award rendered by the
         arbitrator may be entered by any court having jurisdiction thereof. The
         statute of limitations of the state of New York applicable to the
         commencement of a lawsuit will apply to the commencement of an
         arbitration under this section, except that no defenses will be
         available based upon the passage of time during any negotiation or
         mediation required pursuant to Section 12 hereof. All fees, costs and
         expenses of the arbitrators, and all other costs and expenses of the
         arbitration, will be shared equally by the parties to this Agreement
         unless such parties agree otherwise or unless the tribunal in the award
         assesses such costs and expenses against one of such parties or
         allocates such costs and expenses other than equally between such
         parties. Each party to this Agreement acknowledges receipt of a copy of
         the Non-Administered Arbitration Rules & Commentary (Amended 1993) of
         the CPR Institute for Dispute Resolution. Notwithstanding the
         foregoing, either party may, on good cause shown, seek a temporary
         restraining order and/or a preliminary injunction from a court of
         competent jurisdiction, to be effective pending the institution of the
         arbitration process and the deliberation and award of the arbitration
         tribunal.

14.      Miscellaneous.

         14.1     This Agreement incorporates the Definitions Exhibit and the
                  numbered Exhibits referenced herein. This Agreement
                  constitutes the entire agreement and supersedes all prior
                  agreements and understandings, both written and oral
                  (including the Old Agreement), between the parties hereto with
                  respect to the subject matter hereof.

         14.2     This Agreement shall be binding upon and inure to the benefit
                  of the parties hereto and their successors and permitted
                  assigns; provided, however, that except as part of the
                  transfer of all or substantially all assets to a single buyer
                  or pursuant to a merger or other corporate reorganization,
                  neither party shall assign or delegate any of its rights or
                  obligations hereunder at any time without the prior written
                  consent of the other party hereto, which consent shall not be
                  unreasonably withheld.

         14.3     All notices, requests or other communication provided for or
                  permitted hereunder shall be given in writing and shall be
                  hand delivered or sent by facsimile, reputable courier or by
                  registered or certified mail, postage prepaid, return receipt
                  requested, to the address set forth on the signature page of
                  this Agreement, or to such other address as either party may
                  inform the other of in writing. Notices will be deemed
                  delivered on the earliest of transmission by facsimile, actual
                  receipt or three days after mailing as set forth herein.

         14.4     Any terms of this Agreement may be amended, modified or waived
                  only in a writing signed by both parties.

                                       37
<PAGE>
         14.5     If any provision of this Agreement shall be held invalid,
                  illegal or unenforceable, such provision shall be enforced to
                  the maximum extent permitted by law and the parties'
                  fundamental intentions hereunder, and the remaining provisions
                  shall not be affected or impaired.

         14.6     Nothing herein contained shall constitute this a joint venture
                  agreement or constitute either party as the partner, principal
                  or agent of the other, this being an Agreement between
                  independent contracting entities. Neither party shall have the
                  authority to bind the other in any respect whatsoever.

         14.7     In the event that either party hereto is prevented from
                  carrying out its obligations under this Agreement by events
                  beyond its reasonable control, including without limitation
                  acts or omissions of the other party, acts of God or
                  government, natural disasters or storms, fire, political
                  strife, labor disputes, failure or delay of transportation,
                  default by suppliers or unavailability of parts, then such
                  party's performance of its obligations hereunder shall be
                  excused during the period of such event and for a reasonable
                  period of recovery thereafter, and the time for performance of
                  such obligations shall be automatically extended for a period
                  of time equal to the duration of such event or events;
                  provided, however, that the other party may, at its election,
                  terminate this Agreement upon 120 days' prior notice to the
                  party affected by such events, unless such events cease to
                  prevent such affected party's performance hereunder during
                  such 120-day period.

         14.8     This Agreement shall be governed by, and construed and
                  enforced in accordance with, the laws of the State of New York
                  without regard to its conflict of laws rules.

         [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

                                       38
<PAGE>
         IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and acknowledge this Agreement as of the date
first written above.

ENDO PHARMACEUTICALS INC.                 PENWEST PHARMACEUTICALS CO.

By: /s/ CAROL A. AMMON                    By: /s/ TOD R. HAMACHEK
---------------------------------         --------------------------------------
Its: Chairman & CEO                       Its: Chairman & CEO
---------------------------------         --------------------------------------

Address:                                  Address:
100 Painters Drive                        2981 Route 22
Chadds Ford, PA  19317                    Patterson, N.Y.  12563
FAX: (610) 558-9682                       FAX: (845) 878-3498
Attn:  Carol A. Ammon                     Attn:  Tod R. Hamachek

                                          cc:  Steven D. Singer, Esq.
cc:  Caroline B. Manogue                       Hale and Dorr LLP
FAX: (610) 558-9684                            60 State Street
                                               Boston, Massachusetts  02109
                                          FAX: (617) 526-5000

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<PAGE>
DEFINITIONS EXHIBIT

1.       Definitions.

         1.1      "Affiliate" shall mean any corporation, company, partnership,
                  joint venture or other entity which controls, is controlled
                  by, or is under common control with a person or entity. For
                  purposes of this Section 1.1, "control" shall mean (a) in the
                  case of corporate entities, direct or indirect ownership of at
                  least fifty percent (50%) of the stock or shares having the
                  right to vote for the election of directors, and (b) in the
                  case of non-corporate entities, direct or indirect ownership
                  of at least fifty percent (50%) of the equity interest with
                  the power to direct the management and policies of such
                  non-corporate entities.

         1.2      "Alliance Committee" shall mean a committee of six members,
                  three of whom will be designated in writing by each of Penwest
                  and Endo. The Alliance Committee as of the date of this
                  Agreement shall have six members, as follows: Dr. Deborah Fox,
                  Ms. Jennifer Good and Dr. Anand Baichwal, designated by
                  Penwest, and Dr. David Lee, Mr. Peter Lankau and Ms. Caroline
                  Manogue designated by Endo. If at any time a vacancy occurs
                  (whether due to death, disability, resignation, removal by a
                  party of its designee by written notice to the other party, or
                  otherwise), the vacancy will be filled as soon as is
                  reasonably practicable by designation by the party that
                  originally designated the prior incumbent. In the meantime,
                  the Alliance Committee shall continue to function with its
                  remaining members, provided that any Committee Action
                  described in Section 1.10 hereof will continue to require the
                  consent of at least four members.

         1.3      "Applicable Percentage" shall mean the following percentages
                  of the following portions of Net Realization:

                  1.3.1    *** of all Net Realization from all units of the
                           Product sold outside of the United States;

                  1.3.2    *** of all Net Realization from all units of the
                           Product sold by Endo or its distributors or licensees
                           in any tier in the United States, until the aggregate
                           of all such Net Realization from the Product
                           described in this clause 1.3.2 during the term of
                           this Agreement ***;

                  1.3.3    *** of all Net Realization from all units of the
                           Product sold by Endo or its distributors or licensees
                           in any tier in the United States, after the aggregate
                           of all such Net Realization from the Product
                           described in clause 1.3.2 and this clause 1.3.3
                           during the term of this Agreement equals ***, but
                           before such aggregate equals ***;

                  1.3.4    *** of all Net Realization from all units of the
                           Product sold by Endo or its distributors or licensees
                           in any tier in the United States, after the

                                       40
<PAGE>
                           aggregate of all such Net Realization from the
                           Product described in clause 1.3.2, clause 1.3.3, and
                           this clause 1.3.4 equals ***;

                  1.3.5    *** of all Net Realization from all units of the
                           Product sold by Penwest or its distributors or
                           licensees in any tier in the United States, until the
                           aggregate of all such Net Realization from the
                           Product described in this clause 1.3.5 during the
                           term of this Agreement equals ***;

                  1.3.6    *** of all Net Realization from all units of the
                           Product sold by Penwest or its distributors or
                           licensees in any tier in the United States, after the
                           aggregate of all such Net Realization from the
                           Product described in clause 1.3.5 and this clause
                           1.3.6 during the term of this Agreement equals ***,
                           but before such aggregate equals ***; and

                  1.3.7    *** of all Net Realization from all units of the
                           Product sold by Penwest or its distributors or
                           licensees in any tier in the United States, after the
                           aggregate of all such Net Realization from the
                           Product described in clause 1.3.5, clause 1.3.6, and
                           this clause 1.3.7 equals ***.

         1.4      "Approval" shall mean, with respect to the Product and as to
                  each nation in the Territory, the approval by the Regulatory
                  Authority in such nation of the Product for commercial sale in
                  oral solid-dosage form for administration in humans, pursuant
                  to a Product License Application ("PLA") submitted by or for
                  Endo, or if a license to Penwest under Section 6.8 hereof is
                  applicable, pursuant to a PLA submitted by or for Penwest. In
                  the United States, the "Approval" for the Product shall be the
                  approval of the U.S. Food and Drug Administration (herein
                  "FDA") of the Product for sale in oral solid-dosage form for
                  administration in humans, pursuant to a New Drug Application
                  ("NDA").

         1.5      "Best Commercial Efforts" shall mean the exertion on a
                  substantially continuous basis of efforts as would normally be
                  devoted to the applicable task by commercial parties with
                  similar resources to those of the applicable party, where such
                  parties are highly motivated to accomplish such task to the
                  maximum extent practicable, and consider and treat such task
                  as having a priority at least as high as that for any similar
                  task with respect to such party's other drug development or
                  marketing efforts (as the case may be). Best Commercial
                  Efforts will not mean that a party commits that it will
                  actually accomplish the applicable task, nor that it will
                  devote thereto efforts or resources beyond those that a
                  prudent commercial enterprise would devote, even though
                  remaining motivated to do so as described above.

                                       41
<PAGE>
         1.6      "Certification Budget" shall mean the set of expenditures,
                  costs, and other resources anticipated to be devoted by the
                  respective parties to the Certification Tasks during the
                  Certification Period, with respect to the Product.

         1.7      "Certification Excess" shall mean the amount which a party
                  would have borne or paid had it participated fully in the
                  Certification Period, but did not pay due to its election
                  under Section 3.5 or Section 5.5, duly made as provided
                  herein, not to participate fully in the Certification Period.

         1.8      "Certification Period" shall mean with respect to the Product
                  (a) in the United States, the period beginning on the date
                  hereof and (b) in another nation in the Territory, the period
                  beginning on the date a Certification Period therefor is
                  instituted by Committee Action, and, in each case, ending on
                  the earliest of:

                  1.8.1    the completion of all of the Certification Tasks
                           applicable thereto;

                  1.8.2    the termination of the Certification Period pursuant
                           to Section 3.5 or Section 5.5 hereof; or

                  1.8.3    the termination of this Agreement as provided herein.

         1.9      "Certification Task(s)" shall mean, with respect to the
                  Product and as to each nation in the Territory for the
                  Certification Period:

                  1.9.1    those tasks or milestones as shall be designated from
                           time to time by Committee Action as being, within
                           industry norms and standards, sufficient (together
                           with the tasks undertaken to date for the Product) to
                           support the filing of an NDA with the FDA for the
                           Product, or, as to nations other than the U.S., to
                           support the filing of an analogous PLA in the
                           applicable Regulatory Authority;

                  1.9.2    the filing of one or more NDAs and other PLAs with
                           respect to the Product with the FDA and/or the other
                           Regulatory Authorities designated by Committee
                           Action;

                  1.9.3    obtaining Approval of such NDAs and PLAs (on a
                           nation-by-nation basis, as to the approval by the
                           Regulatory Authority having jurisdiction in that
                           nation); and

                  1.9.4    the preparation by Endo, or if and to the extent that
                           Sections 4.2 or 4.3 hereof, or a license to Penwest
                           under Section 6.8 hereof, are applicable, the
                           preparation by Penwest, and the approval in any event
                           by Committee Action, of an initial Manufacturing and
                           Marketing Plan for the Product. In most cases, the
                           Certification Tasks will include all testing and
                           studies including as to efficacy, bioequivalence, and
                           safety

                                       42
<PAGE>
                           and toxicology, in connection with the development,
                           licensing, manufacture and marketing of the Product,
                           and for compliance with all requirements imposed by
                           the government of the United States (inclusive
                           without limitation of the FDA and the DEA) and by any
                           other government(s) in the Territory as may be
                           designated by Committee Action, including without
                           limitation large-scale trials of safety and efficacy
                           of the sort called "Phase III Clinical Trials" in the
                           FDA context, post-marketing surveillance and other
                           studies of the sort called "Phase IV" studies in the
                           FDA context. However, the applicable Certification
                           Tasks may be defined and altered in specific cases by
                           Committee Action, whether or not in conformity with
                           the above-described usual case as now anticipated.

         1.10     "Committee Action" shall mean an official act, decision, or
                  ruling of the Alliance Committee, which shall require in each
                  case that at least one of the following applies:

                  1.10.1   all members of the Alliance Committee present and
                           acting (but in any event a minimum of four such
                           members) have consented thereto, where such consent
                           is given either in writing (signed either
                           collectively or in multiple identical counterparts,
                           the signers being considered "present and acting" for
                           this purpose) or by vote at a duly convened meeting
                           of the Alliance Committee subsequently entered into
                           the minutes of such meeting; or

                  1.10.2   at least two members of the Alliance Committee have
                           consented thereto (in the manner described above),
                           and have further instituted an Escalation Procedure
                           in which the act, decision, or ruling has received
                           the written approval of the Escalation Officer of
                           each party; or

                  1.10.3   arbitration pursuant to Section 13 hereof results in
                           the adoption of the act, decision, or ruling as
                           constituting Committee Action. A Committee Action may
                           include the rescinding or amendment of any prior
                           Committee Action.

         1.11     "Confidential Technology" shall mean all technology that is,
                  at the relevant time hereunder, protected or required to be
                  protected as confidential information pursuant to Section 10
                  hereof.

         1.12     "Effective Date" shall mean September 17, 1997.

         1.13     "Endo Improvement Technology" shall mean any and all
                  technology and rights of Endo, or in which Endo or any of its
                  Affiliates, licensees or sublicensees otherwise has any rights
                  or interests during the term of this Agreement (to the extent
                  that Endo has the right to license the same to Penwest), to
                  the extent the

                                       43
<PAGE>
                  same are improvements, modifications, alterations, or
                  enhancements to any of the inventions covered by the Penwest
                  Patents, Penwest Product Technology, or TIMERx, and to the
                  extent made or discovered, or disclosing inventions made or
                  discovered, prior to the end of the applicable Certification
                  Period, together with all United States and foreign
                  intellectual property and other rights and interests of Endo
                  and its Affiliates, licensees and sublicensees thereto and
                  therein (to the extent that Endo has the right to license the
                  same to Penwest), including without limitation patents, trade
                  secrets, copyright, periods of market exclusivity, and other
                  related rights or interests.

         1.14     "Endo Product Technology" shall mean any and all inventions,
                  improvements, modifications, alterations or enhancements that
                  concern Oxymorphone, including its release profile and
                  metabolites, and that are made by Endo, by Penwest or jointly
                  by Endo or any of its Affiliates, on the one hand, and Penwest
                  or any of its Affiliates, on the other hand, during and in the
                  course of the parties cooperative development activities under
                  or in support of this Agreement, together with all United
                  States and foreign intellectual property and other rights and
                  interests of the parties and their respective Affiliates
                  thereto and therein, including without limitation patents,
                  trade secrets, copyright, periods of market exclusivity, and
                  other related rights or interests.

         1.15     "Endo Technology" shall mean any and all technology and rights
                  of Endo, or in which Endo or any of its Affiliates, licensees
                  or sublicensees otherwise has any rights or interests during
                  the term of this Agreement (to the extent that Endo has the
                  right to license the same to Penwest), which are used or
                  contemplated to be used in connection with the activities
                  contemplated under this Agreement, including without
                  limitation all Oxymorphone rights and technology (and other
                  technology, rights and properties) to the extent the same
                  directly relate to, are desirable for, or are necessary or
                  useful for, the production, storage and/or marketing of the
                  Product and any and all Endo Improvement Technology, together
                  with all United States and foreign intellectual property and
                  other rights and interests of Endo and its Affiliates,
                  licensees and sublicensees thereto and therein (to the extent
                  that Endo has the right to license the same to Penwest),
                  including without limitation patents, trade secrets,
                  copyright, periods of market exclusivity, and other related
                  rights or interests.

         1.16     "Endo Test and Regulatory Data" shall mean any and all test
                  data, test designs and protocols, clinical studies and results
                  thereof, government licenses and applications therefor,
                  government certifications and findings, and related materials,
                  information and rights (including without limitation
                  information regarding bioavailability and bioequivalence, and
                  any adverse drug reactions), developed, commissioned or
                  otherwise obtained by Endo or any of its Affiliates or
                  sublicensees during the term of this Agreement for the uses
                  intended by this Agreement relating to TIMERx, Endo
                  Technology, Endo Product Technology, the

                                       44
<PAGE>
                  Product, Penwest Patents, Penwest Product Technology, TIMERx
                  Production Technology and/or Penwest's Confidential
                  Technology, including, without limitation, all patents, trade
                  secrets, copyrights, periods of market exclusivity and other
                  related rights and interests therein.

         1.17     "Endo Trademark(s)" shall mean those names, symbols and or
                  characters described in Exhibit 1.17 hereto, as the same may
                  be amended from time to time during the term of this Agreement
                  by Endo on at least six (6) months' prior written notice to
                  Penwest (or such shorter notice as reasonably agreed to by the
                  parties), that are owned by Endo and that have been designated
                  by it for use in conjunction with Penwest's packaging and
                  promotion of the Product hereunder, pursuant to Section 8
                  hereof.

         1.18     "Escalation Officer" shall mean the Chairman and Chief
                  Executive Officer of Penwest Pharmaceuticals Co. (currently
                  Tod Hamachek), and the Chief Executive Officer of Endo
                  (currently Carol Ammon), and the persons holding such
                  positions from time to time.

         1.19     "Escalation Procedure" shall mean the decision-making
                  procedure described in Section 12 hereof, whereby the parties
                  intend to avoid deadlocks between them and undue delays in
                  reaching mutually acceptable Committee Action(s).

         1.20     "Exclusivity Period" shall mean, with respect to the Product,
                  a period coterminous with the License Term, except where the
                  Exclusivity Period is shortened as otherwise provided in this
                  Agreement.

         1.21     "Facilities Certifications" shall mean those governmental
                  certifications, licenses and other approvals however
                  designated held or obtained at any time by or for Endo or its
                  Affiliates, subcontractors or sublicensees, and for the
                  facilities of any of them, that are required for the legal
                  production, transportation, storage, testing and or packaging
                  of Oxymorphone products, whether for commercial or research
                  use or sale, or otherwise.

         1.22     "Formulated TIMERx" shall mean TIMERx and certain additives in
                  a formulation developed hereunder specifically for use in the
                  Product.

         1.23     "Formulated TIMERx Price" shall mean Penwest's contract
                  manufacturing cost (or, if made internally, its variable costs
                  plus directly allocable (a) fixed and (b) manufacturing
                  overhead costs relating to the manufacture or acquisition) of
                  the Formulated TIMERx to be provided to Endo or its Affiliates
                  or sublicensees hereunder, as shall be determined and adjusted
                  no more often than annually plus the costs directly relating
                  to the quality control testing referred to in Section 7.2
                  hereof plus the allocable indirect costs and fees referred to
                  in the last two sentences of this Section 1.23; provided,
                  however, that any amounts paid or payable by Penwest for
                  third-party royalties (or for materials acquisition costs to

                                       45
<PAGE>
                  the extent attributable to third-party intellectual properties
                  and essentially equivalent to royalties) which are the
                  responsibility of Penwest under Sections 9.5.1 or 9.5.2 hereof
                  shall not be counted as part of the Formulated TIMERx Price.
                  Costs and fees related to and arising out of patent
                  enforcement litigation ensuing from a third party certifying
                  against a Penwest Patent or a patent covering Penwest Product
                  Technology held by Penwest and listed in the FDA's "Orange
                  Book" shall (to the extent not reflected in the Certification
                  Budget and the reconciliations under Section 3.7 hereof) be
                  part of the allocable indirect costs of the manufacture or
                  acquisition of any Formulated TIMERx provided for use in the
                  Product. If any patent applications are filed or prosecuted by
                  Penwest on Penwest Product Technology, as provided in Section
                  6.2 hereof, the reasonable costs thereof, and of the
                  maintenance of any patents that issue therefrom, shall (to the
                  extent not reflected in the Certification Budget and the
                  reconciliations under Section 3.7 hereof) be part of the
                  allocable indirect costs of the manufacture or acquisition of
                  any Formulated TIMERx provided for use in the Product that
                  would be disclosed in whole or in part in such patent or
                  patent application.

         1.24     "License Term" shall mean, with respect to the Product in each
                  nation in the Territory, the cumulative period covered by the
                  Certification Period and the Marketing Period.

         1.25     "Manufacturing and Marketing Plan(s)" shall mean, with respect
                  to the Product and as to those specific nation(s) specified in
                  such Manufacturing and Marketing Plan, a detailed business,
                  manufacturing, and marketing plan of the sort prepared
                  internally and used by Endo and/or its Affiliates (or, if a
                  license to Penwest under Section 6.8 hereof is applicable,
                  and/or in the circumstances described in Section 4.2 or 4.3
                  hereof, such a plan of the sort prepared and used internally
                  by Penwest and/or its designated third-party marketer) with
                  respect to their drug products generally, including without
                  limitation quantifiable and verifiable plans, goals and
                  milestones for the levels and types of resources, personnel,
                  promotion, advertising, detailing, and other efforts to be
                  devoted to the manufacturing, packaging, quality control, and
                  marketing of the Product, and with respect to the measures of
                  the degree of success achieved in doing so, including without
                  limitation target dates for the full-scale market launch of
                  the Product in each specific nation(s), and Minimum Net
                  Realization(s) for each specific nation(s) in such
                  Manufacturing and Marketing Plan (and related goals and
                  projections for pretax profitability). Each Manufacturing and
                  Marketing Plan shall also describe the schedule and methods to
                  be used to effect the revision thereof and the adoption of
                  substituted Manufacturing and Marketing Plans no less often
                  than annually, through Committee Action.

         1.26     "Marketing Period" shall mean, with respect to the Product and
                  as to each nation in the Territory, the period beginning at
                  the end of the Certification Period for the Product in such
                  nation and ending on the earliest of:

                                       46
<PAGE>
                  1.26.1   the twentieth (20th) anniversary of the end of such
                           Certification Period or, if later, the time at which
                           there are no longer any Penwest Patents, Penwest
                           Product Technology Patents or Endo Product Technology
                           Patents applicable to the Product in such nation, to
                           the extent such patents disclose inventions made
                           prior to the end of such Certification Period; or

                  1.26.2   the termination of the License Term for the Product
                           in such nation pursuant to Section 5.7 hereof or of
                           the License Term for the Product in such nation
                           pursuant to Section 6.8.1 hereof; or

                  1.26.3   the termination of this Agreement as provided herein.

         1.27     "Minimum Net Realization" shall mean, with respect to the
                  Product and each specific nation in the Territory under the
                  then-current Manufacturing and Marketing Plan therefor, a
                  minimum amount of Net Realization generated from sales of the
                  Product in such nation(s) (as will be stated in such
                  Manufacturing and Marketing Plan). The Minimum Net
                  Realization(s) shall be based upon the then current market
                  conditions, taking into account the level and nature of
                  competitive products, the method of promotion and marketing,
                  FDA promotional guidelines, the FDA-approved indications of
                  the Product, the Net Realizations specified and obtained for
                  the Product in other nations, and other factors as shall be
                  determined by Committee Action and (a) for Endo, shall be set
                  at levels at least as high as those that Endo and its
                  Affiliates would reasonably expect to obtain from the
                  marketing of their most prominently marketed drug products
                  that have similar market potential (provided that the
                  determination of similar market potential shall be reasonable
                  and take into account, among other things, each product's
                  indications, allowable claims, side effect profile,
                  profitability, patent estate and labeling) or (b) for Penwest,
                  shall be set at levels at least as high as those that Penwest
                  and its Affiliates would reasonably expect to obtain from the
                  marketing of their most prominently marketed drug products
                  that have similar market potential (provided that the
                  determination of similar market potential shall be reasonable
                  and take into account, among other things, each product's
                  indications, allowable claims, side effect profile,
                  profitability, patent estate and labeling); provided that
                  Minimum Net Realization shall in all cases be determined
                  prospectively and shall not be adjusted after a party fails to
                  achieve such predetermined Minimum Net Realization unless such
                  failure was the result, directly or indirectly, of
                  governmental action or unless such Minimum Net Realization is
                  initially determined by arbitration pursuant to Section 1.10.3
                  of this Definitions Exhibit. Notwithstanding anything to the
                  contrary herein, the Alliance Committee may agree to adjust
                  the Minimum Net Realization at any time, and from time to
                  time, should the market conditions and/or assumptions upon
                  which the Minimum Net Realization was previously established
                  change.

                                       47
<PAGE>
         1.28     "Net Realization" shall mean that portion of the amounts paid
                  or payable (whether in cash, cash equivalents, current or
                  deferred consideration, barter, or other monetary or in-kind
                  compensations or considerations of any nature) attributable to
                  the sale or other distribution of the Product, or to the grant
                  of any rights to make, market, or otherwise exploit the
                  Product, which is to be treated hereunder as a net amount
                  realized by the actual or intended recipient of the same,
                  after the deduction of those direct and indirect costs
                  incurred as provided under a Manufacturing and Marketing Plan
                  approved by Committee Action and appropriately attributable
                  thereto (including without limitation the Formulated TIMERx
                  Price paid to Penwest for the TIMERx incorporated therein, or
                  if Section 6.8.3 hereof becomes applicable, the amounts paid
                  to Endo thereunder), all to be determined in accordance with
                  the accounting and attribution standards and principles
                  described in Exhibit 1.28 hereto, as the same may be amended
                  from time to time by Committee Action.

         1.29     [INTENTIONALLY OMITTED.]

         1.30     "Oxymorphone Price" shall mean Endo's contract manufacturing
                  cost (or, if made internally, its variable costs plus directly
                  allocable (a) fixed and (b) manufacturing overhead costs
                  relating to the manufacture or acquisition) of Oxymorphone to
                  be provided to Penwest or its Affiliates or sublicensees
                  hereunder, as shall be determined and adjusted no more often
                  than annually plus the costs directly relating to the quality
                  control testing referred to in Section 6.8.4(i) hereof plus
                  the allocable indirect costs and fees referred to in the last
                  two sentences of this Section 1.30; provided, however, that
                  any amounts paid or payable by Endo for third-party royalties
                  (or for materials acquisition costs to the extent attributable
                  to third-party intellectual properties and essentially
                  equivalent to royalties) which are the responsibility of Endo
                  under Section 9.6 hereof shall not be counted as part of the
                  Oxymorphone Price. Costs and fees related to and arising out
                  of patent enforcement litigation ensuing from a third party
                  certifying against a patent covering Endo Product Technology
                  held by Endo and listed in the FDA's "Orange Book" shall (to
                  the extent not reflected in the Certification Budget and the
                  reconciliations under Section 3.7 hereof) be part of the
                  allocable indirect costs of the manufacture or acquisition of
                  any Oxymorphone ADS provided for use in the Product. If any
                  patent applications are filed or prosecuted by Endo on Endo
                  Product Technology, as provided in Section 6.2 hereof, the
                  reasonable costs thereof, and of the maintenance of any
                  patents that issue therefrom, shall (to the extent not
                  reflected in the Certification Budget and the reconciliations
                  under Section 3.7 hereof) be part of the allocable indirect
                  costs of the manufacture or acquisition of any Oxymorphone
                  provided for use in the Product that would be disclosed in
                  whole or in part in such patent or patent application.

         1.31     "Penwest Improvement Technology" shall mean any and all
                  technology and rights of Penwest, or in which Penwest or any
                  of its Affiliates, licensees or sublicensees

                                       48
<PAGE>
                  otherwise has any rights or interests during the term of this
                  Agreement (to the extent that Penwest has the right to license
                  the same to Endo), to the extent the same are improvements,
                  modifications, alterations, or enhancements to any of the
                  inventions covered by the Endo Technology, Endo Product
                  Technology, or Oxymorphone and to the extent made or
                  discovered, or disclosing inventions made or discovered, prior
                  to the end of the Certification Period, together with all
                  United States and foreign intellectual property and other
                  rights and interests of Penwest and its Affiliates, licensees
                  and sublicensees thereto and therein (to the extent that
                  Penwest has the right to license the same to Endo),including
                  without limitation patents, trade secrets, copyright, periods
                  of market exclusivity, and other related rights or interests.

         1.32     "Penwest Patents" shall mean:

                  1.32.1   those United States patents and foreign equivalents
                           listed in Exhibit 1.32 hereto and all divisions,
                           continuations, continuations-in-part, reissues, or
                           extensions thereof, any periods of marketing
                           exclusivity relating thereto;

                  1.32.2   (i) those United States and foreign patent
                           applications pending as of the Effective Date that
                           are owned by Penwest, to the extent the same would,
                           if issued as patent(s), in the absence of the
                           licenses granted hereunder be infringed by Endo's
                           production, use, sale, offer for sale, or import of
                           the Product as contemplated under this Agreement; and
                           (ii) subject to Section 6.7.5 hereof, any other
                           patent rights owned or controlled and sublicenseable
                           by Penwest, to the extent the same would in the
                           absence of the licenses granted hereunder be
                           infringed by Endo's production, use, sale, offer for
                           sale, or import of the Product as contemplated under
                           this Agreement and to the extent disclosing
                           inventions made or discovered prior to the end of the
                           applicable Certification Period; and

                  1.32.3   Subject to Section 6.7.5 hereof, Penwest's rights
                           under United States and foreign patents in the
                           Territory, if any, to the extent disclosing any of
                           Penwest's improvements, modifications, alterations,
                           or enhancements to any of the inventions covered by
                           the Penwest Patents that are made for or are
                           otherwise related to or useful with the Product prior
                           to the end of the applicable Certification Period.

         1.33     "Penwest Product Technology" shall mean any and all
                  inventions, improvements, modifications, alterations or
                  enhancements that concern TIMERx, including the formulation
                  thereof, and that are made by Endo, by Penwest or jointly by
                  Endo or any of its Affiliates, on the one hand, and Penwest or
                  any of its Affiliates, on the other hand, during and in the
                  course of the parties cooperative development activities under
                  or in support of this Agreement, together with all United
                  States

                                       49
<PAGE>
                  and foreign intellectual property and other rights and
                  interests of the parties and their respective Affiliates
                  thereto and therein, including without limitation patents,
                  trade secrets, copyright, periods of market exclusivity, and
                  other related rights or interests.

         1.34     "Penwest Test and Regulatory Data" shall mean any and all test
                  data, test designs and protocols, clinical studies and results
                  thereof, government licenses and applications therefor,
                  government certifications and findings, and related materials,
                  information and rights (including without limitation
                  information regarding bioavailability and bioequivalence, and
                  any adverse drug reactions), developed, commissioned or
                  otherwise obtained by Penwest or any of its Affiliates during
                  the term of this Agreement relating to TIMERx, Penwest
                  Patents, and/or TIMERx Production Technology and that are
                  developed for or are otherwise related to or useful with the
                  Product, including, without limitation, all patents, trade
                  secrets, copyrights, periods of market exclusivity and other
                  related rights and interests therein.

         1.35     "Penwest Trademark(s)" shall mean those names, symbols and or
                  characters described in Exhibit 1.17 hereto, as the same may
                  be amended from time to time during the term of this Agreement
                  by Penwest on at least six (6) months' prior written notice to
                  Endo (or such shorter notice as reasonably agreed to by the
                  parties), that are owned by Penwest and that have been
                  designated by it for use in conjunction with Endo's packaging
                  and promotion of the Product hereunder, pursuant to Section 8
                  hereof.

         1.36     "Product" shall mean ***.

         1.37     "Product Technology Patent(s)" shall mean any United States
                  patents and foreign equivalents and United States and foreign
                  patent applications and all divisions, continuations,
                  continuations-in-part, reissues, or extensions thereof, any
                  periods of marketing exclusivity relating thereto, and any
                  letters patent that issue thereon, to the extent the same
                  claim any Penwest Product Technology (including the Penwest
                  Patents) or Endo Product Technology.

         1.38     "Project Contact(s)" shall mean the persons appointed by each
                  party to serve as contact persons between the parties from
                  time to time in relation to this Agreement (in addition to
                  those representatives of the parties on the Alliance Committee
                  who may or may not also contemporaneously be Project
                  Contact(s)). As of the execution of this Agreement, the
                  Project Contact for Penwest is Dr. Tom Sciascia. The initial
                  Project Contact for Endo is Ken Utecht. Each party shall
                  promptly notify the other party of any substitution of other
                  personnel as its Project Contact. Each party may select and
                  supervise its other project staff as needed in its sole
                  discretion.

                                       50
<PAGE>
         1.39     "Regulatory Authority" shall mean the competent authority for
                  each nation of the Territory or legally responsible for
                  authorizing the sale or supply of drug products in that
                  nation.

         1.40     "Restatement Date" shall mean April 2, 2002.

         1.41     "Royalties" shall mean the royalties payable by the parties to
                  one another pursuant to Section 4.5 hereof.

         1.42     "Specifications" shall mean such standards and analytical
                  methods established by Committee Action from time to time with
                  respect to the Product and the components thereof (including
                  without limitation the Formulated TIMERx).

         1.43     "Territory" shall initially mean all nations of the world, but
                  may be reduced as to particular nations, pursuant to Section
                  5.7 or 6.8.1 hereof.

         1.44     "TIMERx Production Technology" shall mean Penwest's rights
                  under the Penwest Patents and any and all other patents,
                  patent applications, and other technology belonging to Penwest
                  or which Penwest has the right to practice and to sublicense
                  from time to time during the term of this Agreement that
                  directly relate to, are desirable for, or are necessary or
                  useful for the production of, Formulated TIMERx for use in the
                  Product.

                                       51
<PAGE>
                                                                    Exhibit 1.17

                                   Trademarks

Endo Trademarks:

         Endo(R)
         Numorphan(R)

Penwest Trademarks:

           Penwest(R)
           TIMERx(R)
           TIMERx Oral Delivery System

                                       52
<PAGE>
                                                                    Exhibit 1.28

               Accounting and Attribution Standards and Principles

Net Sales                  Invoiced amount less trade, quantity, promotional
                           and/or other customary discounts, returns and
                           allowances, rebates, chargebacks, retroactive price
                           adjustments, and a 2% accrual of invoiced amount to
                           cover bad debt, sales, use & excise taxes which is to
                           be reconciled to actual and adjusted as appropriate
                           on a semi-annual basis. In the case of sales to
                           distributors or licensees for further distribution,
                           Net Sales shall be computed on the basis of such
                           distributors' and licensees' sales to unrelated third
                           parties.

Grants of Rights           Amount realized from grant of rights to make, market
                           or otherwise exploit the Product.

 MANUFACTURING COSTS

Bulk ADS Cost              The Oxymorphone Price for the Oxymorphone ADS used.

TIMERx Excipient           The Formulated TIMERx Price for the Formulated TIMERx
                           used.

Dose Form Finishing
   & Packaging             Variable standard costs plus cost variances to be
                           reconciled quarterly, plus allocated fixed
                           manufacturing costs and manufacturing overhead costs
                           supporting only the manufacturing of the Product
                           based on activity based costing concepts that are
                           approved by Committee Action.

DEVELOPMENT COSTS

   Dosage Form             A benefit and OH percentage approved by Committee
                           Action that is applied to labor dollars and is
                           adjusted annually.

MARKETING EXPENSES

                                       53
<PAGE>
   Premarketing            Expenses incurred prior to launch for grants, agency
                           fees, symposia, opinion leader development, plus
                           pre-launch Marketing Managers & clinical liaisons
                           based on FTE percentage of time spent on the Product.
                           Expenses are subject to Alliance Committee review and
                           approval by Committee Action on a quarterly basis.

   Sales & Product
      Management           As mutually agreed, but not to be duplicative with
                           Field Selling costs defined below, subject to
                           Alliance Committee review and approval by Committee
                           Action on a quarterly basis.

Field Selling              Common Standard Selling Cost per detail multiplied by
                           number of details subject to Alliance on a quarterly
                           basis.

Advertising & Promotion    Out-of-pocket costs plus Product Management costs (to
                           the extent not already included in Sales & Product
                           Management costs defined above) based on FTE and
                           actual time subject to Alliance Committee review and
                           approval by Committee Action on a quarterly basis

Commissioned Sales Rep.    Actual reasonable commissions, if applicable.

FINISHED PRODUCT
   DISTRIBUTION
   EXPENSE (FPDE)

Variable and Fixed         A *** accrual of Net Sales to be reconciled and
                           adjusted to actual on an annual basis.

Post Registration
   Studies                 Studies required by the FDA or other applicable
                           Regulatory Authority. Direct costs will be charged.
                           Studies are subject to Alliance Committee review and
                           approval by Committee Action.

General & Admin.
   Expenses (G&A)          Legal, management, forecasting, accounting, financial
                           analysis & reporting, information technology,
                           quality, customer service, medical affairs and
                           regulatory affairs, and other administrative
                           services, all as and to the extent directly required
                           for the foregoing activities,

                                       54
<PAGE>
                           and as reviewed and approved by Committee Action on a
                           quarterly basis.

Total Cost of Sales        Sum of Manufacturing Costs, Development Costs,
                           Marketing Expenses, FPDE, Post Registration Studies,
                           and G&A. Note, however, that the Total Costs of Sales
                           will not include as appropriately attributable
                           expenses or costs any amounts paid or payable by a
                           party for third-party royalties to the extent the
                           same would be the responsibility of the paying party
                           under Section 9.5.1, 9.5.2, or 9.6 of the Agreement.

Net Realization            Net Sales plus Grant of Rights less Total Cost of
                           Sales.

                                       55
<PAGE>
                                                                    Exhibit 1.32

                                 Penwest Patents

<TABLE>
<S>                                <C>       <C>                                  <C>
1.   U.S. 4,994,276                2/19/91   Directly Compressible Sustained      A. Baichwal
                                             Released Excipient                   J. Staniforth
2.   U.S. 5,128,143                7/7/92    Sustained Release Excipient and      A. Baichwal
                                             Tablet Formulation                   J. Staniforth
3.   U.S. 5,135,757                8/4/92    Compressible Sustained Release       A. Baichwal
                                             Solid Dosage Forms                   J. Staniforth
4.   U.S. 5,455,046                10/3/95   Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems for Insoluble
                                             Drugs
5.   U.S. 5,512,297                4/30/96   Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems and Insoluble
                                             Drugs
6.   U.S. 5,554,387                9/10/96   Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems and Insoluble
                                             Drugs
7.   U.S. 5,667,801                9/16/97   Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems for Insoluble
                                             Drugs
8.   U.S. 5,846,563                12/8/98   Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems for Insoluble
                                             Drugs
9.   U.S. 6,136,343                10/24/00  Sustained Release Heterodisperse     A. Baichwal
                                             Hydrogel Systems for Insoluble
                                             Drugs
10.  EP 0360562                    9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
11.  0360562 AUSTRIA               9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
12.  0360562 BELGIUM               9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
13.  0360562 FRANCE                9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
</TABLE>

                                       56
<PAGE>
<TABLE>
<S>                                <C>       <C>                                  <C>
14.  0360562 GREAT BRITAIN         9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
15.  P68907835.8-08 GERMANY        9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
16.  3009204 GREECE                9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
17.  0360562 ITALY                 9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
18.  0360562 LUXEMBOURG            9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
19.  0360562 NETHERLANDS           9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
20.  0360562  SPAIN                9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
21.  0360562 SWEDEN                9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
22.  0360562 SWITZERLAND           9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
23.  623,182 AUSTRALIA             9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
24.  1,903,060 JAPAN               9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
25.  1,339,082 CANADA              9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
26.  65170 IRELAND                 9/19/89   Directly Compressible Sustained      A. Baichwal
                                             Release Excipient                    J. Staniforth
27.    ***                           ***                  ***                          ***
</TABLE>

                                       57
<PAGE>
                                                                     Exhibit 6.1

              Certain Jointly Filed Provisional Patent Applications

                                       ***

                                       58<PAGE>
                                                                    EXHIBIT 10.1

                      SECOND AMENDMENT TO CREDIT AGREEMENT

         This Second Amendment to Credit Agreement ("Amendment") is executed and
entered into by and among FRIEDMAN'S INC., a Delaware corporation (the
"Borrower"), Bank of America, N.A., in its capacity as administrative agent (the
"Administrative Agent"), the Lenders (as defined by the Credit Agreement,
defined below) party hereto (the "Lenders") and the Guarantors (as defined by
the Credit Agreement, defined below) (the "Guarantors"), effective as of April
12, 2002 (the "Amendment Effective Date"), as follows:

                                    Recitals

         a.       The Borrower, the Administrative Agent, the Lenders and the
Guarantors are party to the certain Credit Agreement dated as of September 15,
1999, as amended by Amendment No.1 and Waiver dated March 7, 2001 (the "Credit
Agreement"). Terms defined by the Credit Agreement, where used in this
Amendment, shall have the same meanings as are prescribed by the Credit
Agreement.

         b.       The Borrower, the Administrative Agent, the Lenders and the
Guarantors have agreed to enter into this agreement on the terms specified
hereinbelow.

         NOW THEREFORE, FOR VALUE RECEIVED, the Borrower, the Administrative
Agent, the Lenders and the Guarantors each hereby agrees as follows:

                                    ARTICLE 1
                                   Amendments

         Section  1.1 Amendment to Certain Definitions. Effective as of the
Amendment Effective Date, each of the following definitions in Section 1.1 of
the Credit Agreement hereby is amended and restated to read as follows:

                  "Borrowing Base" means, as of any day, an amount equal to the
         sum of (i) Sixty-five percent (65%) of Eligible Receivables, plus (ii)
         Fifty percent (50%) of Eligible Inventory, minus (iii) $80 million
         (representing a Borrowing Base reserve amount against which credit
         support is provided under the Crescent Credit Agreement which reserve
         amount shall be subject to readjustment at the collective discretion of
         the Administrative Agent and the Required Lenders based on financial
         information delivered to the Lenders pursuant to Section 7.1), minus
         (iv) an amount equal to one month's rental expense for the Consolidated
         Group, minus (v) an amount determined by the Administrative Agent in
         its good faith discretion representing a reserve for obligations owing
         under Hedging Agreements (determined and adjusted monthly on a
         marked-to-market basis), in each case as set forth in the most recent
         Borrowing Base Certificate delivered to the Administrative Agent and

Second Amendment to Credit Agreement, Page 1
<PAGE>
         the Lenders in accordance with Section 7.1(d) (subject to adjustments
         by the Administrative Agent made in good faith to better reflect the
         actual state and condition of the Borrowing Base); provided, however,
         that the foregoing advance rates against Eligible Receivables and
         Eligible Inventory may be adjusted downward by the Administrative Agent
         in its good faith discretion (and thereafter readjusted upward by the
         Administrative Agent in its good faith discretion to rates not in
         excess of the original advance rates). The Administrative Agent will
         give prompt notice to the Borrower and the Lenders of any such
         adjustment in the applicable advance rates.

                  "Permitted Investments" means Investments which are (i) cash
         and Cash Equivalents; (ii) accounts receivable created, acquired or
         made in the ordinary course of business and payable or dischargeable in
         accordance with customary trade terms; (iii) Investments consisting of
         Capital Stock, obligations, securities or other Property received in
         settlement of accounts receivable (created in the ordinary course of
         business) from bankrupt obligors; (iv) Investments existing as of the
         Closing Date and set forth in Schedule 8.6; (v) advances or loans to
         directors, officers and employees in the ordinary course of business
         for reasonable business expenses that do not exceed $1,000,000 in the
         aggregate at any one time outstanding; (vi) advances or loans by the
         Borrower to directors, officers and employees for the purchase of
         Capital Stock in accordance with the terms of employee stock bonus
         plans that do not exceed $2,500,000 in the aggregate at any one time
         outstanding; (vii) advances or loans to customers and suppliers in the
         ordinary course of business that do not exceed $1,000,000 in the
         aggregate at any one time outstanding; (viii) Investments by members of
         the Consolidated Group in their Subsidiaries and Affiliates existing on
         the Closing Date; (ix) Investments by members of the Consolidated Group
         in and to Domestic Credit Parties (other than Crescent or other members
         of the Crescent Consolidated Group; (x) Investments in Crescent or
         members of the Crescent Consolidated Group (A) consisting of
         arrangements relating to service contracts, advertising and the like
         and extended terms for payment thereof, without limit, (B) consisting
         of Support Obligations to the extent permitted by Section 8.1, and (C)
         consisting of an unsecured loan by the Borrower to Crescent in the
         principal amount of $6,000,000, provided, that (i) the terms of such
         loan are satisfactory to the Administrative Agent and the Required
         Lenders, (ii) no principal or interest in respect of such loan shall be
         payable or paid by Crescent or any other member of the Crescent
         Consolidated Group, or received by the Borrower, until such time as all
         "Obligations" as defined by the Crescent Credit Agreement have been
         paid in full and all "Commitments" as defined by the Crescent Credit
         Agreement have been terminated and (iii) all obligations of Crescent in
         respect of such loan are subordinated in right of payment and claim to
         the prior payment in full of all "Obligations" as defined by the
         Crescent Credit Agreement, pursuant to a subordination agreement in
         form and substance satisfactory to the Administrative Agent and the
         Required Lenders; (xi) Investments which constitute Permitted
         Acquisitions; (xii) Investments in Foreign Subsidiaries in an amount
         not to exceed $1,000,000 in the aggregate (on a cost basis) at any one
         time outstanding and (xiii)

Second Amendment to Credit Agreement, Page 2
<PAGE>
         Investments of a nature not contemplated in the foregoing subsections
         in an amount not to exceed $2,000,000 in the aggregate at any time
         outstanding.

         Section 1.2 Amendment to Section 11.6(a)(v). Section 11.6(a)(v) of the
Agreement hereby is amended and restated to read as follows:

                  (v) except as the result of or in connection with an Asset
         Disposition permitted by Section 8.5 or otherwise expressly permitted
         under the Collateral Documents, release or subordinate any Collateral
         having a book value exceeding $1,500,000;

                                   ARTICLE II
                                  Miscellaneous

         Section  2.1 Conditions Precedent. The effectiveness of this Amendment
is subject to the satisfaction of each of the following conditions precedent:

         (a)      the Administrative Agent shall have received this Amendment,
duly executed by the Borrower, the Guarantors, the Administrative Agent and the
Lenders;

         (b)      Payment to the Administrative Agent of all reasonable costs
and expenses incurred by the Administrative Agent in connection with the
preparation, execution and delivery of this Amendment, including the reasonable
fees and expenses of the Administrative Agent's legal counsel;

         (c)      After giving effect to this Amendment, the representations and
warranties contained herein, in the Credit Agreement and in all other Credit
Documents, as amended hereby, shall be true and correct in all material respects
as of the date hereof as if made on the date hereof (except those, if any, which
by their terms specifically relate only to a different date);

         (d)      All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all other agreements, documents
and instruments executed and/or delivered pursuant hereto, and all legal matters
incident thereto, shall be reasonably satisfactory to the Administrative Agent;
and

         (e)      No Default or Event of Default shall have occurred and be
continuing.

         Section 2.2 Representations and Warranties. The Borrower and the
Guarantors each hereby represents and warrants to the Administrative Agent and
the Lenders that, as of the Amendment Effective Date (a) the execution, delivery
and performance of this Amendment and any and all agreements or documents
executed and/or delivered in connection herewith have been authorized by all
requisite corporate action on the part of the Borrower and the Guarantors and
will not violate the Borrower's or any such Guarantor's certificate of
incorporation or bylaws, (b) after giving effect to this Amendment, all
representations and warranties set forth in the Credit Agreement

Second Amendment to Credit Agreement, Page 3
<PAGE>
and in any other Credit Document are true and correct in all material respects
as if made again on and as of such date (except those, if any, which by their
terms specifically relate only to a different date), (c) no Default or Event of
Default has occurred and is continuing and (d) the Credit Agreement (as amended
by this Amendment), and all other Credit Documents are and remain legal, valid,
binding and enforceable obligations in accordance with the terms thereof except
as enforceability may be limited by applicable debtor relief laws and by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or law).

         Section 2.3 No Claims or Offsets; Release. Neither the Borrower nor
any of the Guarantors has any counterclaims, offsets, credits or defenses to the
Credit Documents and the performance of its obligations thereunder, or if such
Person has any such claims, counterclaims, offsets, credits or defenses to the
Credit Documents or any transaction related to the Credit Documents, the same
are hereby waived, relinquished and released in consideration of this Amendment.
In consideration of the agreements of the Administrative Agent and the Lenders
under this Amendment, the Borrower and the Guarantors each hereby releases and
discharges the Administrative Agent and the Lenders from any and all claims or
causes of action, if any, known or unknown, based upon any facts or
circumstances in connection with the Credit Agreement may have occurred at any
time on or prior to the Amendment Effective Date.

         Section 2.4 Survival of Representations and Warranties. All
representations and warranties made in this Amendment or any other Credit
Document shall survive the execution and delivery of this Amendment and the
other Credit Documents, and no investigation by the Administrative Agent or any
Lender, or any closing, shall affect the representations and warranties or the
right of the Administrative Agent and the Lenders to rely upon them.

         Section  2.5 Reference to Agreement. Each of the Credit Documents is
hereby amended so that any reference in such Credit Documents to the Credit
Agreement, whether direct or indirect, shall mean a reference to the Credit
Agreement as amended by this Amendment.

         Section 2.6 Guarantors. The Guarantors join in the execution of this
Amendment for the purpose of acknowledging and consenting to the terms of this
Amendment and reaffirming their guaranty obligations under the Friedman's
Guaranty Agreement.

         Section 2.7 General. Except as expressly provided by this Amendment,
all of the terms and provisions of the Credit Agreement and the other Credit
Documents remain in full force and effect. This Amendment, when signed by the
Borrower, each Guarantor and the Required Lenders as provided required by
Section 11.6 of the Credit Agreement (i) contains the entire agreement among the
parties and may not be amended or modified except in writing signed by all
parties, (ii) may be executed in any number of counterparts, each of which shall
be valid as an original and all of which shall be one and the same agreement,
and (iii) shall constitute a Credit Document. It shall not be necessary in
making proof of this Amendment to produce or account for more than one such
counterpart. A telecopy or other electronic transmission of any executed
counterpart shall be deemed valid as an original.

Second Amendment to Credit Agreement, Page 4
<PAGE>
         THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
         PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
         CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
         NO ORAL AGREEMENTS BETWEEN THE PARTIES.

         IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers in several counterparts effective as
of the Amendment Effective Date specified in the preamble hereof.

BORROWER:                        FRIEDMAN'S INC.,
                                 a Delaware corporation

                                 By: /s/ Victor M. Suglia
                                    --------------------------------------------
                                       Victor M. Suglia
                                       Senior Vice President,
                                       Chief Financial Officer

GUARANTORS:                      FRIEDMAN'S MANAGEMENT CORP.,
                                 a Delaware corporation

                                 By: /s/ Victor M. Suglia
                                    --------------------------------------------
                                       Victor M. Suglia
                                       President

                                 FRIEDMAN'S HOLDING CORP.,
                                 a Delaware corporation

                                 By: /s/ Victor M. Suglia
                                    --------------------------------------------
                                       Victor M. Suglia
                                       Senior Vice President,
                                       Chief Financial Officer

                                 FI STORES LIMITED PARTNERSHIP,
                                 a Georgia limited partnership
                                 By:   Friedman's Inc., its sole general partner

                                       By: /s/ Victor M. Suglia
                                       -----------------------------------------
                                             Victor M. Suglia
                                             Senior Vice President,
                                              Chief Financial Officer

Second Amendment to Credit Agreement, Page 5
<PAGE>
                                 FRIEDMAN'S FLORIDA PARTNERSHIP,
                                 a Florida general partnership
                                 By:   Friedman's Management Corp.,
                                        its managing partner

                                       By: /s/ Victor M. Suglia
                                       -----------------------------------------
                                             Victor M. Suglia
                                             President

Second Amendment to Credit Agreement, Page 6
<PAGE>
                                 FCJV HOLDING CORP.
                                 a Delaware corporation

                                 By:   /s/ Victor M. Suglia
                                       -----------------------------------------
                                             Victor M. Suglia
                                             President

                                 FCJV, L.P., a Delaware limited partnership
                                 By:   FCJV Holding Corp., its general partner

                                       By: /s/ Victor M. Suglia
                                          --------------------------------------
                                             Victor M. Suglia
                                             President

ADMINISTRATIVE
AGENT:                           BANK OF AMERICA, N.A.,
                                 in its capacity as Administrative Agent

                                 By: /s/ David T. Knoblauch
                                    --------------------------------------------
                                 Name: David T. Knoblauch
                                      ------------------------------------------
                                 Title: SVP
                                        ----------------------------------------

LENDERS:                         BANK OF AMERICA, N.A.,
                                 individually in its capacity as a Lender

                                 By: /s/ David T. Knoblauch
                                    --------------------------------------------
                                 Name: David T. Knoblauch
                                      ------------------------------------------
                                 Title: SVP
                                        ----------------------------------------

                                 GENERAL ELECTRIC CAPITAL CORPORATION,
                                 individually in its capacity as a Lender
                                 and in its capacity as Documentation Agent

                                 By: /s/ Mark Smith
                                    --------------------------------------------
                                 Name: Mark Smith
                                      ------------------------------------------
                                 Title:  Duly Authorized Signatory
                                        ----------------------------------------

Second Amendment to Credit Agreement, Page 7
<PAGE>
                                 FLEET RETAIL FINANCE INC.

                                 By: /s/ Christine M. Scott
                                    --------------------------------------------
                                 Name: Christine M. Scott
                                      ------------------------------------------
                                 Title: Vice President
                                       -----------------------------------------

                                 FLEET CAPITAL CORPORATION

                                 By: /s/ Rodney G. McSwain
                                    --------------------------------------------
                                 Name: Rodney G. McSwain
                                      ------------------------------------------
                                 Title: Senior Vice President
                                       -----------------------------------------

                                 SUNROCK CAPITAL CORP.

                                 By: /s/ Thomas Romanowski
                                    --------------------------------------------
                                 Name: Thomas Romanowski
                                      ------------------------------------------
                                 Title: SVP
                                       -----------------------------------------

                                 LASALLE BANK, N.A.

                                 By: /s/ Douglas C. Colletti
                                    --------------------------------------------
                                 Name: Douglas C. Colletti
                                      ------------------------------------------
                                 Title: 1st VP
                                       -----------------------------------------

                                 THE PROVIDENT BANK

                                 By: /s/ Brent S. Vandermyde
                                    --------------------------------------------
                                 Name: Brent S. Vandermyde
                                      ------------------------------------------
                                 Title: Assistant Vice President
                                       -----------------------------------------

                                 CONGRESS FINANCIAL CORPORATION

                                 By: /s/ David Stair
                                    --------------------------------------------
                                 Name:  David Stair
                                      ------------------------------------------
                                 Title: First Vice President
                                       -----------------------------------------

Second Amendment to Credit Agreement, Page 8

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