##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, 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, 2007ORo

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
    Suite 11
    Danbury, Connecticut(Address of Principal
    Executive Offices)

06810-5120(Zip Code)   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-K Form 10-K Form 10-K. o
    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


14Item 1B.


Unresolved Staff Comments


26Item 2.


Properties


26Item 3.


Legal Proceedings


26Item 4.


Submission of Matters to a Vote of Security
    Holders


27Executive 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


49Item 8.


Financial Statements and Supplementary Data


49Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


49Item 9A.


Controls and Procedures


49PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


52Item 11.


Executive Compensation


52Item 12.


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


52Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


52Item 14.


Principal Accounting Fees and Services


52PART IVItem 15.


Exhibits and Financial Statement Schedules


53Signatures


54EX-23 Consent of Ernst & Young LLPEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO    Forward
    Looking Statements
   i




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##### Table of Contents



PART I  ITEM 1.
    BUSINESS  Overview
    ® ® twice-a-day
      Products
  Opana ® ER. ® twice-a-day
    ® ® ® ®




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30-month Item 3-Legal
    Nalbuphine ER. ® ®
   2




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twelve-hour twelve-hour
      A0001.
  Additional Product Candidates.
  PW4153

Parkinsons diseasePW4110

Epilepsy
    3




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Our
    Strategy
    
    Focus on products that address disorders of the nervous
    system.  We are focusing on products that address
    disorders of the nervous system. We believe the market for
    treating nervous system disorders is attractive because many of
    these disorders are chronic in nature and are largely treated by
    specialist physicians that can be addressed with a relatively
    small sales force. In addition, we believe many of the currently
    approved products for the treatment of nervous system disorders
    can be enhanced by drug delivery technologies. If, however, we
    believe that we could develop a product that would address an
    unmet medical need and have a substantial market value, we may
    also selectively develop product candidates for disorders
    outside of the nervous system.
    Develop product candidates that have the potential for at
    least five years of exclusivity in the
    marketplace.  We intend to expand our portfolio to
    include product candidates for which we or our collaborators
    could obtain at least five years of exclusivity in the
    marketplace following marketing approval. This exclusivity could
    arise from meeting certain regulatory criteria for market
    exclusivity with the FDA, for example, in connection with the
    approval of new chemical entities or orphan drugs, or from
    intellectual property protection.
    Seek alternative regulatory pathway when
    appropriate.  When appropriate, we intend to
    utilize a 505(b)(2) regulatory strategy to seek
    approval for products we develop by reformulating existing drugs
    utilizing proprietary drug delivery technologies. Under this
    strategy, we would file a section 505(b)(2) New Drug
    Application, or a section 505(b)(2) NDA, which would rely on the
    FDAs previous findings for the safety and effectiveness of
    the existing drug, in addition to the data we generate regarding
    our reformulated drug. Because a section 505(b)(2) NDA may
    rely on the FDAs previous findings, the trials that need
    to be conducted are generally more limited. Therefore, the
    development of a drug using the 505(b)(2) regulatory strategy is
    generally less costly and time consuming than the full NDA
    process.
    Continue to leverage and expand our expertise in drug
    development and the use of our proprietary drug delivery
    technologies.  We believe that we have significant
    expertise in drug formulation and in oral drug delivery
    technologies. Our proprietary drug delivery technologies, TIMERx
    controlled release,
    Geminex®
    dual delivery, and
    SyncroDose®
    and
    Gastrodosetm
    site-specific deliveries are applicable to a wide range of drugs
    with different physical and chemical properties including water
    soluble and insoluble drugs, as well as high dose and low dose
    drugs. Using these technologies, we believe that we can
    formulate drugs with precise release profiles and improve the
    characteristics of existing drugs. We have made, and plan to
    continue to make, these technologies available to collaborators
    in traditional 4




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
    Commercialize product candidates independently and in
    collaboration with third parties.  We currently do
    not have any sales infrastructure. Opana ER is marketed by Endo;
    other marketed products using our TIMERx technology are marketed
    by other collaborators. We expect that in the future, we will
    independently seek regulatory approval for most of our product
    candidates designed for the treatment of disorders of the
    nervous system. By retaining the rights to these products
    through approval, we believe that we can retain more value of
    such products if they are approved. In addition, we may retain
    marketing rights, or co-promotion rights, for our products that
    would be marketed to specialist physicians and build a
    relatively small specialty sales force to market these products.
    For those products that we selectively develop for the treatment
    of disorders outside of the nervous system, we plan to seek
    collaborators for the marketing of those products. The timing of
    seeking a collaborator will depend on a number of factors,
    including the costs of clinical development and our financing
    needs.  Drug
    Delivery Technologies
    TIMERx
      ®
  Geminex
   5




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SyncroDose
    GastroDose
    Collaborative
    Agreements
      Endo
    Pharmaceuticals Inc.
       6




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
    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, a period we refer to as the royalty holiday. If we were
    not subject to the $41 million royalty holiday, we believe
    that we would have received royalties from Endo of approximately
    $18.6 million for the twelve months ended December 31,
    2007, and that cumulatively, through December 31, 2007,
    approximately $19.7 million has been applied against the
    royalty holiday. We expect Endo to initiate the payment of
    royalties to us on U.S. sales of Opana ER commencing in the
    second half of 2008.
    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.
    Our share of the development costs for Opana ER that we opted
    out of funding in April 2003 will be fixed at $28 million
    and will be recouped by Endo through a temporary 50% reduction
    in royalties. This temporary reduction in royalties will not
    apply until the threshold for the $41 million royalty
    holiday has been met.    Edison
    Pharmaceuticals, Inc.
    agreed-upon
     7




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country-by-country, product-by-product
  Mylan
    Pharmaceuticals Inc.
    Otsuka
    Pharmaceutical Co., Ltd.
   8




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Research
    and Development
    Manufacturing
        Marketing
    and Distribution
     9




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Patents
    and Proprietary Rights
          Patent
    Litigation
      Trademarks
  ® ® ® tm Form 10-K
  Government
    Regulation
   10




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and/or
      NDAs:
       11




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505(b)(2) NDAs:
    ANDAs:
   12




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##### Table of Contents



Orphan Drug Designation:
  Other FDA Requirements:
    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. 13




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Employees
    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 not been profitable and expect to continue to incur
    substantial losses
     14




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
    the commercial success of Opana ER, and the timing and amount of
    royalties from Endos sales of Opana ER which may be
    affected by any potential generic entry;
    our ability to successfully defend our intellectual property
    protecting our products;
    the level of our investment in research and development
    activities, including the timing and costs of conducting our
    clinical trials of nalbuphine ER;
    the timing and amount of payments to Edison in connection with
    the Edison agreement, as well as our costs of development for
    drug candidates to which we acquire rights under the Edison
    agreement;
    the successful development and commercialization of product
    candidates in our portfolio;
    the level of investment for acquisitions or in-licensing of
    compounds or technologies intended to support our
    growth; and
    royalties from Mylans sales of Pfizers generic
    Procardia XL 30 mg.  We may
    require additional funding, which may be difficult to
    obtain
        
    the commercial success of Opana ER;
    the timing and amount of payments received under collaborative
    agreements, including in particular our agreement with Endo with
    respect to Opana ER and our agreement with Mylan with respect to
    Pfizers generic Procardia XL 30 mg;
    our ability to access the second $12 million term loan
    under the credit facility and the timing of the availability of
    this $12 million;
    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 other collaborative and independent development
    projects, funding obligations with respect to the projects, and
    the related costs to us of clinical studies for our product
    candidates;
    the level of investment for the acquisition or in-licensing of
    technologies or compounds intended to support our growth; 15




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
    the structure and terms of any future collaborative agreements;
    the prosecution, defense and enforcement of our patents and
    other intellectual property rights, such as our Orange Book
    listed patents for Opana ER including our costs associated with
    the IMPAX litigation and any other litigation in which we become
    involved;
    the level of our investments in capital expenditures for
    facilities and equipment; and
    our success in reducing our spending and managing our costs.    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.     16




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30-month
      Our
    success depends on our ability to protect our patents and other
    intellectual property rights
  30-month 30-month 30-month
     17




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We are
    dependent on our collaborators to 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. This 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. In January 2007, we resolved our dispute
    as part of an amendment to the strategic alliance agreement
    between us and Endo. 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
     18




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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
      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
         20




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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.            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
   21




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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
       22




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Recently
    enacted FDAAA may make it more difficult and costly for us to
    obtain regulatory approval of our product candidates and to
    produce, market and distribute products after
    approval.
    Opana
    ER contains a narcotic ingredient. As a result of reported
    misuse and abuse of prescription narcotics, the sale of Opana ER
    is subject to additional regulations, including compliance with
    risk management programs, which may prove difficult or expensive
    to comply with; and we and Endo may face lawsuits
    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
   23




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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;
    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.      We are
    dependent upon a limited number of suppliers for the gums used
    in our TIMERx materials
   24




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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
      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
   25




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The
    market price of our common stock may be volatile
    Specific
    provisions of our Shareholder Rights Plan, Certificate 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
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES        ITEM 3.
    LEGAL
    PROCEEDINGS   26




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30-month
  ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   27




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EXECUTIVE
    OFFICERS OF THE REGISTRANT    Name

Age


Title

DatesJennifer L. Good


43


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.


53


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.


53


Senior Vice President, Pharmaceutical Development

2007  currentPresident, A. Hawi Consulting Ltd.

2002  2007Paul F. Hayes


52


Vice President, Strategic Marketing

2005  currentSenior Director, Marketing, Oscient Pharmaceuticals

2002  2005Deputy Director, Marketing, Bayer Healthcare Pharmaceuticals

1999  2002Frank P. Muscolo


51


Controller and Chief Accounting Officer

2007  currentController

1997  2007Benjamin L. Palleiko


42


Senior Vice President, Corporate Development and Chief Financial
    Officer

2006  currentDirector, Investment Banking, Sun Trust Robinson Humphrey

2003  2006Vice President, Investment Banking, Robertson Stephens, Inc.

2000  2002Thomas Sciascia, M.D.


54


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 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


$
4.68PERIODS IN 2006Quarter Ended March 31

$
23.70


$
19.00Quarter Ended June 30

$
23.10


$
15.73Quarter Ended September 30

$
22.74


$
16.20Quarter Ended December 31

$
19.35


$
15.67      29




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except for per share data)STATEMENT OF OPERATIONS DATA:Revenues

$
3,308


$
3,499


$
6,213


$
5,108


$
4,678Cost of revenues


605



231



39



104



169Gross profit


2,703



3,268



6,174



5,004



4,509Selling, general and administrative


14,260



14,075



13,247



9,485



10,361Research and product development


23,561



22,857



17,797



20,205



20,590Investment income


1,770



2,352



1,974



906



476Interest expense


(1,117
)














(34
)Loss from continuing operations


(34,465
)


(31,312
)


(22,898
)


(23,785
)


(26,006
)Earnings from discontinued operations, net of income tax expense


















177Gain on sale of discontinued operations(a)


















9,894Total discontinued operations


















10,071Net loss

$
(34,465
)

$
(31,312
)

$
(22,898
)

$
(23,785
)

$
(15,935
)Basic and diluted loss per share:Continuing operations

$
(1.48
)

$
(1.38
)

$
(1.05
)

$
(1.28
)

$
(1.56
)Discontinued operations


















0.60Net loss per share

$
(1.48
)

$
(1.38
)

$
(1.05
)

$
(1.28
)

$
(0.96
)Weighted average shares of common stock outstanding


23,216



22,751



21,711



18,627



16,678   December 31,2007


2006


2005


2004


2003(In thousands)BALANCE SHEET DATA:Cash and cash equivalents

$
15,680


$
16,182


$
15,917


$
14,249


$
8,241Marketable securities


7,293



24,408



39,377



60,121



55,652Working capital


17,891



38,254



53,912



71,946



60,697Total assets


36,982



52,742



67,021



87,522



78,503Long term obligations-deferred compensation


2,588



2,763



2,977



3,314



3,104Long term debt


9,595















Accumulated deficit


(206,893
)


(172,428
)


(141,116
)


(118,218
)


(94,433
)Shareholders equity(b)

$
16,237


$
45,121


$
60,411


$
78,801


$
67,696    (a)
    
    On February 27, 2003, Penwest sold substantially all of the
    assets used in its former excipients business to subsidiaries
    and affiliates of Josef Rettenmaier Holding GmbH & Co.
    KG for $41.75 million, plus the assumption of specified
    liabilities. The purchase price included $39.5 million in
    cash and a non-interest bearing promissory note of
    $2.25 million, with $1.0 million paid to Penwest in
    April 2003 and $1.25 million paid to Penwest in May 2004.(b)
    
    On March 11, 2008, Penwest sold units representing an
    aggregate of 8,140,600 shares of its common stock, together
    with warrants to purchase an aggregate of 4,070,301 shares
    of its common stock, in a private placement, for a total
    purchase price of approximately $25.1 million. The Company
    expects net proceeds to be approximately $23.2 million from
    this private placement, after deducting the placement
    agents fees and other estimated expenses. The financial
    impact of this private placement is not included in this Balance
    Sheet Data. 30




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




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Products
  Opana ® ER. ® twice-a-day around-the-clock
    ® ® ® ®
    30-month Item 3-Legal
   32




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Nalbuphine ER. ® ®
  twelve-hour twelve-hour
  intent-to-treat
   33




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##### Table of Contents



A0001.
        Additional Product Candidates.
  PW4153


Parkinsons diseasePW4110


Epilepsy
      34




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##### Table of Contents




    the commercial success of Opana ER, and the timing and amount of
    royalties from Endos sales of Opana ER which may be
    affected by any potential generic entry;
    the level of our investment in research and development
    activities;
    the level of our investment for acquisitions, or in-licensing of
    technologies or compounds intended to support our growth;
    the successful development and commercialization of product
    candidates in our portfolio;
    the timing and amounts of payments to Edison in connection with
    the Edison agreement, as well as our internal costs of
    development for drug candidates for which we acquire rights
    under this agreement; and
    royalties from Mylans sales of Pfizers generic
    version of Procardia XL 30 mg.      Critical
    Accounting Policies and Estimates
   35




---



##### Table of Contents



Revenue
    Recognition
  Royalties and licensing fees 
  Milestone payments 
  Product sales 
  Research and development reimbursements
  Research
    and Development Expenses
      Deferred
    Taxes  Valuation Allowance
   36




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##### Table of Contents



Impairment
    of Long-Lived Assets
  and/or
  Share-Based
    Compensation
      
    the stock option exercise price;
    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.   37




---



##### Table of Contents



Form 10-K.
    Results
    of Operations for Years Ended December 31, 2007, 2006 and
    2005
  Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2007


2006


2006


2005


2005(In thousands, except percentages)Royalty and Licensing Fees

$
2,613



(16
)%

$
3,118



(50
)%

$
6,213Product Sales


519



36



381



n/a



Research and Development Reimbursement


176



n/a











Total Revenues

$
3,308



(5
)%

$
3,499



(44
)%

$
6,213      38




---



##### Table of Contents



Cost
    of Revenues
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2007


2006


2006


2005


2005(In thousands, except percentages)Cost of Product Sales

$
438



90
%

$
231



492
%

$
39Cost of Research and Development Reimbursements


167



n/a











Total Cost of Revenues

$
605



162
%

$
231



492
%

$
39       Selling,
    General and Administrative Expenses
  Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2007


2006


2006


2005


2005(In thousands, except percentages)Selling, General and Administrative Expenses

$
14,260



1
%

$
14,075



6
%

$
13,247        39




---



##### Table of Contents



Research
    and Product Development Expenses
        Percentage





PercentageIncrease





Increase(Decrease) from





(Decrease) from2007


2006


2006


2005


2005(In thousands, except percentages)Nalbuphine ER

$
6,618



57
%

$
4,211



256
%

$
1,184Torsemide ER


413



(81
)%


2,196



111
%


1,043Edison Program


3,797



n/a











PW2101














(100
)%


1,817Phase I and Internal Costs


12,733



(23
)%


16,450



20
%


13,753Total Research and Product Development Expense

$
23,561



3
%

$
22,857



28
%

$
17,797     
    Nalbuphine ER These expenses reflect our
    direct external expenses relating to the development of
    nalbuphine ER. These expenses approximated 28% of R&D
    expenses for 2007 and consisted primarily of payments to third
    parties in connection with clinical trials of nalbuphine ER,
    including payments for the drug active. The expenses for this
    program increased in 2007 from 2006, as we conducted a Phase I
    safety trial and a Phase IIa proof of concept efficacy and
    safety trial in 2007. During 2008, we expect our research and
    product development expenses relating to nalbuphine ER to
    decrease compared to 2007 as we do not plan to begin a Phase IIb
    trial until the second half of 2008 subject to the availability
    of capital resources to conduct this study. The costs, however,
    could be significantly impacted by the timing of when we start
    this trial; therefore, the timing of the trial will effect the
    level of our R&D expenses in 2008.
    Torsemide ER These expenses reflect our
    direct external expenses relating to the development of
    torsemide ER. These expenses consisted primarily of payments to
    third parties in connection with clinical trials of torsemide
    ER. During the third quarter of 2007, we completed a review of
    all our 40




---



##### Table of Contents



development programs, including torsemide ER. As a result of
    this review, we terminated our development efforts on this
    program. This decision was based upon our analysis of the
    expected level of effort required for this program compared to
    our internal resources and the programs lack of fit with
    our corporate strategy. We do not expect to incur any expenses
    for torsemide ER in future periods.  
    Edison Program These expenses reflect our
    funding of Edisons research activities under the Edison
    agreement as well as our direct external expense relating to the
    preclinical development work that we are conducting on A0001.
    The amounts included in 2007 include the initial upfront payment
    of $1.0 million and quarterly research and development
    payments that we began paying in the second half of 2007. We
    anticipate that these expenses will increase in 2008 as we
    continue to make quarterly research and development payments for
    the full year of 2008 and increase our activity with respect to
    the development of A0001, including a Phase I clinical trial we
    currently intend to commence in the second half of 2008.
    Phase I 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 payments to third parties for the drug active and
    proof-of-principle
    biostudies conducted on our Phase I product candidates.      Tax
    Rates
    Liquidity
    and Capital Resources
  Sources
    of Liquidity
    Private Placement.
 41




---



##### Table of Contents



Senior Secured Credit Facility.
     42




---



##### Table of Contents



Cash
    Flows
             43




---



##### Table of Contents



Funding
    Requirements
          
    the commercial success of Opana ER;
    the timing and amount of payments received under collaborative
    agreements, including in particular our agreement with Endo with
    respect to Opana ER and our agreement with Mylan with respect to
    Pfizers generic Procardia XL 30 mg;
    our ability to access the second $12 million term loan
    under the credit facility and the timing of the availability of
    this $12 million;
    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 acquire rights
    under the Edison agreement; 44




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##### Table of Contents




    the progress of other collaborative and independent development
    projects, funding obligations with respect to the projects, and
    the related costs to us of clinical studies for our product
    candidates;
    the level of investment for the acquisition or in-licensing of
    technologies or compounds intended to support our growth;
    the structure and terms of any future collaborative agreements;
    the prosecution, defense and enforcement of our patents and
    other intellectual property rights, such as the Opana ER patents
    and the IMPAX matter;
    the prosecution, defense and enforcement of our patents and
    other intellectual property rights, such as our Orange Book
    listed patents for Opana ER including our costs associated with
    the IMPAX litigation and any other litigation which we become
    involved;
    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
   45




---



##### Table of Contents



Contractual
    Obligations
    Less than








AfterTotal


One Year


1-3 Years


4-5 Years


5 YearsOperating leases

$
1,406


$
806


$
600


$



$
Purchase obligations


3,205



3,205











Deferred compensation, including current portion


2,878



294



587



587



1,410Payments due under credit facility


14,423



3,548



10,875







Edison agreement


4,667



4,542



125







Total

$
26,579


$
12,395


$
12,187


$
587


$
1,410     
    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
 46




---



##### Table of Contents



Net
    Operating Loss Carryforwards
    Market
    Risk and Risk Management Policies
        Recent
    Accounting Pronouncements
   47




---



##### Table of Contents



No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
    or Services to Be Used in Future Research and Development
    Activities, No. 07-3. No. 07-3, No. 07-3 EITF 07-3
  No. 07-1, Accounting for Collaborative Arrangements EITF 07-1. EITF 99-19
 48




---



##### Table of Contents



EITF 07-1
    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
 49




---



##### Table of Contents



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.     50




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                 
    51




---



##### 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   52




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##### Table of Contents



PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Form 10-K:
          Form 10-K
 53




---



##### Table of Contents



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

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

Date:  March 12, 2008/s/  Benjamin
    L. PalleikoBenjamin
    L. Palleiko

Senior Vice President, Corporate Development and Chief Financial
    Officer (principal financial officer)

Date:  March 12, 2008/s/  Frank
    P. MuscoloFrank
    P. Muscolo

Controller and Chief Accounting Officer (principal accounting
    officer)

Date: March 12, 2008/s/  Paul
    E. FreimanPaul
    E. Freiman

Chairman of the Board

Date: March 12, 2008/s/  Christophe
    BianchiChristophe
    Bianchi, M.D.

Director

Date: March 12, 2008/s/  Peter
    F. DrakePeter
    F. Drake, Ph.D.

Director

Date: March 12, 2008/s/  Robert
    J. HennesseyRobert
    J. Hennessey

Director

Date: March 12, 2008/s/  David
    P. MeekerDavid
    P. Meeker, M.D.

Director

Date: March 12, 2008/s/  William
    J. OSheaWilliam
    J. OShea

Director

Date: March 12, 2008John
    N. Staniforth, Ph.D.

Director

Date:/s/  Anne
    M. VanLentAnne
    M. VanLent

Director

Date: March 12, 2008  54




---



##### 



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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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm               
    F-2




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.



BALANCE
    SHEETS  December 31,2007


2006(In thousands, except share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
15,680


$
16,182Marketable securities


7,293



24,408Trade accounts receivable


781



683Inventories


667



201Prepaid expenses and other current assets


1,489



1,595Total current assets


25,910



43,069Fixed assets, net


3,582



3,787Patents, net


2,539



3,184Deferred charges


2,479



Other assets


2,472



2,702Total assets

$
36,982


$
52,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,239


$
1,324Accrued expenses


1,602



2,096Accrued development costs


1,483



1,105Loan payable  current portion


2,405



Deferred compensation  current portion


290



290Total current liabilities


8,019



4,815Loan payable


9,595



Accrued financing fee


360



Deferred revenue


183



43Deferred compensation


2,588



2,763Total liabilities


20,745



7,621Shareholders 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
    23,426,323 shares at December 31, 2007 and
    23,132,815 shares at December 31, 2006


23



23Additional paid in capital


222,927



217,427Accumulated deficit


(206,893
)


(172,428
)Accumulated other comprehensive income


180



99Total shareholders equity


16,237



45,121Total liabilities and shareholders equity

$
36,982


$
52,742    F-3




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.



STATEMENTS
    OF OPERATIONS  Year Ended December 31,2007


2006


2005(In thousands, except per share data)Revenues:Royalties and licensing fees

$
2,613


$
3,118


$
6,213Product sales


519



381



Research and development reimbursements


176







Total revenues


3,308



3,499



6,213Cost of revenues:Cost of product sales


438



231



39Cost of research and development reimbursements


167







Total cost of revenues


605



231



39Gross profit


2,703



3,268



6,174Operating expenses:Selling, general and administrative


14,260



14,075



13,247Research and product development


23,561



22,857



17,797Total operating expenses


37,821



36,932



31,044Loss from operations


(35,118
)


(33,664
)


(24,870
)Investment income


1,770



2,352



1,974Interest expense


(1,117
)






Loss before income tax expense


(34,465
)


(31,312
)


(22,896
)Income tax expense










2Net loss

$
(34,465
)

$
(31,312
)

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

$
(1.48
)

$
(1.38
)

$
(1.05
)Weighted average shares of common stock outstanding


23,216



22,751



21,711    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, 2004


21,693


$
22


$
197,097


$
(118,218
)

$
(100
)

$
78,801Net loss














(22,898
)






(22,898
)Changes in unrealized loss on marketable securities


















(54
)


(54
)Comprehensive loss






















(22,952
)Proceeds from stock option and Employee Stock Purchase Plan
    exercises


151







1,479











1,479Stock compensation charges in connection with stock incentive
    plans


46







685











685Stock compensation charge in connection with modification of
    stock options










2,398











2,398Balances, December 31, 2005


21,890



22



201,659



(141,116
)


(154
)


60,411Net loss














(31,312
)






(31,312
)Changes 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
)Changes in unrealized gain/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


$
16,237    F-5




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##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.



STATEMENTS
    OF CASH FLOWS  Year Ended December 31,2007


2006


2005(In thousands)Operating activities:Net loss

$
(34,465
)

$
(31,312
)

$
(22,898
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation


1,107



1,001



987Amortization of patents


379



565



464Inventory reserves


18







497Patent impairment losses


584



254



137Deferred revenue


140



(14
)


(14
)Deferred compensation


182



190



194Deferred royalty termination costs


(1,541
)






Stock compensation


3,792



4,978



3,083Changes in operating assets and liabilities:Trade accounts receivable


(98
)


259



184Inventories


(483
)


(61
)


5Accounts payable, accrued expenses and other


752



497



(2,700
)Net cash used in operating activities


(29,633
)


(23,643
)


(20,061
)Investing activities:Acquisitions of fixed assets, net


(918
)


(1,818
)


(276
)Patent costs


(319
)


(619
)


(479
)Purchases of marketable securities


(24,605
)


(27,739
)


(51,499
)Proceeds from maturities of marketable securities


41,950



41,248



47,054Proceeds from sales of marketable securities






1,600



25,450Proceeds from cash surrender value of life insurance policy
    withdrawal






446



Net cash provided by investing activities


16,108



13,118



20,250Financing activities:Issuance of common stock


1,135



10,790



1,479Proceeds from loan payable


12,000







Debt issuance costs


(112
)






Net cash provided by financing activities


13,023



10,790



1,479Net (decrease)/increase in cash and cash equivalents


(502
)


265



1,668Cash and cash equivalents at beginning of year


16,182



15,917



14,249Cash and cash equivalents at end of year

$
15,680


$
16,182


$
15,917    F-6




---



##### 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
    Marketable
    Securities
   F-7




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Credit
    Risk and Fair Value of Financial Instruments
        Inventories
  (first-in,
  Long-Lived
    Assets
    Machinery and equipment


5-10 yearsOffice furniture, equipment and software


3-10 yearsLeasehold improvements


1-3 years    F-8




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Foreign
    Currencies
    Accumulated
    Other Comprehensive Income (Loss)
    Income
    Taxes
           F-9




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Revenue
    Recognition
  Royalties and licensing fees
  Milestone payments
  Product sales 
  Research and development reimbursements
  Research
    and Development Expenses
   F-10




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Per
    Share Data
    December 31,2007


2006


2005(In thousands of shares)Stock options outstanding


2,411



2,267



3,016Restricted stock outstanding (unvested)


142



52



682,553



2,319



3,084   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 (the
    Company does not anticipate paying dividends for the foreseeable
    future); and
    the risk-free interest rate for the expected option term.   F-11




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        3.
    RECENT
    ACCOUNTING PRONOUNCEMENTS      No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
    or Services to Be Used in Future Research and Development
    Activities No. 07-3). No. 07-3, No. 07-3 No. 07-3 No. 07-3
 F-12




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  No. 07-1, Accounting for Collaborative Arrangements No. 07-1). No. 99-19 No. 07-1 No. No. 07-3
    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


$



$
7,293December 31, 2006:Corporate debt securities

$
21,381


$
3


$
10


$
21,374U.S. government agency-backed discounted notes


3,038







4



3,034Total marketable securities

$
24,419


$
3


$
14


$
24,408     Contractual maturity  maturing in one year or less

$
7,293      F-13




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  5.
    INVENTORIES    December 31,2007


2006(In thousands)Raw materials

$
37


$
64Finished products


630



137Total inventories

$
667


$
201         6.
    FIXED
    ASSETS    December 31,2007


2006(In thousands)Equipment and leasehold improvements

$
6,777


$
6,382Software


2,442



1,998Projects in progress


25



3089,244



8,688Less: accumulated depreciation and amortization


5,662



4,901$
3,582


$
3,787    F-14




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    7.
    PATENTS  December 31,2007


2006(In thousands)Patents, net of accumulated amortization of $1,947 and $2,101,
    respectively:

$
2,539


$
3,184       Year

Amount2008

$
2952009


2932010


2782011


2352012


171Thereafter


1,267Total

$
2,539     8.
    LOAN
    PAYABLE  Credit
    Facility
   F-15




---



##### Table of Contents



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

$
2,405One to two years


5,483Two to three years


4,112$
12,000     9.
    SHAREHOLDERS
    EQUITY  Form S-3
 F-16




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Share-Based
    Compensation
    2007


2006Selling, general and administrative

$
3,194


$
3,071Research and product development


598



1,907Total

$
3,792


$
4,978       2005(In thousands,except per share data)Net loss  as reported

$
(22,898
)Stock-based compensation expense included in reported net loss


2,939Stock-based compensation under fair value method


(3,652
)Net loss  pro forma after stock-based compensation
    under fair value method

$
(23,611
)Net loss per share, basic and diluted  as reported

$
(1.05
)Net loss per share, basic and diluted  pro forma
    after stock-based compensation under fair value method

$
(1.09
)   Penwest
    Stock Incentive Plans
   F-17




---



##### 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, 2006


2,266,660


$
14.23Granted


497,250


$
12.88Exercised


(95,024
)

$
10.60Forfeited


(249,676
)

$
15.41Expired


(8,250
)

$
15.54Balance at December 31, 2007


2,410,960


$
13.97



5.8


$
2,421Options Exercisable


1,487,305


$
13.00



4.1


$
2,421       2007


2006


2005Expected dividend yield


None



None



NoneRisk free interest rate


4.7
%


4.7
%


4.1
%Expected volatility


56
%


58
%


48
%Expected life of options


5.5 years



5.6 years



7.5 years     Weighted-Average


AggregateGrant-Date


IntrinsicShares


Fair Value


ValueRestricted stock outstanding at December 31, 2006


51,500


$
15.24


$
853,355Granted


144,000


$
13.66Vested


(41,500
)

$
15.77Cancelled


(12,000
)

$
14.86Restricted stock outstanding at December 31, 2007


142,000


$
14.77


$
827,860  F-18




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Employee
    Stock Purchase Plan
    Rights
    Agreement
       F-19




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  10.
    COMMITMENTS  Leases
          OperatingLeases(In thousands)2008

$
8062009


600Thereafter


Total minimum lease payments

$
1,406   Other
    Contracts
   F-20




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  11.
    INCOME
    TAXES      2007


2006


2005Statutory tax rate


(34
)%


(34
)%


(34
)%Valuation allowance


34



34



34
%



%



%     2007


2006(In thousands)Deferred compensation and SERP liability

$
(1,190
)

$
(1,266
)Deferred revenue


(71
)


(17
)Stock-based compensation


(2,782
)


(1,830
)Tax credit carryforwards


(6,427
)


(5,363
)Net operating loss carryforwards


(63,391
)


(56,156
)Other


(359
)


(13
)Total deferred tax assets


(74,220
)


(64,645
)Depreciation and amortization


1,373



1,608Other


257



337Total deferred tax liabilities


1,630



1,945Net deferred tax asset before valuation allowance


(72,590
)


(62,700
)Valuation allowance


72,590



62,700Net deferred tax liability

$



$
        F-21




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      12.
    COMPENSATION
    CHARGE    13.
    ROYALTY
    TERMINATION AGREEMENT       F-22




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  14.
    RETIREMENT
    PLANS AND OTHER EMPLOYEE BENEFITS  Savings
    Plan
      Supplemental
    Executive Retirement Plan
       F-23




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      December 31, 2006Prior to Adopting


Effect of Adopting


As Reported atSFAS No. 158


SFAS No. 158


December 31, 2006Intangible asset (retirement plan)

$



$



$
Liability for plan benefits

$
2,297


$
(110
)

$
2,187Accumulated other comprehensive income

$



$
110


$
110       2007


2006(In thousands)Benefit obligation at beginning of period

$
2,187


$
2,168Interest cost


118



120Actuarial (gain) loss


(62
)


50Benefits paid


(151
)


(151
)Benefit obligation at December 31,

$
2,092


$
2,187     2007


2006(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

$



$
     2007


2006(In thousands)Current liabilities

$
(147
)

$
(147
)Noncurrent liabilities


(1,945
)


(2,040
)Net amount recognized at December 31, (included in deferred
    compensation)

$
(2,092
)

$
( 2,187
)     2007


2006(In thousands)Net gain

$
(184
)

$
(122
)Prior service cost


11



12Total

$
(173
)

$
(110
)  F-24




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2007


2006(In thousands)Projected benefit obligation

$
2,092


$
2,187Accumulated benefit obligation

$
2,092


$
2,187Plan assets at fair value

$



$
     2007


2006(In thousands)Interest cost

$
118


$
120Amortization of prior service cost


2



2Amortization of gains






Net periodic benefit cost

$
120


$
122       2007


2006(In thousands)Net gain

$
(62
)


N/AAmortization of prior service cost


(1
)


N/ATotal recognized in other comprehensive income

$
(63
)


N/A     2007


2006Discount rate


5.90
%


5.60
%Rate of compensation increase


N/A



N/A     2007


2006Discount rate


5.60
%


5.75
%Rate of compensation increase


N/A



N/A  F-25




---



##### Table of Contents



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

$
1512009


1512010


1512011


1512012


151Years
    2013-2017


752   Deferred
    Compensation Plan
    2008

$
1432009


1432010


1432011


1432012


143Years
    2013-2014


286    F-26




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Health
    Care and Life Insurance Benefits
    15.
    COLLABORATION
    AND LICENSING AGREEMENTS  and/or
  Endo
    Pharmaceuticals Inc.
  ® ® ® ® ®
        
    Endo will 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 will be 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). If the Company was not
    subject to the $41 million Royalty Holiday, the Company
    believes that it would have received royalties from Endo of
    approximately $18.6 million for the year ended
    December 31, 2007. Cumulatively, through December 31,
    2007, the Company believes that approximately $19.7 million
    has been applied against the Royalty Holiday. We expect that
    Endo will initiate the payment of royalties to the Company on
    U.S. sales of Opana ER commencing in the second half of
    2008. F-27




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   
    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.
    The Companys share of the development costs for Opana ER
    that it opted out of funding in April 2003 will be fixed at
    $28 million and will be recouped by Endo through a
    temporary 50% reduction in royalties. This temporary reduction
    in royalties will not apply until the threshold for the
    $41 million Royalty Holiday has been met.    Edison
    Pharmaceuticals, Inc.
    agreed-upon
       F-28




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    country-by-country, product-by-product
  Mylan
    Pharmaceuticals Inc.
    Otsuka
    Pharmaceutical Co., Ltd.
   F-29




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Prism
    Pharmaceuticals, Inc.
  and/or
    16.
    CONTINGENCIES  and/or
   F-30




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      17.
    SUBSEQUENT
    EVENTS  Actavis Paragraph IV Certification
    Notice.
  Private Placement.
     F-31




---



##### Table of Contents



PENWEST
    PHARMACEUTICALS CO.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  18.
    QUARTERLY
    FINANCIAL DATA (UNAUDITED)    Quarter EndedDec. 31,Mar. 31,


June 30,


Sept. 30,


20072007


2007


2007


(a)(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Total revenues

$
842


$
712


$
882


$
872Gross profit


732



568



739



664Net loss

$
(6,954
)

$
(8,958
)

$
(9,251
)

$
(9,302
)Net loss per share

$
(0.30
)

$
(0.39
)

$
(0.40
)

$
(0.40
)   Quarter EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2006


2006


2006


2006(Unaudited)


(Unaudited)


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

$
965


$
1,075


$
720


$
739Gross profit


943



1,042



671



612Net loss

$
(6,303
)

$
(7,416
)

$
(8,741
)

$
(8,852
)Net loss per share

$
(0.28
)

$
(0.33
)

$
(0.38
)

$
(0.38
)     (a)
    
    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-32




---



##### Table of Contents



SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
    PENWEST PHARMACEUTICALS CO.
    DECEMBER 31, 2007 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, 2007Inventory Allowances

$



$
18


$



$



$
18Year ended December 31, 2006Inventory Allowances

$
208


$



$



$
208
(a)

$
Year ended December 31, 2005Inventory Allowances

$
85


$
497


$



$
374
(a)

$
208     (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

Number2
.1

Purchase Agreement by and between the Registrant and Josef
    Rettenmaier Holding GmBh & Co. KG, dated
    November 1, 2002.



Schedule 14A

1/31/2003

000-234672
.2

Amendment to Purchase Agreement made as of February 26,
    2003, by and among the Registrant., Josef Rettenmaier Holding
    GmbH & Co. KG, and the other parties named therein.



8-K

2/28/2003

000-234673
.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

333-383894
.2

Form of Rights Agreement dated as of July 27, 1998 between
    the Registrant and the Rights Agent.



10/A

7/17/1998

000-2346710
.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

Form of Tax Allocation Agreement entered into between the
    Registrant and Penford Corporation.



10

6/22/1998

000-2346710
.10

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
.11

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



8-K

2/5/2007

000-23467 S-2




---



##### Table of Contents



Filed withExhibit



this Form

Form or

Filing Date

SEC FileNumber

Description

10-K

Schedule

with SEC

Number10
.12

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



10-Q

5/15/2002

000-2346710
.13

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



8-K

2/5/2007

000-2346710
.14

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



10-Q

5/15/2002

000-2346710
.15

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



10-Q

5/15/2003

000-2346710
.16

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
.17

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
.18

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
.19

Form of Option Agreement for 1997 Incentive Plan



10-K

3/16/05

000-2346710
.20

Nonstatutory Stock Option Agreement dated June 21, 2004 by
    and between the Registrant and Alan F. Joslyn, Ph.D.



S-8

7/26/2005

333-12689710
.21

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
.22

2005 Stock Incentive Plan



8-K

6/7/2005

000-2346710
.23

Amendment No. 1 to 2005 Stock Incentive Plan



10-Q

11/9/06

000-2346710
.24

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



8-K

6/7/2005

000-2346710
.25

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



8-K

6/7/2005

000-2346710
.26

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



8-K

6/7/2005

000-2346710
.27

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



8-K

6/7/2005

000-2346710
.28

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



10-K

3/16/2006

000-2346710
.29

Summary of Executive Officer Bonus Program



10-K

3/16/2007

000-2346710
.30

Summary of the Director Compensation Program



10K

3/16/2007

000-2346710
.31

Offer Letter between the Registrant and Benjamin L. Palleiko,
    effective June 19, 2006



10-Q

8/9/2006

000-2346710
.32

Severance and Settlement Agreement and Release dated
    February 9, 2007 by and between the Registrant and Alan
    Joslyn



10-Q

5/10/2007

000-23467 S-3




---



##### Table of Contents



Filed withExhibit



this Form

Form or

Filing Date

SEC FileNumber

Description

10-K

Schedule

with SEC

Number10
.33

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



10-K

3/16/2007

000-2346710
.34

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
.35

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
.36

Amendment to Rights Agreement dated as of March 5, 2008
    between the Registrant and Mellon Investor Services LLC



8-K

3/6/2008

000-2346710
.37

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



8-K

3/6/2008

000-2346710
.38

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

000-2346723


Consent of Ernst & Young LLP

X31
.1

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

X31
.2

Certification of 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
.1

Certification of Principal Executive 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.

X32
.2

Certification of 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-4