##### Table of Contents





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,
    2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number
    001-34267
 PENWEST PHARMACEUTICALS
    CO.
 (Exact name of registrant as
    specified in its charter)
  Washington

91-1513032(State or other jurisdiction
    of

(I.R.S. Employerincorporation or
    organization)

Identification No.)2981 Route 22

12563-2335Suite 2

(Zip Code)Patterson, New York(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

The NASDAQ Stock Market(Including Associated Preferred Stock Purchase Rights)   SECURITIES
    REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
    None
  o þ
  o þ
  þ o
  Regulation S-T o 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.




---



##### 





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


Business


1Item 1A.


Risk Factors


15Item 1B.


Unresolved Staff Comments


28Item 2.


Properties


28Item 3.


Legal Proceedings


28Item 4.


[RESERVED]


32Executive Officers of the Registrant


32PART IIItem 5.


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


33Item 6.


Selected Financial Data


34Item 7.


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


35Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


54Item 8.


Financial Statements and Supplementary Data


54Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


54Item 9A.


Controls and Procedures


54Item 9B.


Other Information


57PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


58Item 11.


Executive Compensation


58Item 12.


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


58Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


58Item 14.


Principal Accountant Fees and Services


58PART IVItem 15.


Exhibits and Financial Statement Schedules


59Signatures


60EX-10.30Ex-23Ex-31Ex-32    Forward
    Looking Statements
   i




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PART I  ITEM 1.
    BUSINESS  Overview
  α-tocopherolquinone,
  ® ® twice-a-day around-the-clock
        
    Working closely with Endo to maximize the value of Opana
    ER.
    Completing the two Phase IIa trials of A0001 in patients with
    FA and MELAS syndrome and making a decision regarding further
    development of this compound.
    Exploring potential licensing opportunities for A0001 in
    anticipation of the completion of the Phase IIa
    trials.
    Continuing to grow the Companys drug delivery business
    both by completing formulation work on compounds under
    development and signing additional collaboration agreements.
    Continuing to aggressively manage our expenses to ensure our
    costs are appropriate given our priorities.




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Products
  Opana
    ER
  twice-a-day around-the-clock
  Endo Collaboration
  Opana ER Outside the United
    States
      Opana Exclusivity
 2




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30-month 30-month 30-month
    A0001.
        build-up
   3




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®
  Clinical
    Developments
             4




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Nifedipine XL.
  Drug
    Delivery Collaborations
      TIMERx
      Geminex
   5




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SyncroDose
    GastroDose
    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 to us, 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 receive 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, 2009, $3.7 million of the 6




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$28 million remains to be recouped by Endo. We believe this
    amount will be fully recouped by Endo during the first quarter
    of 2010, and that a portion of the royalty paid to us by Endo
    for the first quarter of 2010 will be paid at the full royalty
    rate.  
    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.          Valeant
    Pharmaceuticals International
  ®
   7




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Edison
    Pharmaceuticals, Inc.
            country-by-country, product-by-product last-to-expire
  Mylan
    Pharmaceuticals Inc.
   8




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Drug
    Delivery Technology Collaborations
    Research
    and Development
    Manufacturing
         9




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Marketing
    and Distribution
      Patents
    and Proprietary Rights
      Approved Drug Products with Therapeutic
    Equivalence Evaluations,
    Patent
    Litigation
   10




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Trademarks
  ® ® ® tm Form 10-K
  Government
    Regulation
  and/or
    NDAs:
   11




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505(b)(2) NDAs:
   12




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ANDAs:
    Orphan Drug Designation:
    Fast Track Designation:
 13




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Other FDA Requirements:
    Foreign Regulation.
    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.  moderate-to-severe
 14




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®
    Employees
      Information
    Available on the Internet
  Form 10-K, Form 10-Q, Form 8-K
  ITEM 1A. 
    RISK
    FACTORS  Our business faces many risks. If any of the events or
    circumstances described in the following risks actually occurs,
    our business, financial condition or results of operations could
    suffer and the trading price of our common stock could decline.
    The following risks should be considered, together with all of
    the other information in this annual report before deciding to
    invest in our securities.
  We
    have a history of net losses and may not be able to achieve or
    maintain profitability on an annual basis
     15




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
    the commercial success of Opana ER, and the amount of royalties
    on 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, and the prosecution by us and Endo
    of additional patent applications with respect to Opana ER;
    our ability to access funding support for development programs
    from third party collaborators;
    our ability to enter into drug delivery technology
    collaborations;
    the level of our investment in research and development
    activities, including the timing and costs of conducting
    clinical trials of A0001;
    the amount of our general and administrative expenses; and
    the successful development and commercialization of product
    candidates in our portfolio, and products being developed for
    collaborations.  We may
    require additional funding, which may be difficult to
    obtain
      
    the commercial success of Opana ER, and the amount of royalties
    we receive on sales of Opana ER, which may be adversely affected
    by any potential generic competition;
    the timing and amount of payments received under our drug
    delivery technology collaboration agreements;
    the results of our Phase IIa clinical trials of A0001, and the
    cost of any future pre-clinical studies and clinical trials that
    we may conduct, our ability to enter into collaborations for
    A0001, or otherwise access to funding and support for
    pre-clinical studies and clinical trials of A0001;
    our and Endos ability to enter into collaborations for
    Opana ER outside the United States, and the structure and terms
    of any such agreements;
    our ability to access funding support for development programs
    from third party collaborators;
    our ability to enter into drug delivery technology
    collaborations, and the structure and terms of such
    collaborations;
    the level of our investment in capital expenditures for
    facilities and equipment; and
    our success in continuing to reduce our spending and managing
    our costs.   16




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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 competing
    products;
    Endos ability to educate the medical community about the
    benefits, safety and efficacy of Opana ER;
    the effectiveness of Endos sales and marketing activities;
    the potential impact of tamper resistant opioids newly available
    in the market;
    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;
    the required risk evaluation management strategy currently being
    considered by the FDA; and
    the availability of generic versions of Opana ER and the timing
    of generic competition.    30-month 30-month 30-month
 17




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Our
    success depends on our ability, or our collaborators
    ability, to protect our patents and other intellectual property
    rights
  ,
  30-month 30-month
     18




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We are
    dependent on our collaborators to develop, manufacture and
    commercialize our products
          
    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 dispute 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
     19




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The
    Drug Enforcement Administration, 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 may face lawsuits as a
    result
    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.    moderate-to-severe
 20




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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
         21




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
    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.    We may
    not be able to obtain orphan drug exclusivity for our products.
    If our competitors are able to obtain orphan drug exclusivity
    for their products, we may not be able to have our competitive
    products approved by the applicable regulatory authority for a
    significant period of time
         22




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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
    ® 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
     23




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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.
    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
   24




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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 in development;
    we may not be able to initiate or continue clinical trials on
    our collaborations for products that are under
    development; and
    we may be delayed in submitting applications for regulatory
    approvals of our products.     25




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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
     26




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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
    Penwest more difficult
    Proxy
    contests pursued by dissident shareholders may be costly and
    disruptive to our business operations
   27




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ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES      ITEM 3.
    LEGAL
    PROCEEDINGS  Item 1.
    Legal
    Proceedings  Impax
    ANDA Litigation
  ® ® ® 45-day 30-month ® and/or
  ®
 28




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® and/or
  Actavis
    ANDA Litigation
  ® ® ® ® and/or
  ® ® and/or
  ® ® 180-day ® ®
  Sandoz
    ANDA Litigation
  ® ® ® ®
 29




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and/or
  ® ® and/or
  Barr
    ANDA Litigation
  ® ® ® ® ® and/or ® ®
  Roxane
    ANDA Litigation
  ® ® ®
  Watson
    ANDA Litigation
  ® ® ® ®
 30




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Tang/Edelman
    Shareholder Claim
    Tang Capital Partners, et al. Penwest Pharmaceuticals Co. No. 09-2-00617-0),
  Tang Capital Partners, et al. v. Penwest
    Pharmaceuticals Co.),
  Tang Capital Partners, et al. v.
    Penwest Pharmaceuticals Co.),
 31




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ITEM 4.
    RESERVED EXECUTIVE
    OFFICERS OF THE REGISTRANT    Name

Age

Title

DatesJennifer L. Good


45


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.


55


Senior Vice President, Licensing and Business Development

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

1997  2006Amale Hawi, Ph.D.


56


Senior Vice President, Pharmaceutical Development

2007  currentPresident, A. Hawi Consulting Ltd., a pharmaceutical development
    consulting practice

2002  2007Frank P. Muscolo


53


Controller and Chief Accounting Officer

2007  currentController

1997  2007Thomas Sciascia, M.D.


56


Senior Vice President, Clinical Development and Regulatory and
    Chief Medical Officer

2009  currentSenior Vice President and Chief Medical Officer

2001  2009  32




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

LowPERIODS IN 2009Quarter Ended March 31

$
2.12


$
1.21Quarter Ended June 30

$
3.26


$
1.50Quarter Ended September 30

$
2.95


$
2.08Quarter Ended December 31

$
2.92


$
1.80PERIODS 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


$
0.34      33




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ITEM 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2009


2008


2007


2006


2005(In thousands, except for per share data)STATEMENT OF OPERATIONS DATA:Revenues

$
23,812


$
8,534


$
3,308


$
3,499


$
6,213Cost of revenues


2,655



1,438



605



231



39Selling, general and administrative


9,413



12,052



14,260



14,075



13,247Research and product development


12,430



21,041



23,561



22,857



17,797Investment income


15



541



1,770



2,352



1,974Interest expense


(829
)


(1,278
)


(1,117
)






Net loss

$
(1,500
)

$
(26,734
)

$
(34,465
)

$
(31,312
)

$
(22,898
)Basic and diluted net loss per share

$
(0.05
)

$
(0.89
)

$
(1.48
)

$
(1.38
)

$
(1.05
)Weighted average shares of common stock outstanding 
    basic and diluted


31,666



29,923



23,216



22,751



21,711   December 31,2009


2008


2007


2006


2005(In thousands)BALANCE SHEET DATA:Cash and cash equivalents

$
11,246


$
16,692


$
15,680


$
16,182


$
15,917Marketable securities


240







7,293



24,408



39,377Working capital


11,655



14,792



17,891



38,254



53,912Total assets


25,896



31,854



36,982



52,742



67,021Long term obligations-deferred compensation


2,376



2,384



2,588



2,763



2,977Long term debt






4,112



9,595







Accumulated deficit


(235,127
)


(233,627
)


(206,893
)


(172,428
)


(141,116
)Shareholders equity

$
15,022


$
15,926


$
16,237


$
45,121


$
60,411  34




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
  α-tocopherolquinone,
  ® ® twice-a-day
    up-front
  Endo.
 35




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up-front ®
  up-front up-front
       36




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Edison.
      Mylan.
    Restructuring Charges.
   37




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Net loss and profitability.
  
    the commercial success of Opana ER, and the amount of royalties
    on 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, and the prosecution by us and Endo
    of additional patent applications with respect to Opana ER;
    our ability to access funding support for our development
    programs from third party collaborators;
    our ability to enter into drug delivery technology
    collaborations;
    the level of our investment in research and development
    activities, including the timing and costs of conducting
    clinical trials of A0001;
    the level of our general and administrative expenses; and
    the successful development and commercialization of product
    candidates in our portfolio and products being developed for
    collaborations.    Critical
    Accounting Policies and Estimates
   38




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Revenue
    Recognition
  Royalties
  Product sales  free-on-board,
  Collaborative licensing and development
    revenue
    Milestone payments 
  Research
    and Product Development Expenses
   39




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Deferred
    Taxes  Valuation Allowance
    Impairment
    of Long-Lived Assets
  and/or
  Share-Based
    Compensation
  non-employee
    
    the stock option exercise price;
    the expected term of the option; 40




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
    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; and
    the risk free interest rate for the expected option term.      Form 10-K.
      Recent
    Accounting Pronouncements
   41




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2009-01, 2009-01.
  2009-05, 2009-05. 2009-05
  No. 2009-13, 2009-13. 2009-13, 605-25. 2009-13
 42




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No. 2010-06, 2010-06. 820-10 2010-06
  Results
    of Operations for Years Ended December 31, 2009, 2008 and
    2007
  Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2009


2008


2008


2007


2007(In thousands, except percentages)Royalties

$
20,792



206
%

$
6,805



167
%

$
2,553Product sales


562



(18
)


685



32



519Collaborative licensing and development revenue


2,458



135



1,044



342



236Total revenues

$
23,812



179
%

$
8,534



158
%

$
3,308      43




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Cost
    of Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2009


2008


2008


2007


2007(In thousands, except percentages)Cost of royalties

$
387



81
%

$
214



398
%

$
43Cost of product sales


551



81



305



(23
)


395Cost of collaborative licensing and development revenue


1,717



87



919



450



167Total cost of revenues

$
2,655



85
%

$
1,438



138
%

$
605        44




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Selling,
    General and Administrative Expenses
  Percentage



PercentageIncrease



Increase(Decrease) from



(Decrease) from2009

2008

2008

2007

2007(In thousands, except percentages)Selling, general and
    administrative expenses

$
9,413



(22
)%

$
12,052



(15
)%

$
14,260         Research
    and Product Development Expenses
   45




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Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2009


2008


2008


2007


2007(In thousands, except percentages)A0001 and Edison payments

$
4,774



(36
)%

$
7,403



95
%

$
3,797Nalbuphine ER






(100
)


2,238



(66
)


6,618PW4153






(100
)


882



385



182Other phase I products and internal costs


7,656



(27
)


10,518



(19
)


12,964Total research and product development expense

$
12,430



(41
)%

$
21,041



(11
)%

$
23,561   
    A0001 and Edison Payments These expenses
    reflect our direct external expenses relating to the development
    of A0001, and for the 2008 and 2007 periods, also includes our
    funding of Edisons research activities under the Edison
    Agreement. The 2009 and 2008 expenses also include milestone
    payments to Edison. These expenses approximated 38% of our
    R&D expenses for 2009 and included costs of preclinical and
    clinical studies of A0001 that we conducted in 2009, and a
    milestone payment made to Edison in 2009 for the selection an
    additional compound that we were entitled to under the Edison
    Agreement, as discussed below. The milestone payment made to
    Edison in 2008 was for the commencement of dosing in a Phase Ia
    clinical trial of A0001. As of December 31, 2009, we had
    incurred $16.0 million in total expenses for the A0001
    program and for contract research payments to Edison. Of this
    amount, approximately $5.4 million consisted of quarterly
    contract research payments to Edison that we made in 2007 and
    2008.   46




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##### Table of Contents




    Nalbuphine ER These expenses reflect our
    direct external expenses relating to the development of
    nalbuphine ER. In 2008 and 2007, these expenses consisted
    primarily of payments to third parties in connection with
    clinical trials of nalbuphine ER that we conducted. 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. After the completion of the Phase IIa trial in the first
    quarter of 2008, we determined to seek a collaborator for the
    further development and commercialization of nalbuphine ER, and
    not to conduct any additional development work until we entered
    into such a collaboration. As a result, we did not incur any
    R&D expenses in 2009 and we do not expect to incur any
    additional R&D expenses for nalbuphine ER, unless we find a
    collaborator to continue the development work.
    PW4153 These expenses reflect our direct
    external expenses relating to the development of PW4153. These
    expenses 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,
    share-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.     47




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##### Table of Contents



Tax
    Rates
    Liquidity
    and Capital Resources
  Sources
    of Liquidity
    Private Placement.
    Senior Secured Credit Facility.
     48




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##### Table of Contents



Cash
    Flows
             49




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##### Table of Contents



Funding
    Requirements
       50




---



##### 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 competition;
    the timing and amount of payments received under our drug
    delivery technology collaborative agreements;
    the results of our Phase IIa clinical trials of A0001, and the
    cost of any future pre-clinical studies and clinical trials that
    we may conduct, our ability to enter into collaborations for
    A0001, or otherwise access to funding and support for
    pre-clinical studies and clinical trials of A0001;
    our and Endos ability to enter into new collaborations for
    Opana ER outside the United States, and the structure and terms
    of any such agreements;
    our ability to access funding support for development programs
    from third party collaborators;
    our ability to enter into drug delivery technology
    collaborations, and the structure and terms of such
    collaborations;
    the level of our investment in capital expenditures for
    facilities or equipment; and
    our success in reducing our spending and managing our costs.   51




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##### Table of Contents



Form S-3
      Contractual
    Obligations
    Less than








AfterTotal


One Year


1-3 Years


4-5 Years


5 YearsOperating leases

$
225


$
225


$



$



$
Purchase obligations


4,427



4,427











Deferred compensation


2,670



294



587



587



1,202Payments due under credit facility


4,651



4,651











Total

$
11,973


$
9,597


$
587


$
587


$
1,202       
    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. 52




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
    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
  Net
    Operating Loss Carryforwards
       53




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##### Table of Contents



Market
    Risk and Risk Management Policies
        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)
 54




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##### Table of Contents



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
    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.       55




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Report of
    Independent Registered Public Accounting Firm
                  
    56




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##### Table of Contents



ITEM 9B.
    OTHER
    INFORMATION  Retention
    Agreements
   57




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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   58




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##### Table of Contents



PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Form 10-K:
          Form 10-K
 59




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##### Table of Contents



SIGNATURES      /s/  Jennifer
    L. Good   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 16, 2010/s/  Frank
    P. MuscoloFrank
    P. Muscolo

Controller and Chief Accounting Officer (principal accounting
    officer)

Date: March 16, 2010/s/  Paul
    E. FreimanPaul
    E. Freiman

Chairman of the Board

Date: March 16, 2010/s/  Christophe
    BianchiChristophe
    Bianchi, M.D.

Director

Date: March 16, 2010/s/  Peter
    F. DrakePeter
    F. Drake, Ph.D.

Director

Date: March 16, 2010/s/  Joseph
    EdelmanJoseph
    Edelman

Director

Date: March 16, 2010/s/  David
    P. MeekerDavid
    P. Meeker, M.D.

Director

Date: March 16, 2010/s/  Kevin
    C. TangKevin
    C. Tang

Director

Date: March 16, 2010/s/  Anne
    M. VanLentAnne
    M. VanLent

Director

Date: March 16, 2010  60




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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 31,2009


2008(In thousands, except share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
11,246


$
16,692Marketable securities


240



Trade accounts receivable


6,226



4,894Inventories, net


263



440Prepaid expenses and other current assets


1,289



1,365Total current assets


19,264



23,391Fixed assets, net


1,576



2,177Patents, net


996



1,819Deferred charges


1,740



2,244Other assets, net


2,320



2,223Total assets

$
25,896


$
31,854LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
750


$
745Accrued expenses


2,178



1,695Accrued development costs


275



385Loan payable  current portion


4,112



5,483Deferred compensation  current portion


294



291Total current liabilities


7,609



8,599Loan payable






4,112Accrued financing fee






360Deferred revenue


889



473Deferred compensation


2,376



2,384Total liabilities


10,874



15,928Commitments and Contingencies (see Notes 13 and 18)Shareholders 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
    31,778,416 shares at December 31, 2009 and
    31,697,250 shares at December 31, 2008


32



32Additional paid-in capital


249,982



249,262Accumulated deficit


(235,127
)


(233,627
)Accumulated other comprehensive income


135



259Total shareholders equity


15,022



15,926Total liabilities and shareholders equity

$
25,896


$
31,854    F-3




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  STATEMENTS OF OPERATIONS
  Year Ended December 31,2009


2008


2007(In thousands, except per share data)Revenues:Royalties

$
20,792


$
6,805


$
2,553Product sales


562



685



519Collaborative licensing and development revenue


2,458



1,044



236Total revenues


23,812



8,534



3,308Operating expenses:Cost of revenues


2,655



1,438



605Selling, general and administrative


9,413



12,052



14,260Research and product development


12,430



21,041



23,561Total operating expenses


24,498



34,531



38,426Loss from operations


(686
)


(25,997
)


(35,118
)Investment income


15



541



1,770Interest expense


(829
)


(1,278
)


(1,117
)Loss before income tax expense


(1,500
)


(26,734
)


(34,465
)Income tax expense










Net loss

$
(1,500
)

$
(26,734
)

$
(34,465
)Basic and diluted net loss per common share

$
(0.05
)

$
(0.89
)

$
(1.48
)Weighted average shares of common stock outstanding 
    basic and diluted


31,666



29,923



23,216    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, 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



15,926Net loss














(1,500
)






(1,500
)Adjustment for funded status of post retirement plan


















(124
)


(124
)Comprehensive loss






















(1,624
)Proceeds from Employee Stock Purchase Plan exercises


37







65











65Stock compensation charges in connection with stock incentive
    plans


44







655











655Balances, December 31, 2009


31,778


$
32


$
249,982


$
(235,127
)

$
135


$
15,022    F-5




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  STATEMENTS OF CASH FLOWS
  Year Ended December 31,2009


2008


2007(In thousands)Operating activities:Net loss

$
(1,500
)

$
(26,734
)

$
(34,465
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation


641



989



1,107Amortization of patents


289



367



379Inventory reserves






18



18Patent impairment losses


339



702



584Loss on disposal of fixed assets


17



209



Note receivable reserve






1,000



Deferred revenue


416



290



140Deferred compensation


171



177



182Deferred royalty termination costs amortization (paid)


274



101



(1,541
)Share-based compensation


655



3,125



3,792Changes in operating assets and liabilities:Trade accounts receivable


(1,332
)


(4,113
)


(98
)Inventories


177



209



(483
)Accounts payable, accrued expenses and other


(73
)


(2,298
)


752Net cash provided by (used in) operating activities


74



(25,958
)


(29,633
)Investing activities:Acquisitions of fixed assets, net


(80
)


(112
)


(918
)Proceeds from sale of fixed assets


23



318



Patent costs


(34
)


(349
)


(319
)Purchases of marketable securities


(1,220
)


(7,859
)


(24,605
)Proceeds from maturities of marketable securities


980



15,157



41,950Reimbursements of patent costs by collaborator


229







Loan disbursed to collaborator






(1,000
)


Net cash (used in) provided by investing activities


(102
)


6,155



16,108Financing activities:Issuance of common stock, net


65



23,220



1,135Proceeds from loan payable










12,000Repayment of debt


(5,483
)


(2,405
)


Debt issuance costs










(112
)Net cash (used in) provided by financing activities


(5,418
)


20,815



13,023Net (decrease) increase in cash and cash equivalents


(5,446
)


1,012



(502
)Cash and cash equivalents at beginning of year


16,692



15,680



16,182Cash and cash equivalents at end of year

$
11,246


$
16,692


$
15,680    F-6




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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


5-10 yearsOffice furniture and equipment


3-10 yearsSoftware


3-5 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  free-on-board
  Collaborative licensing and development
    revenue
    Milestone payments
  Research
    and Product Development Expenses
   F-10




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Per
    Share Data
    December 31,2009


2008


2007(In thousands of shares)Stock options outstanding


2,617



2,514



2,411Restricted stock outstanding (unvested)


56



134



142Warrants to purchase common stock


4,070



4,070



6,743



6,718



2,553   Share-Based
    Compensation
      
    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; and
    the risk-free interest rate for the expected option term.   F-11




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Subsequent
    Events
  and/or
  3.
    RECENT
    ACCOUNTING PRONOUNCEMENTS     F-12




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      2009-01, 2009-01).
  2009-05, 2009-05). 2009-05
  No. 2009-13, 2009-13). 2009-13, Subtopic 605-25. 2009-13
  No. 2010-06, 2010-06). 820-10
 F-13




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  2010-06
    4.
    MARKETABLE
    SECURITIES    Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


Value(In thousands)Certificate of deposit

$
240


$



$



$
240Total marketable securities

$
240


$



$



$
240           5.
    FAIR
    VALUE MEASUREMENT    Level 1:
  Level 2:
  Level 3:
   F-14




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##### Table of Contents



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


Level 2


Level 3


Total(In thousands)Cash and cash equivalents

$
11,246


$



$



$
11,246Marketable securities






240







240Money market account


296











296Total

$
11,542


$
240


$



$
11,782     6.
    OTHER
    ASSETS    December 31,


December 31,2009


2008(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

$
2,024


$
1,924Money market account


296



2992,320



2,223Loan receivable from collaborator (see Note 17)


1,000



1,0003,320



3,223Allowance for loan receivable from collaborator


(1,000
)


(1,000
)Other assets, net

$
2,320


$
2,223     7.
    INVENTORIES     F-15




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      8.
    FIXED
    ASSETS    December 31,2009


2008(In thousands)Equipment and leasehold improvements

$
4,957


$
5,707Software


2,425



2,4257,382



8,132Less: accumulated depreciation and amortization


5,806



5,955$
1,576


$
2,177       9.
    PATENTS    December 31,2009


2008(In thousands)Patents, net of accumulated amortization of $1,746 and $1,849,
    respectively:

$
996


$
1,819  F-16




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##### Table of Contents



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

Amount(In thousands)2010

$
2272011


1942012


1642013


1282014


51Thereafter


232Total

$
996   and/or
  10.
    LOAN
    PAYABLE  Credit
    Facility
     F-17




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          11.
    SHAREHOLDERS
    EQUITY  Form S-3
  Private
    Placement
       F-18




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Share-Based
    Compensation
    2009


2008


2007(In thousands)Selling, general and administrative

$
93


$
2,248


$
3,194Research and product development


562



877



598Total

$
655


$
3,125


$
3,792       Penwest
    Stock Incentive Plans
   F-19




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##### 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, 2008


2,514,252


$
12.28Granted


508,200


$
1.57Exercised





$
Forfeited


(369,754
)

$
9.87Expired


(35,466
)

$
6.44Balance at December 31, 2009


2,617,232


$
10.62



5.9


$
461,844Options Exercisable


1,730,318


$
13.44



4.6


$
34,955       2009


2008


2007Expected dividend yield


None



None



NoneRisk free interest rate


2.0
%


3.0
%


4.7
%Expected volatility


75
%


78
%


56
%Expected life of options


5.7 years



5.7 years



5.5 years     Weighted-Average


AggregateGrant-Date


IntrinsicShares


Fair Value


ValueRestricted stock outstanding at December 31, 2008


134,000


$
11.22


$
193,630Granted


30,000


$
1.83Vested


(108,000
)

$
9.67Restricted stock outstanding at December 31, 2009


56,000


$
9.17


$
142,800    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  2009


2008


2007(In thousands)Cost of royalties

$
387


$
214


$
43Cost of product sales


551



305



395Cost of collaborative licensing and development revenue


1,717



919



167Total cost of revenues

$
2,655


$
1,438


$
605  F-21




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    13.
    COMMITMENTS  Leases
          Other
    Contracts
    14.
    INCOME
    TAXES   F-22




---



##### Table of Contents



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


2008


2007Statutory tax rate


(34
)%


(35
)%


(34
)%Valuation allowance


34



35



34
%



%



%       2009


2008(In thousands)Deferred compensation and SERP liability

$
(1,094
)

$
(1,145
)Deferred revenue


(347
)


(184
)Share-based compensation


(3,264
)


(3,442
)Tax credit carryforwards


(1,927
)


(637
)Net operating loss carryforwards


(37,177
)


(36,425
)Other


(442
)


(129
)Total deferred tax assets


(44,251
)


(41,962
)Depreciation and amortization


741



1,034Other


244



305Total deferred tax liabilities


985



1,339Net deferred tax asset before valuation allowance


(43,266
)


(40,623
)Valuation allowance


43,266



40,623Net deferred tax asset

$



$
      F-23




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        15.
    ROYALTY
    TERMINATION AGREEMENT       F-24




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   16.
    RETIREMENT
    PLANS AND OTHER EMPLOYEE BENEFITS  Savings
    Plan
    Supplemental
    Executive Retirement Plan
          2009


2008(In thousands)Benefit obligation at beginning of period

$
1,975


$
2,092Interest cost


120



119Actuarial loss (gain)


122



(85
)Benefits paid


(151
)


(151
)Benefit obligation at December 31,

$
2,066


$
1,975     2009


2008(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

$



$
  F-25




---



##### Table of Contents



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


2008(In thousands)Current liabilities

$
(147
)

$
(147
)Noncurrent liabilities


(1,919
)


(1,828
)Net amount recognized at December 31, (included in deferred
    compensation)

$
(2,066
)

$
(1,975
)     2009

2008(In thousands)Net gain

$
(143
)

$
(268
)Prior service cost


8



9Total

$
(135
)

$
(259
)     2009


2008(In thousands)Projected benefit obligation

$
2,066


$
1,975Accumulated benefit obligation

$
2,066


$
1,975Plan assets at fair value

$



$
     2009


2008(In thousands)Interest cost

$
120


$
119Amortization of prior service cost


2



1Amortization of net gains


(4
)


Net periodic benefit cost

$
118


$
120       2009


2008(In thousands)Net loss (gain)

$
122


$
(85
)Amortization of prior service cost


(2
)


(1
)Amortization of net gains


4



Total recognized in other comprehensive income

$
124


$
(86
)     2009

2008Discount rate


5.64
%


6.35
%Rate of compensation increase


N/A



N/A  F-26




---



##### Table of Contents



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


2008Discount rate


6.35
%


5.90
%Rate of compensation increase


N/A



N/A     2010

$
1512011


1512012


1512013


1512014


151Years
    2015-2019


751   Deferred
    Compensation Plan
    2010

$
1472011


1472012


1472013


1472014


147    F-27




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Health
    Care and Life Insurance Benefits
    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 to the Company beginning from the time of the product
    launch in July 2006 (the Royalty Holiday). In the
    third quarter of 2008, the Royalty Holiday ended. The Company
    recognized royalties from Endo related to sales of Opana ER in
    the amount of $19.3 million for 2009.
    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, 2009, $3.7 million of the
    $28 million remains to be 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
 F-30




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  last-to-expire
    Mylan
    Pharmaceuticals Inc.
        Drug
    Delivery Technology Collaborations
   F-31




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    18.
    CONTINGENCIES  and/or
  Impax
    ANDA Litigation
  ® ® ® 45-day 30-month ® and/or
  ® ® and/or
  Actavis
    ANDA Litigation
  ® ®
 F-32




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  ® ® and/or
  ® ® and/or ® ® 180-day ® ®
    Sandoz
    ANDA Litigation
  ® ® ® ® and/or
  ® ®
 F-33




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  and/or
  Barr
    ANDA Litigation
  ® ® ® ® ® and/or ® ®
  Roxane
    ANDA Litigation
  ® ® ®
  Watson
    ANDA Litigation
  ® ® ®
  ®
 F-34




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Tang/Edelman
    Shareholder Claim
    Tang Capital Partners, et
    al. Penwest Pharmaceuticals Co. No. 09-2-00617-0),
  Tang Capital Partners, et
    al. Penwest Pharmaceuticals Co.) No. 09-2-16472-0),
  Tang Capital Partners, et
    al. v. Penwest Pharmaceuticals Co.)
 F-35




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    19.
    RESTRUCTURING
    CHARGES      20.
    QUARTERLY
    FINANCIAL DATA (UNAUDITED)    Quarter EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2009(a)


2009(b)


2009(c)


2009(d)(Unaudited)


(Unaudited)


(Unaudited)


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

$
5,270


$
5,259


$
6,294


$
6,989Net (loss) income

$
(962
)

$
(2,138
)

$
383


$
1,217Net (loss) income per share, basic

$
(0.03
)

$
(0.07
)

$
0.01


$
0.04Net (loss) income per share, diluted

$
(0.03
)

$
(0.07
)

$
0.01


$
0.04   F-36




---



##### Table of Contents



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


June 30,


Sept. 30,


Dec. 31,2008(e)


2008


2008(f)


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
)     (a)
    
    In the first quarter of 2009 the Company recorded a severance
    charge in its statement of operations in the amount of $550,000
    in connection with staff reductions. Of such severance charge,
    $464,000 and $86,000 were recorded as selling, general and
    administrative expense and research and product development
    expense, respectively. In addition, as a result of these
    terminations, the Company recorded a non-cash credit of
    approximately $885,000 associated with the forfeiture of stock
    options held by these former employees. Of such amount, $844,000
    and $41,000 were recorded as credits to selling, general and
    administrative expense, and research and development expense,
    respectively (see Note 19).(b)
    
    In the second quarter of 2009, the Company recorded charges of
    $1.1 million in selling, general and administrative
    expenses in connection with the proxy contest initiated by Tang
    Capital and Perceptive Life Sciences. These charges included
    costs associated with the proxy solicitation, including legal
    and other advisory fees. The Company incurred a total of
    $1.3 million in selling, general and administrative
    expenses in the six month period ended June 30, 2009.(c)
    
    In the third quarter of 2009, the Company recorded a credit of
    $347,000 in selling, general and administrative expense
    attributable to a non-recurring credit from the insurance policy
    related to the cash surrender value of life insurance policies
    that the Company holds for its supplemental executive retirement
    and deferred compensation plans for its former CEO, as a result
    of having held the policies for 20 years.(d)
    
    In the fourth quarter of 2009, the Company recorded a
    restructuring charge in its statement of operations of $326,000
    in connection with severance arrangements for staff reductions
    and the corporate office relocation. Of such charge, $260,000
    and $66,000 were recorded as selling, general and administrative
    expense and research and product development expense,
    respectively. In addition, as a result of these terminations,
    the Company recorded a non-cash credit of $105,000 associated
    with the forfeiture of stock options held by these former
    employees. Of such amount, $68,000 and $37,000 were recorded as
    credits to selling, general and administrative expense and
    research and product development expense, respectively (see
    Note 19).(e)
    
    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.  (f)
    
    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 planned to pursue and patents that
    the Company determined it would no longer maintain. F-37




---



##### Table of Contents



SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS



PENWEST
    PHARMACEUTICALS CO.

DECEMBER
    31, 2009 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, 2009Inventory Allowances

$
36


$



$



$
35
(a)

$
1Year ended December 31, 2008Inventory Allowances

$
18


$
18


$



$



$
36Year ended December 31, 2007Inventory Allowances

$



$
18


$



$



$
18     (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, as amended



S-8

7/2/08

333-1520863
.3

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 and 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

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
.7

Third Amendment, signed March 31, 2009, 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

5/11/2009

000-3426710
.8

1997 Equity Incentive Plan



S-1

10/21/1997

333-3838910
.9

1997 Employee Stock Purchase Plan



S-1

10/21/1997

333-3838910
.10

1998 Spinoff Option Plan



10/A

7/7/1998

000-2346710
.11

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
.12

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



8-K

2/5/2007

000-2346710
.13

Form of Option Agreement for 1997 Incentive Plan



10-K

3/16/05

000-2346710
.14

2005 Stock Incentive Plan, as amended



10-Q

8/8/2008

000-2346710
.15

Amendment No. 1 to 2005 Stock Incentive Plan



10-Q

11/9/06

000-2346710
.16

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



8-K

6/7/2005

000-2346710
.17

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



8-K

6/7/2005

000-2346710
.18

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



8-K

6/7/2005

000-2346710
.19

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



8-K

6/7/2005

000-2346710
.20

Summary of Executive Officer Bonus Program



10-K

3/16/2009

001-34267 S-2




---



##### Table of Contents



Filed withExhibit



this Form

Form or

Filing Date

SEC FileNumber

Description

10-K

Schedule

with SEC

Number10
.21

Summary of the Director Compensation Program



10-K

3/16/2009

001-3426710
.22

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



10-K

3/16/2007

000-2346710
.23

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
.24

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
.25

Settlement Agreement dated May 5, 2009, by and between
    Edison Pharmaceuticals, Inc. and the Company



10-Q

8/10/09

000-3426710
.26

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



8-K

3/6/2008

000-2346710
.27

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
.28

Rights Agreement, dated as of March 11, 2009, between the
    Registrant and Mellon Investor Services, LLC, as Rights Agent



8-K

03/12/2009

000-2346710
.29

Severance and Settlement Agreement and Release, dated
    January 30, 2009, by and between the Registrant and
    Benjamin L. Palleiko



10-Q

05/11/2009

001-3426710
.30

Lease dated February 27, 2003, by and between JRS Pharma LP
    and the Registrant, as amended to date

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