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UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
   þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number
    000-23467
 PENWEST PHARMACEUTICALS
    CO.
 (Exact name of registrant as
    specified in its charter)
  Washington

91-1513032(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)39 Old Ridgebury Road

06810-5120Suite 11

(Zip Code)Danbury, Connecticut(Address of Principal Executive
    Offices)   Registrants telephone number, including area code:
 (877) 736-9378
  SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
    ACT:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $.001
    (Including Associated Preferred Stock Purchase Rights)

The NASDAQ Stock Market   SECURITIES
    REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated filer
    o

Accelerated filer
    þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





PENWEST
    PHARMACEUTICALS CO.
  INDEX TO
    FORM 10-K
   
 PagePART IItem 1.


Business


1Item 1A.


Risk Factors


14Item 1B.


Unresolved Staff Comments


26Item 2.


Properties


26Item 3.


Legal Proceedings


26Item 4.


Submission of Matters to a Vote of Security
    Holders


28Executive Officers of the Registrant


28PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


29Item 6.


Selected Financial Data


30Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


31Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


47Item 8.


Financial Statements and Supplementary Data


47Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


47Item 9A.


Controls and Procedures


47PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


50Item 11.


Executive Compensation


50Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


50Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


50Item 14.


Principal Accounting Fees and Services


50PART IVItem 15.


Exhibits and Financial Statement Schedules


51SignaturesEX-10.26 Summary of Executive Officer Bonus ProgramEX-10.27 Summary of the Director Compensation ProgramEX-10.34 Form of Executive Retention AgreementsEX-23 Consent of Ernst & Young LLPEX-31 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302EX-32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906    Forward
    Looking Statements
   i




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PART I  ITEM 1.
    BUSINESS  Overview
    ® ® twice-a-day around-the-clock
        
    Maximizing the value of Opana ER, working closely with
    Endo.  We plan to continue to take steps to
    protect and prosecute the intellectual property around Opana ER
    and explore licensing opportunities for Opana ER outside the
    United States.
    Advancing the development of A0001 drug
    candidate.  Through the planned Phase Ib and IIa
    trials, we are seeking to establish proof of concept with
    respect to both safety and efficacy.
    Monetizing the value of our proven drug delivery technologies
    and drug formulation expertise by executing additional
    deals.  We are seeking to enter into at least two
    new collaborations in 2009. We believe that, with two
    agreements, this aspect of our business can operate on a
    breakeven basis, fund a portion of our overhead and provide us
    with a financial stake in products, should they advance in
    development and commercialization.
    Managing overhead and other costs to ensure that our
    infrastructure is sized appropriately to our
    priorities.  We continue to significantly reduce
    expenses and closely manage our cash expenditures. In January
    2009, we reduced our personnel by 18%.




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Products
  Opana ER. ® twice-a-day around-the-clock
      ® ® ® ® ®
    30-month
       2




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A0001.
      ®
   3




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Nifedipine XL.
  Nalbuphine ER.
  intent-to-treat
    Additional Product Candidate.
 4




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Drug
    Delivery Technologies
    TIMERx
        Geminex
    SyncroDose
    GastroDose
   5




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Collaborative
    and Licensing Agreements
  Endo
    Pharmaceuticals Inc.
            
    Endo would pay us royalties on U.S. sales of Opana ER
    calculated based on a royalty rate starting at 22% of annual net
    sales of the product up to $150 million of annual net
    sales, with the royalty rate then increasing, based on
    agreed-upon
    levels of annual net sales achieved, from 25% up to a maximum of
    30%.
    No royalty payments would be due to us for the first
    $41 million of royalties that would otherwise have been
    payable beginning from the time of the product launch in July
    2006. In the third quarter of 2008, the royalty holiday was
    completed and we began to recognize royalties from Endo.
    Our share of the development costs for Opana ER that we opted
    out of funding in April 2003 would be fixed at $28 million
    and would be recouped by Endo through a temporary 50% reduction
    in royalties following the completion of the royalty holiday. As
    of December 31, 2008, $5.0 million of the
    $28 million had been recouped by Endo.
    Endo would pay us a percentage of any sublicense income it
    receives and milestone payments of up to $90 million based
    upon the achievement of
    agreed-upon
    annual net sales thresholds.     6




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Edison
    Pharmaceuticals, Inc.
            country-by-country, product-by-product last-to-expire
 7




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Mylan
    Pharmaceuticals Inc.
    Drug
    Delivery Technology Collaborations
    Research
    and Development
    Manufacturing
   8




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Marketing
    and Distribution
      Patents
    and Proprietary Rights
      Approved Drug Products with Therapeutic
    Equivalence Evaluations,
    Patent
    Litigation
   9




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Trademarks
  ® ® ® tm Form 10-K
  Government
    Regulation
  and/or
      NDAs:
 10




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505(b)(2) NDAs:
   11




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ANDAs:
    Orphan Drug Designation:
  Other FDA Requirements:
   12




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Competition
      
    the safety and efficacy of our products;
    the relative speed with which we can develop products;
    generic competition for any product that we develop;
    our ability to protect the intellectual property surrounding our
    products;
    our ability to differentiate our products from our
    competitors products; and
    external factors affecting pricing
    and/or
    reimbursement.    ®
    Employees
   13




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Information
    Available on the Internet
  Form 10-K, Form 10-Q, Form 8-K
  ITEM 1A. 
    RISK
    FACTORS  Investing in our common stock involves a high degree of risk,
    and you should carefully consider the risks and uncertainties
    described below in addition to the other information included or
    incorporated by reference in this annual report on
    Form 10-K.
    If any of the following risks actually occurs, our business,
    financial condition or results of operations would likely
    suffer, possibly materially. In that case, the trading price of
    our common stock could fall.
  We
    have a history of net losses and may not be able to achieve or
    maintain profitability on an annual basis
          
    the commercial success of Opana ER, and the amount of royalties
    from Endos sales of Opana ER, which may be adversely
    affected by any potential generic competition;
    our ability to successfully defend our intellectual property
    protecting our products;
    our ability to access funding support for development programs
    from third party collaborators;
    the level of our investment in research and development
    activities, including the timing and costs of conducting
    clinical trials of our products;
    the level of our general and administrative expenses;
    the successful development and commercialization of product
    candidates in our portfolio; and
    royalties from Mylans sales of Pfizers generic
    version of Procardia XL 30 mg. 14




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We may
    require additional funding which may be difficult to
    obtain
        
    the commercial success of Opana ER, and the amount of royalties
    from Endos sales of Opana ER, which may be adversely
    affected by any potential generic competition;
    the prosecution, defense and enforcement of our patents and
    other intellectual property rights, such as our Orange Book
    listed patents for Opana ER;
    the timing and amount of payments received under collaborative
    agreements including our agreement with Mylan with respect to
    Pfizers generic version of Procardia XL 30 mg;
    the timing and amount of payments to Edison in connection with
    the Edison agreement, as well as our internal costs of
    development for drug candidates for which we acquired rights
    under this agreement;
    the progress of any development projects we may undertake and
    funding obligations with respect to these projects;
    our ability to enter into collaborations for Opana ER outside
    the United States, our drug delivery technologies and nalbuphine
    ER, and the structure and terms of any such agreements;
    our ability to access funding support for development programs
    from third party collaborators;
    the level of our investment in capital expenditures for
    facilities and equipment; and
    our success in reducing our spending and managing our costs.   15




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Our
    ability to generate revenues depends heavily on the success of
    Opana ER
      
    the safety and efficacy of Opana ER as compared to competitive
    products;
    Endos ability to educate the medical community about the
    benefits, safety profile and efficacy of Opana ER;
    the effectiveness of Endos sales and marketing activities;
    Endos ability to manufacture and maintain suitable
    inventory for sale on an ongoing basis;
    the reimbursement policies of government and third party payors
    with respect to Opana ER;
    the pricing of Opana ER;
    the level of stocking of Opana ER by wholesalers and retail
    pharmacies; and
    the availability of generic versions of Opana ER and the timing
    of generic competition.    30-month
      Our
    success depends on our ability, or our collaborators
    ability, to protect our patents and other intellectual property
    rights
  ,
 16




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30-month 30-month 30-month
      We are
    dependent on our collaborators to manufacture and commercialize
    our products
       17




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
    Our collaborators may be pursuing alternative technologies or
    developing alternative products, either on their own or in
    collaboration with others, that may be competitive to the
    product on which we are collaborating, which could affect our
    collaborators commitment to our collaboration.
    Our collaborators may reduce marketing or sales efforts, or
    discontinue marketing or sales of our products, which could
    reduce the revenues we receive on the products.
    Our collaborators may pursue higher priority programs or change
    the focus of their commercialization programs, which could
    affect the collaborators commitment to us. Pharmaceutical
    and biotechnology companies re-evaluate their priorities from
    time to time, including following mergers and consolidations,
    which have been common in recent years in these industries.
    Disputes may arise between us and our collaborators from time to
    time regarding contractual or other matters. In 2006, we were
    engaged in a dispute with Endo with regard to the sharing of
    marketing expenses during the period prior to when Opana ER
    reaches profitability, which we subsequently resolved. Any other
    such disputes with Endo or other collaborators could be time
    consuming and expensive, and could impact our anticipated rights
    under our agreements with those collaborators.  We
    have limited experience in developing, manufacturing, marketing
    and selling pharmaceutical products
      The
    Drug Enforcement Agency, or DEA, limits the availability of the
    active drug substances used in Opana ER. As a result,
    Endos procurement quota may not be sufficient to meet
    commercial demand
      Misuse
    and/or abuse of Opana ER , which contains a narcotic ingredient,
    could subject us to additional regulations, including compliance
    with risk management programs, which may prove difficult or
    expensive for us to comply with, and we and Endo may face
    lawsuits
   18




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We
    face significant competition, which may result in others
    discovering, developing or commercializing products before us or
    more successfully than we do
    
    significantly greater financial, technical and human resources
    than we have and may be better equipped to develop, manufacture
    and commercialize drug products;
    more extensive experience than we have in conducting preclinical
    studies and clinical trials, obtaining regulatory approvals, and
    manufacturing and marketing pharmaceutical products;
    competing products that have already received regulatory
    approval or are in late-stage development; or
    collaborative arrangements in our target markets with leading
    companies and research institutions.      ®
   19




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If our
    clinical trials are not successful or take longer to complete
    than we expect, we may not be able to develop and commercialize
    our products such as A0001
            
    be delayed in obtaining marketing approval for our products;
    not be able to obtain marketing approval for our
    products; or
    not be able to obtain approval for indications that are as broad
    as intended.     20




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Even
    if we are able to obtain regulatory approvals for any of our
    product candidates, if they exhibit harmful side effects after
    approval, our regulatory approvals could be revoked or otherwise
    negatively impacted, and we could be subject to costly and
    damaging product liability claims
    Our
    controlled release drug delivery technologies rely on the
    ability to control the release of the active drug substances and
    our business would be harmed if it was determined that there
    were circumstances under which the active drug substances from
    one of our extended release products would be released rapidly
    into the blood stream
    ®
 21




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in vitro in vitro
  We are
    subject to extensive government regulation including the
    requirement of approval before our products may be marketed.
    Even if we obtain marketing approval, our products will be
    subject to ongoing regulatory review
          We may
    become involved in patent litigation or other proceedings
    relating to our products or processes, which could result in
    liability for damages or termination of our development and
    commercialization programs
    
    We or our collaborators may initiate litigation or other
    proceedings against third parties to enforce our intellectual
    property rights. 22




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
    If our competitors file patent applications that claim
    technology also claimed by us, we or our collaborators may
    participate in interference or opposition proceedings to
    determine the priority of invention.
    If third parties initiate litigation claiming that our processes
    or products infringe their patent or other intellectual property
    rights, we and our collaborators will need to defend our rights
    in such proceedings.  and/or
    We
    have only limited manufacturing capabilities and will be
    dependent on third party manufacturers
        
    we or our collaborators may not be able to meet commercial
    demands for Opana ER or our other products;
    we may not be able to initiate or continue clinical trials for
    products that are under development; and
    we may be delayed in submitting applications for regulatory
    approvals of our products. 23




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We are
    dependent upon a limited number of suppliers for the gums used
    in our TIMERx materials
    If we
    or our collaborators fail to obtain an adequate level of
    reimbursement by governmental or third party payors for Opana ER
    or any other products we develop, we may not be able to
    successfully commercialize the affected product
        We
    will be exposed to product liability claims and may not be able
    to obtain adequate product liability insurance
     24




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If we
    are unable to retain our key personnel and continue to attract
    additional professional staff, we may not be able to maintain or
    expand our business
    The
    market price of our common stock may be volatile
    Specific
    provisions of our Shareholder Rights Plan, Articles of
    Incorporation and Bylaws and the laws of Washington State make a
    takeover of Penwest or a change in control or management of our
    Company more difficult
    Proxy
    contests pursued by dissident shareholders may be costly and
    disruptive to our business operations
   25




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ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES        ITEM 3.
    LEGAL
    PROCEEDINGS  Item 1.
    Legal
    Proceedings  Impax
    ANDA Litigation
   26




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30-month
  30-month
    Actavis
    ANDA Litigation.
  30-month
      Sandoz
    ANDA Litigation.
   27




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Barr
    ANDA Litigation.
    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   EXECUTIVE
    OFFICERS OF THE REGISTRANT    Name

Age

Title

DatesJennifer L. Good


44


President and Chief Executive Officer

2006  currentPresident, Chief Operating Officer and Chief Financial Officer

2005  2006Senior Vice President, Finance and Chief Financial Officer

1997  2005Anand R. Baichwal, Ph.D.


54


Senior Vice President, Licensing and Chief Scientific Officer

2006  currentSenior Vice President, Research & New Technology
    Development and Chief Scientific Officer

1997  2006Amale Hawi, Ph.D.


55


Senior Vice President, Pharmaceutical Development

2007  currentPresident, A. Hawi Consulting Ltd.

2002  2007Paul F. Hayes


53


Vice President, Strategic Marketing

2005  currentSenior Director, Marketing, Oscient Pharmaceuticals

2002  2005Deputy Director, Marketing, Bayer Healthcare Pharmaceuticals

1999  2002Frank P. Muscolo


52


Controller and Chief Accounting Officer

2007  currentController

1997  2007Thomas Sciascia, M.D.


55


Senior Vice President and Chief Medical Officer

2001  current  28




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PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  mark-up,
  High


LowPERIODS IN 2008Quarter Ended March 31

$
6.02


$
2.40Quarter Ended June 30

$
3.72


$
2.56Quarter Ended September 30

$
4.22


$
1.60Quarter Ended December 31

$
2.11


$
0.34PERIODS IN 2007Quarter Ended March 31

$
17.50


$
9.43Quarter Ended June 30

$
13.99


$
9.92Quarter Ended September 30

$
14.60


$
10.57Quarter Ended December 31

$
11.64


$
4.68      29




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except for per share data)STATEMENT OF OPERATIONS DATA:Revenues

$
8,534


$
3,308


$
3,499


$
6,213


$
5,108Cost of revenues


1,438



605



231



39



104Selling, general and administrative


12,052



14,260



14,075



13,247



9,485Research and product development


21,041



23,561



22,857



17,797



20,205Investment income


541



1,770



2,352



1,974



906Interest expense


(1,278
)


(1,117
)










Net loss

$
(26,734
)

$
(34,465
)

$
(31,312
)

$
(22,898
)

$
(23,785
)Basic and diluted net loss per share

$
(0.89
)

$
(1.48
)

$
(1.38
)

$
(1.05
)

$
(1.28
)Weighted average shares of common stock outstanding 
    basic and diluted


29,923



23,216



22,751



21,711



18,627   December 31,2008


2007


2006


2005


2004(In thousands)BALANCE SHEET DATA:Cash and cash equivalents

$
16,692


$
15,680


$
16,182


$
15,917


$
14,249Marketable securities






7,293



24,408



39,377



60,121Working capital


14,792



17,891



38,254



53,912



71,946Total assets


31,854



36,982



52,742



67,021



87,522Long term obligations-deferred compensation


2,384



2,588



2,763



2,977



3,314Long term debt


4,112



9,595











Accumulated deficit


(233,627
)


(206,893
)


(172,428
)


(141,116
)


(118,218
)Shareholders equity

$
15,926


$
16,237


$
45,121


$
60,411


$
78,801  30




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
    ® ® twice-a-day
      Endo.
     31




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Edison.
  Mylan.
  Net loss and profitability.
  
    the commercial success of Opana ER, and the amount of royalties
    from Endos sales of Opana ER, which may be adversely
    affected by any potential generic competition;
    our ability to successfully defend our intellectual property
    protecting our products;
    our ability to access funding support for our development
    programs from third party collaborators;
    the level of our investment in research and development
    activities, including the timing and costs of conducting
    clinical trials of our products;
    the level of our general and administrative expenses;
    the successful development and commercialization of product
    candidates in our portfolio; and
    royalties from Mylans sales of Pfizers generic
    version of Procardia XL 30 mg.    Critical
    Accounting Policies and Estimates
   32




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Revenue
    Recognition
  Royalties 
  Product sales 
  Collaborative licensing and development
    revenue
    Milestone payments 
  Research
    and Development Expenses
   33




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Deferred
    Taxes  Valuation Allowance
    Impairment
    of Long-Lived Assets
  and/or
  Share-Based
    Compensation
      
    the stock option exercise price; 34




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
    the expected term of the option;
    the grant date price of our common stock, which is issuable upon
    exercise of the option;
    the expected volatility of our common stock;
    expected dividends on our common stock (we do not anticipate
    paying dividends for the foreseeable future); and
    the risk free interest rate for the expected option term.    Form 10-K.
    Recent
    Accounting Pronouncements
     35




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No. 07-3, No. 07-3. No. 07-3, No. 07-3 No. 07-3 No. 07-3
  No. 07-1, No. 07-1. No. 99-19 No. 07-1 No. 07-1 No. 07-1
  No. SFAS 142-3, SFAS 142-3. SFAS 142-3 SFAS 142-3 SFAS 142-3 SFAS 142-3
  No. 07-5, No. 07-5. No. 07-5 No. 01-6, No. 01-6. No. 07-5 No. 07-5 No. 01-6 No. 07-5
 36




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Changes
    in Presentation
        Results
    of Operations for Years Ended December 31, 2008, 2007 and
    2006
  Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2008


2007


2007


2006


2006(In thousands, except percentages)Royalties

$
6,805



167
%

$
2,553



(18
)%

$
3,104Product Sales


685



32



519



36



381Collaborative Licensing and Development Revenue


1,044



342



236



1586



14Total Revenues

$
8,534



158
%

$
3,308



(5
)%

$
3,499      37




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Cost
    of Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2008


2007


2007


2006


2006(In thousands, except percentages)Cost of Royalties

$
214



398
%

$
43




%

$
43Cost of Product Sales


305



(23
)


395



110



188Cost of Collaborative Licensing and Development Revenue


919



450



167



n/a



Total Cost of Revenues

$
1,438



138
%

$
605



162
%

$
231         Selling,
    General and Administrative Expenses
  Percentage



PercentageIncrease



Increase(Decrease) from



(Decrease) from2008

2007

2007

2006

2006(In thousands, except percentages)Selling, General and Administrative Expenses

$
12,052



(15
)%

$
14,260



1
%

$
14,075    38




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Research
    and Product Development Expenses
        Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2008


2007


2007


2006


2006(In thousands, except percentages)A0001 and Edison Payments

$
7,403



95
%

$
3,797



n/a


$
Nalbuphine ER


2,238



(66
)


6,618



57
%


4,211PW4153


882



385



182



n/a



Other Phase I Products and Internal Costs


10,518



(19
)


12,964



(30
)


18,646Total Research and Product Development Expense

$
21,041



11
%

$
23,561



3
%

$
22,857   
    A0001 and Edison Payments These expenses
    reflect our funding of Edisons research activities under
    the Edison agreement as well as our direct external expenses
    relating to the development of A0001. These expenses
    approximated 35% of our R&D expenses for 2008 and included
    quarterly research and development payments to Edison totaling
    $3.5 million in 2008, a milestone payment made to Edison in
    2008 for the commencement of dosing in a Phase Ia clinical trial
    of A0001, and costs related to preclinical studies and the Phase
    Ia study of A0001 we conducted in 2008. As of December 31,
    2008, 39




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we have incurred $11.2 million in total expenses for the
    A0001 program and for contract research payments to Edison. Of
    this amount, approximately $5.4 million consisted of the
    quarterly contract research payments to Edison. In May 2008, we
    submitted an IND for A0001 for certain indications. In July
    2008, we initiated a Phase Ia placebo-controlled, single
    ascending dose trial designed to evaluate the safety and
    tolerability of A0001 in healthy subjects, and to collect
    pharmacokinetic data.    
    Nalbuphine ER These expenses reflect our
    direct external expenses relating to the development of
    nalbuphine ER. These expenses approximated 11% of our R&D
    expenses for 2008 and consisted primarily of payments to third
    parties in connection with clinical trials of nalbuphine ER. The
    expenses for this program decreased in 2008 as compared to 2007,
    as 2007 included costs we incurred in connection with a Phase I
    safety trial that we completed in 2007, a Phase IIa trial that
    we completed in January 2008 and costs for the purchase of drug
    active. In 2006, we advanced nalbuphine ER from Phase I through
    Phase IIa clinical trials and completed additional preparation
    for further clinical trials in 2007. We determined in 2008 to
    seek a collaborator for the further development and
    commercialization of nalbuphine ER, and not to conduct any
    additional development work until we enter into such a
    collaboration.
    PW4153 These expenses reflect our direct
    external expenses relating to the development of PW4153. These
    expenses approximated 4% of our R&D expenses for 2008 and
    consisted primarily of payments to third parties in connection
    with clinical trials and other development work. In July 2008,
    we conducted a Phase I clinical trial for PW4153 to assess the
    pharmacokinetics of our formulation in healthy volunteers. Based
    on the results of this study, we determined to terminate this
    development program. We do not anticipate any significant
    additional costs for this program in the future.
    Other Phase I Products and Internal Costs These expenses reflect internal and external
    expenses not separately reported under a product development
    program noted above, and include the areas of pharmaceutical
    development, clinical and regulatory. The types of expenses
    included in internal expenses primarily are salary and benefits,
    stock-based compensation costs, depreciation on purchased
    equipment, and the amortization or any write-downs of patent
    costs, other than product patent write-offs charged directly to
    a separately reported product development program or
    amortization of patent costs relating to commercialized
    products, which are included in cost of revenues. The types of
    expenses included in external expenses are primarily related to
    preclinical studies, proof-of-principle biostudies conducted on
    our Phase I product candidates and payments to third parties for
    drug active.   40




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##### Table of Contents



Tax
    Rates
    Liquidity
    and Capital Resources
  Sources
    of Liquidity
    Private Placement.
    Senior Secured Credit Facility.
 41




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##### Table of Contents



Cash
    Flows
         42




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##### Table of Contents



Funding
    Requirements
       43




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##### Table of Contents




    the commercial success of Opana ER, and the amount of royalties
    from Endos sales of Opana ER, which may be adversely
    affected by any potential generic entry;
    the timing and amount of payments received under collaborative
    agreements, including our agreement with Mylan with respect to
    Pfizers generic version of Procardia XL 30 mg;
    the timing and amount of our internal costs of development for
    drug candidates for which we acquire rights under the Edison
    agreement;
    the progress of our development projects, funding obligations
    with respect to the projects and the related costs to us of
    clinical studies for our product candidates;
    our ability to enter into collaborations for Opana ER outside
    the United States, nalbuphine ER and our drug delivery
    technologies, and the structure and terms of any such agreements;
    the prosecution, defense and enforcement of our patents and
    other intellectual property rights, such as our Orange Book
    listed patents for Opana ER;
    the level of our investment in capital expenditures for
    facilities or equipment; and
    our success in reducing our spending and managing our costs.    Form S-3
     44




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##### Table of Contents



Contractual
    Obligations
    Less than








AfterTotal


One Year


1-3 Years


4-5 Years


5 YearsOperating leases

$
617


$
617


$



$



$
Purchase obligations


3,432



3,432











Deferred compensation, including current portion


2,675



294



587



587



1,207Payments due under credit facility


10,875



6,224



4,651







Edison agreement


125



125











Total

$
17,724


$
10,692


$
5,238


$
587


$
1,207       
    We have a Supplemental Executive Retirement Plan, or SERP, a
    nonqualified plan which covers our former Chairman and Chief
    Executive Officer, Tod R. Hamachek. Under the SERP, effective in
    May 2005, we became obligated to pay Mr. Hamachek
    approximately $12,600 per month over the lives of
    Mr. Hamachek and his spouse.
    We also have a Deferred Compensation Plan, or DCP, a
    nonqualified plan which covers Mr. Hamachek. Under the DCP,
    effective in May 2005, we became obligated to pay
    Mr. Hamachek approximately $140,000 per year, including
    interest, in ten annual installments. However, these
    installments are recalculated annually based on market interest
    rates as provided for under the DCP.    and/or
   45




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##### Table of Contents



Net
    Operating Loss Carryforwards
        Market
    Risk and Risk Management Policies
       46




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##### Table of Contents



ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Evaluation of Disclosure Controls and
    Procedures. Rules 13a-15(e) 15d-15(e)
  Changes in Internal Control Over Financial
    Reporting. Rules 13a-15(f) 15d-15(f)
  Reports on Internal Control Over Financial
    Reporting
  Managements
    Annual Report on Internal Control Over Financial
    Reporting
  Rule 13a-15(f) 15d-15(f)
  
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of our assets;
    Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that our receipts and expenditures are being made only in
    accordance with authorizations of our management and
    directors; and 47




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
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.     48




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                 
    49




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##### Table of Contents



PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    www.penwest.com.
  Form 8-K
  Form 10-K
  ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   50




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##### Table of Contents



PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Form 10-K:
          Form 10-K
 51




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##### Table of Contents



SIGNATURES      
   President and Chief Executive Officer
      /s/  Jennifer
    L. GoodJennifer
    L. Good

President and Chief Executive Officer, Director (principal
    executive officer and principal financial officer)

Date:  March 12, 2009/s/  Frank
    P. MuscoloFrank
    P. Muscolo

Controller and Chief Accounting Officer (principal accounting
    officer)

Date: March 12, 2009/s/  Paul
    E. FreimanPaul
    E. Freiman

Chairman of the Board

Date: March 12, 2009/s/  Christophe
    BianchiChristophe
    Bianchi, M.D.

Director

Date: March 12, 2009/s/  Peter
    F. DrakePeter
    F. Drake, Ph.D.

Director

Date: March 12, 2009/s/  Robert
    J. HennesseyRobert
    J. Hennessey

Director

Date: March 12, 2009/s/  David
    P. MeekerDavid
    P. Meeker, M.D.

Director

Date: March 12, 2009/s/  William
    J. OSheaWilliam
    J. OShea

Director

Date: March 12, 2009/s/  John
    N. StaniforthJohn
    N. Staniforth, Ph.D.

Director

Date:  March 12, 2009/s/  Anne
    M. VanLentAnne
    M. VanLent

Director

Date: March 12, 2009  52




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##### Table of Contents



APPENDIX A
   PENWEST
    PHARMACEUTICALS CO.
  INDEX TO FINANCIAL STATEMENTS AND
 FINANCIAL STATEMENT SCHEDULE
  PageFinancial StatementsReport of Independent Registered Public
    Accounting Firm


F-2Balance Sheets


F-3Statements of Operations


F-4Statements of Shareholders Equity


F-5Statements of Cash Flows


F-6Notes to Financial Statements


F-7Schedule II  Valuation and
    Qualifying Accounts


S-1  F-1




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Report of
    Independent Registered Public Accounting Firm               
    F-2




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  BALANCE
    SHEETS
  December 31,2008


2007(In thousands, except share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
16,692


$
15,680Marketable securities






7,293Trade accounts receivable


4,894



781Inventories


440



667Prepaid expenses and other current assets


1,365



1,489Total current assets


23,391



25,910Fixed assets, net


2,177



3,582Patents, net


1,819



2,539Deferred charges


2,244



2,479Other assets


2,223



2,472Total assets

$
31,854


$
36,982LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
745


$
2,239Accrued expenses


1,695



1,602Accrued development costs


385



1,483Loan payable  current portion


5,483



2,405Deferred compensation  current portion


291



290Total current liabilities


8,599



8,019Loan payable


4,112



9,595Accrued financing fee


360



360Deferred revenue


473



183Deferred compensation


2,384



2,588Total liabilities


15,928



20,745Shareholders equity:Preferred stock, par value $.001, authorized
    1,000,000 shares, none outstanding






Common stock, par value $.001, authorized
    60,000,000 shares, issued and outstanding
    31,697,250 shares at December 31, 2008 and
    23,426,323 shares at December 31, 2007


32



23Additional paid in capital


249,262



222,927Accumulated deficit


(233,627
)


(206,893
)Accumulated other comprehensive income


259



180Total shareholders equity


15,926



16,237Total liabilities and shareholders equity

$
31,854


$
36,982    F-3




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  STATEMENTS
    OF OPERATIONS
  Year Ended December 31,2008


2007


2006(In thousands, except per share data)Revenues:Royalties

$
6,805


$
2,553


$
3,104Product sales


685



519



381Collaborative licensing and development revenue


1,044



236



14Total revenues


8,534



3,308



3,499Operating expenses:Cost of revenues


1,438



605



231Selling, general and administrative


12,052



14,260



14,075Research and product development


21,041



23,561



22,857Total operating expenses


34,531



38,426



37,163Loss from operations


(25,997
)


(35,118
)


(33,664
)Investment income


541



1,770



2,352Interest expense


(1,278
)


(1,117
)


Loss before income tax expense


(26,734
)


(34,465
)


(31,312
)Income tax expense










Net loss

$
(26,734
)

$
(34,465
)

$
(31,312
)Basic and diluted net loss per common share

$
(0.89
)

$
(1.48
)

$
(1.38
)Weighted average shares of common stock outstanding 
    basic and diluted


29,923



23,216



22,751    F-4




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  STATEMENTS
    OF SHAREHOLDERS EQUITY
  AccumulatedAdditional





OtherCommon Stock


Paid-In


Accumulated


ComprehensiveShares


Amount


Capital


Deficit


Income (Loss)


Total(In thousands)Balances, December 31, 2005


21,890


$
22


$
201,659


$
(141,116
)

$
(154
)

$
60,411Net loss














(31,312
)






(31,312
)Decrease in unrealized loss on marketable securities


















143



143Comprehensive loss






















(31,169
)Transition adjustment for funded status of post retirement plan


















110



110Proceeds from stock option and Employee Stock Purchase Plan
    exercises


1,213



1



10,790











10,791Stock compensation charges in connection with stock incentive
    plans


30







4,978











4,978Balances, December 31, 2006


23,133



23



217,427



(172,428
)


99



45,121Net loss














(34,465
)






(34,465
)Decrease in unrealized loss on marketable securities


















18



18Adjustment for funded status of post retirement plan


















63



63Comprehensive loss






















(34,384
)Proceeds from stock option and Employee Stock Purchase Plan
    exercises


113







1,135











1,135Issuance of common stock pursuant to royalty termination
    agreements


39







573











573Stock compensation charges in connection with stock incentive
    plans


141







3,792











3,792Balances, December 31, 2007


23,426



23



222,927



(206,893
)


180



16,237Net loss














(26,734
)






(26,734
)Decrease in unrealized gain on marketable securities


















(7
)


(7
)Adjustment for funded status of post retirement plan


















86



86Comprehensive loss






















(26,655
)Proceeds from Employee Stock Purchase Plan exercises


41







70











70Stock compensation charges in connection with stock incentive
    plans


89







3,125











3,125Issuance of common stock pursuant to an equity financing, net


8,141



9



23,140











23,149Balances, December 31, 2008


31,697


$
32


$
249,262


$
(233,627
)

$
259


$
15,926    F-5




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  STATEMENTS
    OF CASH FLOWS
  Year Ended December 31,2008


2007


2006(In thousands)Operating activities:Net loss

$
(26,734
)

$
(34,465
)

$
(31,312
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation


989



1,107



1,001Amortization of patents


367



379



565Inventory reserves


18



18



Patent impairment losses


702



584



254Loss on disposal of fixed assets


209







Note receivable reserve


1,000







Deferred revenue


290



140



(14
)Deferred compensation


177



182



190Deferred royalty termination costs amortization (paid)


101



(1,541
)


Share-based compensation


3,125



3,792



4,978Changes in operating assets and liabilities:Trade accounts receivable


(4,113
)


(98
)


259Inventories


209



(483
)


(61
)Accounts payable, accrued expenses and other


(2,298
)


752



497Net cash used in operating activities


(25,958
)


(29,633
)


(23,643
)Investing activities:Acquisitions of fixed assets, net


(112
)


(918
)


(1,818
)Proceeds from sale of fixed assets


318







Patent costs


(349
)


(319
)


(619
)Purchases of marketable securities


(7,859
)


(24,605
)


(27,739
)Proceeds from maturities of marketable securities


15,157



41,950



41,248Proceeds from sales of marketable securities










1,600Proceeds from cash surrender value of life insurance policy
    withdrawal










446Loan disbursed to collaborator


(1,000
)






Net cash provided by investing activities


6,155



16,108



13,118Financing activities:Issuance of common stock, net


23,220



1,135



10,790Proceeds from loan payable






12,000



Repayment of debt


(2,405
)






Debt issuance costs






(112
)


Net cash provided by financing activities


20,815



13,023



10,790Net increase (decrease) in cash and cash equivalents


1,012



(502
)


265Cash and cash equivalents at beginning of year


15,680



16,182



15,917Cash and cash equivalents at end of year

$
16,692


$
15,680


$
16,182    F-6




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS
  1.
    BUSINESS    ® ® twice-a-day around-the-clock
      2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Basis
    of Presentation
       F-7




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Cash
    and Cash Equivalents
    Marketable
    Securities
  available-for-sale
  Credit
    Risk and Fair Value of Financial Instruments
        Inventories
  (first-in,
 F-8




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Long-Lived
    Assets
    Machinery and equipment


5-10 yearsOffice furniture, equipment and software


3-10 yearsLeasehold improvements


1-3 years     Foreign
    Currencies
    Accumulated
    Other Comprehensive Income (Loss)
    Income
    Taxes
     F-9




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Revenue
    Recognition
  Royalties
  Product sales 
  Collaborative licensing and development
    revenue
    Milestone payments
 F-10




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Research
    and Development Expenses
      Per
    Share Data
    December 31,2008


2007


2006(In thousands of shares)Stock options outstanding


2,514



2,411



2,267Restricted stock outstanding (unvested)


134



142



52Warrants to purchase common stock


4,070







6,718



2,553



2,319   Share-Based
    Compensation
     F-11




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    
    the stock option exercise price;
    the expected term of the option;
    the grant date price of the Companys common stock, which
    is issuable upon exercise of the option;
    the expected volatility of the Companys common stock;
    expected dividends on the Companys common stock (the
    Company does not anticipate paying dividends for the foreseeable
    future); and
    the risk-free interest rate for the expected option term.        3.
    RECENT
    ACCOUNTING PRONOUNCEMENTS   F-12




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      No. 07-3, No. 07-3). No. 07-3, No. 07-3 No. 07-3 No. 07-3
  No. 07-1, No. 07-1). No. 99-19 No. 07-1 No. 07-1 No. 07-1
  No. SFAS 142-3, (SFAS 142-3). SFAS 142-3 SFAS 142-3 SFAS 142-3
 F-13




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  SFAS 142-3
  No. 07-5, No. 07-5). No. 07-5 No. 01-6, No. 01-6). No. 07-5 No. 07-5 No. 01-6 No. 07-5
    4.
    MARKETABLE
    SECURITIES      Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


Value(In thousands)December 31, 2007:Corporate debt securities

$
6,785


$
7


$



$
6,792U.S. government agency-backed discounted notes


501











501Total marketable securities

$
7,286


$
7


$



$
7,293       5.
    FAIR
    VALUE MEASUREMENT    Level 1:
 F-14




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Level 2:
  Level 3:
      Level 1


Level 2


Level 3


Total(In thousands)Cash and cash equivalents

$
16,692


$



$



$
16,692     6.
    OTHER
    ASSETS    December 31,


December 31,2008


2007(In thousands)Assets held in a trust for the Companys Supplemental
    Executive Retirement Plan and Deferred Compensation Plan (see
    Note 16):Cash surrender value of life insurance policies

$
1,924


$
2,468Money market account


299



42,223



2,472Loan receivable from collaborator (see Note 17)


1,000



3,223



2,472Allowance for loan receivable from collaborator


(1,000
)


Other assets, net

$
2,223


$
2,472   7.
    INVENTORIES    December 31,2008


2007(In thousands)Raw materials

$



$
37Finished products


440



630Total inventories

$
440


$
667    F-15




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      8.
    FIXED
    ASSETS    December 31,2008


2007(In thousands)Equipment and leasehold improvements

$
5,707


$
6,777Software


2,425



2,442Projects in progress






258,132



9,244Less: accumulated depreciation and amortization


5,955



5,662$
2,177


$
3,582       9.
    PATENTS  December 31,2008


2007(In thousands)Patents, net of accumulated amortization of $1,849 and $1,947,
    respectively:

$
1,819


$
2,539  F-16




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Year

Amount(In thousands)2009

$
3382010


3272011


2962012


2492013


163Thereafter


446Total

$
1,819     10.
    LOAN
    PAYABLE  Credit
    Facility
     F-17




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        (In thousands)Less than one year

$
5,483One to two years


4,112$
9,595     11.
    SHAREHOLDERS
    EQUITY  Form S-3
  Private
    Placement
       F-18




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Share-Based
    Compensation
    2008


2007(In thousands)Selling, general and administrative

$
2,248


$
3,194Research and product development


877



598Total

$
3,125


$
3,792     Penwest
    Stock Incentive Plans
     F-19




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Weighted-AverageWeighted


Remaining


AggregateAverage


Contractual Terms


IntrinsicShares


Exercise Price


in Years


ValueBalance at December 31, 2007


2,410,960


$
13.97Granted


496,990


$
2.75Exercised





$
Forfeited


(59,415
)

$
14.09Expired


(334,283
)

$
10.00Balance at December 31, 2008


2,514,252


$
12.28



6.3


$
Options Exercisable


1,471,639


$
14.27



4.8


$
       2008


2007


2006Expected dividend yield


None



None



NoneRisk free interest rate


3.0
%


4.7
%


4.7
%Expected volatility


78
%


56
%


58
%Expected life of options


5.7 years



5.5 years



5.6 years     Weighted-Average


AggregateGrant-Date


IntrinsicShares


Fair Value


ValueRestricted stock outstanding at December 31, 2007


142,000


$
14.77


$
827,860Granted


48,000


$
5.41Vested


(56,000
)

$
15.23Restricted stock outstanding at December 31, 2008


134,000


$
11.22


$
193,630    F-20




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Employee
    Stock Purchase Plan
    Rights
    Agreements
      12.
    COST OF
    REVENUES  2008


2007


2006(In thousands)Cost of royalties

$
214


$
43


$
43Cost of product sales


305



395



188Cost of collaborative licensing and development revenue


919



167



Total cost of revenues

$
1,438


$
605


$
231     13.
    COMMITMENTS  Leases
     F-21




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        OperatingLeases(In thousands)2009

$
617Thereafter


Total minimum lease payments

$
617     Other
    Contracts
    14.
    INCOME
    TAXES      2008


2007


2006Statutory tax rate


(35
)%


(34
)%


(34
)%Valuation allowance


35



34



34
%



%



%    F-22




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      2008


2007(In thousands)Deferred compensation and SERP liability

$
(1,145
)

$
(1,190
)Deferred revenue


(184
)


(71
)Share-based compensation


(3,442
)


(2,782
)Tax credit carryforwards


(637
)


(6,427
)Net operating loss carryforwards


(36,425
)


(63,391
)Other


(129
)


(359
)Total deferred tax assets


(41,962
)


(74,220
)Depreciation and amortization


1,034



1,373Other


305



257Total deferred tax liabilities


1,339



1,630Net deferred tax asset before valuation allowance


(40,623
)


(72,590
)Valuation allowance


40,623



72,590Net deferred tax liability

$



$
          F-23




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    15.
    ROYALTY
    TERMINATION AGREEMENT        16.
    RETIREMENT
    PLANS AND OTHER EMPLOYEE BENEFITS  Savings
    Plan
     F-24




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Supplemental
    Executive Retirement Plan
          2008


2007(In thousands)Benefit obligation at beginning of period

$
2,092


$
2,187Interest cost


119



118Actuarial (gain) loss


(85
)


(62
)Benefits paid


(151
)


(151
)Benefit obligation at December 31,

$
1,975


$
2,092     2008


2007(In thousands)Fair value of plan assets at beginning of year

$



$
Employer contributions


151



151Benefit payments


(151
)


(151
)Fair value of plan assets at end of year

$



$
     2008


2007(In thousands)Current liabilities

$
(147
)

$
(147
)Noncurrent liabilities


(1,828
)


(1,945
)Net amount recognized at December 31, (included in deferred
    compensation)

$
(1,975
)

$
(2,092
)  F-25




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2008


2007(In thousands)Net gain

$
(268
)

$
(184
)Prior service cost


9



11Total

$
(259
)

$
(173
)     2008


2007(In thousands)Projected benefit obligation

$
1,975


$
2,092Accumulated benefit obligation

$
1,975


$
2,092Plan assets at fair value

$



$
     2008


2007(In thousands)Interest cost

$
119


$
118Amortization of prior service cost


1



2Amortization of gains






Net periodic benefit cost

$
120


$
120       2008


2007(In thousands)Net gain

$
(85
)

$
(62
)Amortization of prior service cost


(1
)


(1
)Total recognized in other comprehensive income

$
(86
)

$
(63
)     2008


2007Discount rate


6.35
%


5.90
%Rate of compensation increase


N/A



N/A     2008


2007Discount rate


5.90
%


5.60
%Rate of compensation increase


N/A



N/A    F-26




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2009

$
1512010


1512011


1512012


1512013


151Years
    2014-2018


751   Deferred
    Compensation Plan
    2009

$
1432010


1432011


1432012


1432013


1432014


143     Health
    Care and Life Insurance Benefits
   F-27




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  17.
    COLLABORATIVE
    AND LICENSING AGREEMENTS  and/or
  Endo
    Pharmaceuticals Inc.
        
    Endo has agreed to pay the Company royalties on U.S. sales
    of Opana ER calculated based on a royalty rate starting at 22%
    of annual net sales of the product up to $150 million of
    annual net sales, with the royalty rate then increasing, based
    on
    agreed-upon
    levels of annual net sales achieved, from 25% up to a maximum of
    30%.
    No royalty payments were due to the Company for the first
    $41 million of royalties that would otherwise have been
    payable beginning from the time of the product launch in July
    2006 (the Royalty Holiday). In the third quarter of
    2008, this Royalty Holiday ended. The Company recognized
    royalties from Endo related to sales of Opana ER in the amount
    of $5.0 million for 2008.
    The Companys share of the development costs for Opana ER
    that it opted out of funding in April 2003 totaled
    $28 million and will be recouped by Endo through a
    temporary 50% reduction in royalties. Commencing in the third
    quarter of 2008, the Company began to receive reduced royalty
    payments from Endo, with such temporary reductions to continue
    until the $28 million is fully recouped. As of
    December 31, 2008, $5.0 million of the
    $28 million has been recouped by Endo.
    Endo will pay the Company a percentage of any sublicense income
    it receives and milestone payments of up to $90 million
    based upon the achievement of
    agreed-upon
    annual net sales thresholds.   F-28




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Edison
    Pharmaceuticals, Inc.
         F-29




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    country-by-country, product-by-product
  Mylan
    Pharmaceuticals Inc.
    Drug
    Delivery Technology Collaborations
    18.
    CONTINGENCIES  and/or
  Impax
    ANDA Litigation
   F-30




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  30-month
  30-month
    Actavis
    ANDA Litigation.
   F-31




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  30-month
      Sandoz
    ANDA Litigation.
    ® and/or ®
    Barr
    ANDA Litigation.
   F-32




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        19.
    SUBSEQUENT
    EVENTS  Staff
    Reductions
    Rights
    Plan
       F-33




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    20.
    QUARTERLY
    FINANCIAL DATA (UNAUDITED)    Quarter EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2008(a)


2008


2008(b)


2008(Unaudited)


(Unaudited)


(Unaudited)(Unaudited)(In thousands, except per share data)Total revenues

$
739


$
1,316


$
1,361


$
5,118Net loss

$
(10,297
)

$
(6,928
)

$
(7,277
)


(2,232
)Net loss per share

$
(0.41
)

$
(0.22
)

$
(0.23
)

$
(0.07
)   Quarter EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2007


2007


2007


2007(c)(Unaudited)


(Unaudited)


(Unaudited)(Unaudited)(In thousands, except per share data)Total revenues

$
842


$
712


$
882


$
872Net loss

$
(6,954
)

$
(8,958
)

$
(9,251
)

$
(9,302
)Net loss per share

$
(0.30
)

$
(0.39
)

$
(0.40
)

$
(0.40
)     (a)
    
    In the first quarter of 2008, the Company recognized an
    impairment loss of $1.0 million to establish a reserve
    against the collectability of the loan that the Company made to
    Edison in February 2008 under the Companys agreement with
    Edison. The $1.0 million was charged against selling,
    general and administrative expenses.(b)
    
    In the third quarter of 2008, the Company recorded a credit to
    selling, general and administrative expense in the amount of
    $470,000 for the reimbursement of legal fees by Endo in
    connection with patent enforcement litigation related to Opana
    ER (see Note 17). In addition, in the third quarter of
    2008, the Company recorded an impairment charge to research and
    product development expense in the amount of $490,000 in
    connection with patent costs related to development programs
    that the Company no longer plans to pursue and patents that the
    Company determined it would no longer maintain.(c)
    
    During the fourth quarter of 2007, the Company recognized an
    impairment loss of $414,000 related to patents primarily in
    connection with early stage development programs discontinued by
    the Company, and that it determined no longer had value. Such
    charge was reflected in research and product development
    expense. In addition, the Company recorded a net credit of
    $327,000 in the fourth quarter of 2007 as an adjustment to
    incentive compensation expense to reflect a reduction in
    expected payouts in 2008, of which a credit of $188,000 and a
    credit of $139,000 were recorded to selling, general and
    administrative expense and research and product development
    expense, respectively. F-34




---



##### Table of Contents



SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS



PENWEST
    PHARMACEUTICALS CO.

DECEMBER
    31, 2008 AdditionsCharged toBalance at


Charged to


Other





Balance atBeginning


Costs and


Accounts-


Deductions-


End ofof Period


Expenses


Describe


Describe


Period(In thousands)Year ended December 31, 2008Inventory Allowances

$
18


$
18


$



$



$
36Year ended December 31, 2007Inventory Allowances

$



$
18


$



$



$
18Year ended December 31, 2006Inventory Allowances

$
208


$



$



$
208
(a)

$
     (a)
    
    Disposals of unrecoverable inventory costs. S-1




---



##### Table of Contents



Exhibit Index
  Filed withExhibit



this Form

Form or

Filing Date

SEC FileNumber

Description

10-K

Schedule

with SEC

Number3
.1

Amended and Restated Articles of Incorporation of the Registrant



10-Q

8/3/2004

000-234673
.2

Amended and Restated Bylaws of the Registrant



S-1

10/21/1997

333-383893
.3

Amendment to Amended and Restated Bylaws of the Registrant



8-K

11/13/2007

000-234673
.4

Designation of Rights and Preference of Series A Junior
    Participating Preferred Stock of the Registrant filed on
    July 17, 1998



10/A

7/17/1998

000-234674
.1

Specimen certificate representing the Common Stock



S-1/A

12/17/1997

333-3838910
.1

Product Development and Supply Agreement dated August 17,
    1994 by and between the Registrant and Mylan Pharmaceuticals Inc.



S-1

10/21/1997

333-3838910
.2

Sales and Distribution Agreement dated January 3, 1997 by
    and between the Registrant and Mylan Pharmaceuticals Inc.



S-1

10/21/1997

333-3838910
.3

Letter Agreement dated February 25, 2000 by and between the
    Registrant Mylan Pharmaceuticals Inc.



10-Q

8/14/2000

000-2346710
.4

Amended and Restated Strategic Alliance Agreement, dated as of
    April 2, 2002, by and between Endo Pharmaceuticals Holdings
    Inc. and the Registrant



10-Q

8/14/2002

000-2346710
.5

Amendment, dated January 7, 2007, to the Amended and
    Restated Strategic Alliance Agreement, dated as of April 2,
    2002, by and between Endo Pharmaceuticals Inc. and the Registrant



8-K

2/15/2007

000-2346710
.6

1997 Equity Incentive Plan



S-1

10/21/1997

333-3838910
.7

1997 Employee Stock Purchase Plan



S-1

10/21/1997

333-3838910
.8

1998 Spinoff Option Plan



10/A

7/7/1998

000-2346710
.9

Recognition and Incentive Agreement dated as of May 14,
    1990 between the Registrant and Anand Baichwal, as amended



S-1/A

11/10/1997

333-3838910
.10

Termination Agreement dated as of February 1, 2007 by and
    between Anand Baichwal and the Registrant



8-K

2/5/2007

000-2346710
.11

Royalty Agreement dated September 25, 1992 between the
    Registrant and John N. Staniforth



10-Q

5/15/2002

000-2346710
.12

Termination Agreement dated as of February 1, 2007 by and
    between John Staniforth and the Registrant



8-K

2/5/2007

000-2346710
.13

Confidentiality, Consulting and Noncompetition Agreement dated
    September 25, 1992 between the Registrant and John N.
    Staniforth



10-Q

5/15/2002

000-2346710
.14

Lease Agreement dated as of February 3, 2003 by and between
    Union Carbide Corporation and the Registrant



10-Q

5/15/2003

000-2346710
.15

Lease Amendment and Attornment Agreement, dated March 15,
    2004, by and between Union Carbide Corporation and the Registrant



10-Q

8/3/2004

000-2346710
.16

Second Amendment to Lease dated as of June 6, 2006 by and
    among Danbury Buildings, Inc., Union Carbide Corporation and the
    Registrant



10-Q

8/8/2007

000-2346710
.17

Third Amendment to Lease dated as of April 13, 2007 by and
    among Danbury Building Co., L.P. and the Registrant



10-Q

8/8/2007

000-2346710
.18

Form of Option Agreement for 1997 Incentive Plan



10-K

3/16/05

000-23467 S-2




---



##### Table of Contents



Filed withExhibit



this Form

Form or

Filing Date

SEC FileNumber

Description

10-K

Schedule

with SEC

Number10
.19

Severance and Settlement Agreement and Release dated
    February 14, 2005 by and between the Registrant and Tod R.
    Hamachek



10-Q

5/9/2005

000-2346710
.20

2005 Stock Incentive Plan, as amended



10-Q

8/8/2008

000-2346710
.21

Amendment No. 1 to 2005 Stock Incentive Plan



10-Q

11/9/06

000-2346710
.22

Form of Incentive Stock Option Agreement for grants under 2005
    Stock Incentive Plan



8-K

6/7/2005

000-2346710
.23

Form of Employee Nonstatutory Stock Option Agreement for grants
    under 2005 Stock Incentive Plan



8-K

6/7/2005

000-2346710
.24

Form of Nonstatutory Stock Option Agreement (Consultants and
    Directors) for grants under 2005 Stock Incentive Plan



8-K

6/7/2005

000-2346710
.25

Form of Director Restricted Stock Agreement for grants under
    2005 Stock Incentive Plan



8-K

6/7/2005

000-2346710
.26

Summary of Executive Officer Bonus Program

X10
.27

Summary of the Director Compensation Program

X10
.28

Manufacture and Supply Agreement dated November 6, 2006
    between the Registrant and Draxis Specialty Pharmaceuticals
    Inc.



10-K

3/16/2007

000-2346710
.29

Credit and Security Agreement dated as of March 13, 2007 by
    and among the Registrant and Merrill Lynch Capital, a division
    of Merrill Lynch Business Financial Services Inc.



10-Q

5/10/2007

000-2346710
.30

Collaboration and License Agreement dated as of July 16,
    2007 by and between Edison Pharmaceuticals, Inc. and the
    Registrant



10-Q

11/8/2007

000-2346710
.31

Securities Purchase Agreement dated March 5, 2008, among
    the Registrant and the purchasers party thereto



8-K

3/6/2008

000-2346710
.32

Form of Warrant issued by the Registrant to each of the
    purchasers under the Securities Purchase Agreement dated
    March 5, 2008



8-K

3/6/2008

000-2346710
.33

Second Amendment, dated July 14, 2008, to the Amended and
    Restated Strategic Alliance Agreement, dated as of April 2,
    2002, by and between the Registrant and Endo Pharmaceuticals
    Inc.



10-Q

11/10/2008

000-2346710
.34

Form of Executive Retention Agreements entered into by the
    Registrant and each of its Executive Officers

X23


Consent of Ernst & Young LLP

X31


Certification of Principal Executive Officer and Principal
    Financial Officer pursuant to Exchange Act
    Rules 13a-14
    or 15d-14, as adopted pursuant to Section 302 of
    Sarbanes-Oxley Act of 2002

X32


Certification of Principal Executive Officer and Principal
    Financial Officer pursuant to Exchange Act
    Rules 13a-14(b)
    or 15d-14(b) and 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of Sarbanes-Oxley Act of 2002

X     
    
    Confidential treatment granted as to certain portions, which
    portions are omitted and filed separately with the Commission.
    
    Management contract or compensatory plan or arrangement required
    to be filed as an Exhibit to the Annual Report on
    Form 10-K.
    
    Confidential treatment requested as to certain portions, which
    portions are omitted and filed separately with the Commission. S-3