<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended June 30, 2001

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from _______________ to _________________


                          Commission File No. 000-23467

                           PENWEST PHARMACEUTICALS CO.
             (Exact name of registrant as specified in its charter)

               Washington                                91-1513032
----------------------------------------    ------------------------------------
        (State of Incorporation)            (I.R.S. Employer Identification No.)

      2981 Route 22, Patterson, NY                       12563-9970
----------------------------------------    ------------------------------------
(Address of principal executive offices)                 (Zip Code)


                                 (845) 878-3414
              -----------------------------------------------------
              (Registrant's telephone number, including area code.)


     Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                    Yes  X               No
                        ----                -----

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 10, 2001.

                  Class                                     Outstanding
     -----------------------------------                  ---------------
      Common stock, par value $.001                         15,218,655
<PAGE>   2

                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I.       Financial Information

     Item 1.  Financial Statements (Unaudited)

              Condensed Consolidated Balance Sheets........................   1

              Condensed Consolidated Statements of Operations..............   2

              Condensed Consolidated Statements of Cash Flows..............   3

              Notes to Condensed Consolidated Financial Statements.........   4

     Item 2.  Management's Discussion and Analysis of Financial Condition
                and Results of Operations..................................   6

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk...  10

Part II.      Other Information

     Item 1.  Legal Proceedings............................................  11

     Item 4.  Submission of Matters to a Vote of Security Holders..........  11

     Item 6.  Exhibits and Reports on Form 8-K.............................  11

Signature..................................................................  12

Exhibit Index..............................................................  13


                                       i
<PAGE>   3

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                           PENWEST PHARMACEUTICALS CO.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                        JUNE 30,      DECEMBER 31,
                                                                          2001            2000
                                                                       -----------    ------------
                                                                       (UNAUDITED)      (NOTE 2)

<S>                                                                     <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents ......................................      $  1,146       $  2,204
  Trade accounts receivable, net of allowance for
     doubtful accounts of  $219 and $235 .........................         5,932          8,154
  Inventories:
     Raw materials and other .....................................         1,457          2,611
     Finished goods ..............................................         6,795          5,585
                                                                        --------       --------
                                                                           8,252          8,196
  Prepaid expenses and other current assets ......................           597            745
                                                                        --------       --------
     Total current assets ........................................        15,927         19,299
Fixed assets, net ................................................        16,253         17,473
Intangible assets, net ...........................................         3,189          2,899
Other assets .....................................................         2,662          2,623
                                                                        --------       --------
     Total assets ................................................      $ 38,031       $ 42,294
                                                                        ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable ...............................................      $  2,358       $  3,199
  Accrued expenses ...............................................         1,972          1,790
  Accrued development costs ......................................         1,775          2,911
  Taxes payable ..................................................           353            270
  Loan payable ...................................................         2,713             --
                                                                        --------       --------
       Total current liabilities .................................         9,171          8,170

Deferred income taxes ............................................           188            205
Deferred revenue .................................................           388            378
Deferred compensation ............................................         2,617          2,524
                                                                        --------       --------
       Total liabilities .........................................        12,364         11,277
Shareholders' equity:
  Preferred stock, par value $.001, authorized
     1,000,000 shares, none outstanding ..........................            --             --
  Common stock, par value $.001, authorized
     39,000,000 shares, issued and outstanding
     12,724,528 shares in 2001 and 12,669,780
      shares in 2000 .............................................            13             13
  Additional paid in capital .....................................        77,632         77,276
  Accumulated deficit ............................................       (50,234)       (44,945)
  Accumulated other comprehensive loss ...........................        (1,744)        (1,327)
                                                                        --------       --------
       Total shareholders' equity ................................        25,667         31,017
                                                                        --------       --------
       Total liabilities and shareholders' equity ................      $ 38,031       $ 42,294
                                                                        ========       ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       1
<PAGE>   4

                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      THREE MONTHS
                                                                                      ENDED JUNE 30,
                                                                                 -----------------------
                                                                                   2001           2000
                                                                                 --------       --------
                                                                                      (UNAUDITED)
<S>                                                                              <C>            <C>
Revenues
  Product sales ...........................................................      $  8,378       $  7,754
  Royalties and licensing fees ............................................         1,137          1,149
                                                                                 --------       --------
    Total revenues ........................................................         9,515          8,903
Cost of product sales .....................................................         5,817          5,284
                                                                                 --------       --------
    Gross profit ..........................................................         3,698          3,619
Operating expenses
  Selling, general and administrative .....................................         3,742          2,921
  Research and product development ........................................         2,960          2,811
                                                                                 --------       --------
    Total operating expenses ..............................................         6,702          5,732
                                                                                 --------       --------
Loss from operations ......................................................        (3,004)        (2,113)
Investment income .........................................................            20             68
Interest expense ..........................................................            78             15
                                                                                 --------       --------
Loss before income taxes ..................................................        (3,062)        (2,060)
Income tax expense ........................................................           104             48
                                                                                 --------       --------
Net loss ..................................................................      $ (3,166)      $ (2,108)
                                                                                 ========       ========

Basic and diluted net loss per share ......................................      $  (0.25)      $  (0.17)
                                                                                 ========       ========

Weighted average shares of common stock outstanding .......................        12,700         12,475
                                                                                 ========       ========


                                                                                       SIX MONTHS
                                                                                      ENDED JUNE 30,
                                                                                 -----------------------
                                                                                   2001           2000
                                                                                 --------       --------
                                                                                      (UNAUDITED)
Revenues
  Product sales ...........................................................      $ 17,614       $ 18,235
  Royalties and licensing fees ............................................         2,840          2,043
                                                                                 --------       --------
     Total revenues .......................................................        20,454         20,278
Cost of product sales .....................................................        12,380         12,101
                                                                                 --------       --------
       Gross profit .......................................................         8,074          8,177
Operating expenses
  Selling, general and administrative .....................................         6,737          5,946
  Research and product development ........................................         6,283          5,431
                                                                                 --------       --------
     Total operating expenses .............................................        13,020         11,377
                                                                                 --------       --------
Loss from operations ......................................................        (4,946)        (3,200)
Investment income .........................................................            60             68
Interest expense ..........................................................           152            141
                                                                                 --------       --------
Loss before income taxes and cumulative effect of change in accounting
 principle ................................................................        (5,038)        (3,273)
Income tax expense ........................................................           251            144
                                                                                 --------       --------
Loss before cumulative effect of change in  accounting principle ..........        (5,289)        (3,417)
Cumulative effect of change in accounting principle (Note 4) ..............            --           (410)
                                                                                 --------       --------
Net loss ..................................................................      $ (5,289)      $ (3,827)
                                                                                 ========       ========

Basic and diluted amounts per share:
  Loss before cumulative effect of change in accounting principle .........      $  (0.42)      $  (0.28)
  Cumulative effect of change in accounting principal (Note 4) ............            --          (0.04)
                                                                                 --------       --------
Net loss ..................................................................      $  (0.42)      $  (0.32)
                                                                                 ========       ========
Weighted average shares of common stock outstanding .......................        12,689         12,015
                                                                                 ========       ========
Pro forma amounts assuming the accounting change  is applied retroactively:
Net loss ..................................................................      $ (5,289)      $ (3,417)
                                                                                 ========       ========
Basic and diluted net loss per share ......................................      $  (0.42)      $  (0.28)
                                                                                 ========       ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       2
<PAGE>   5

                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                               SIX MONTHS
                                                             ENDED JUNE 30,
                                                         --------------------
                                                          2001         2000
                                                         -------      -------
                                                              (UNAUDITED)

Net cash used in operating activities ..............     $(3,405)     $(4,195)

Investing activities:
  Acquisitions of fixed assets, net ................        (252)        (785)
  Other ............................................        (411)        (103)
                                                         -------      -------
Net cash used in investing activities ..............        (663)        (888)

Financing activities:
  Borrowings from credit facility ..................      17,558        2,800
  Repayments of credit facility ....................     (14,845)      (9,500)
  Issuance of common stock, net ....................         357       17,327
                                                         -------      -------
Net cash provided by financing activities ..........       3,070       10,627

Effect of exchange rate changes on cash and cash
 equivalents .......................................         (60)         (31)
                                                         -------      -------
Net (decrease) increase in cash and cash equivalents      (1,058)       5,513
Cash and cash equivalents at beginning of period ...       2,204          739
                                                         -------      -------
Cash and cash equivalents at end of period .........     $ 1,146      $ 6,252
                                                         =======      =======


     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   6

                           PENWEST PHARMACEUTICALS CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BUSINESS

     Penwest Pharmaceuticals Co. (the "Company" or "Penwest") is engaged in the
research, development, and commercialization of novel oral drug delivery
products and technologies and has extensive expertise in developing,
manufacturing, and selling excipient ingredients for the pharmaceutical
industry. Based on this fundamental expertise in tableting ingredients, the
Company has developed TIMERx(R) ("TIMERx"), a proprietary oral drug delivery
technology which provides a variety of release rates, and PROSOLV SMCC(R)
("PROSOLV"), a co-processing drug delivery technology which improves the
performance characteristics of tablets. The Company has manufacturing facilities
in Iowa and Finland and has customers primarily throughout North America and
Europe.

     The Company is subject to the risks and uncertainties associated with a
drug delivery company actively engaged in research and development. These risks
and uncertainties include, but are not limited to, a history of net losses, a
requirement for additional funding, technological changes, dependence on
collaborators and key personnel, the successful completion of development
efforts and of obtaining regulatory approval, the successful commercialization
of TIMERx controlled release products, compliance with government regulations,
patent infringement litigation and competition from current and potential
competitors, some with greater resources than the Company.

2. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation for
the interim periods presented have been included. All such adjustments are of a
normal recurring nature. Operating results for the six-month period ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 25, 2001.

     The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.

     Certain prior year amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on previously
reported results of operations.

3. SUBSEQUENT EVENT

     On July 11, 2001, the Company completed a private placement of 2,447,187
shares of common stock to selected institutional investors, resulting in
proceeds of approximately $30 million, less expenses. The Company intends to use
the net proceeds of this offering primarily for the development of drug delivery
programs as well as to fund the research and development of new oral drug
delivery technologies.

4. ACCOUNTING CHANGE

     In the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101")
effective January 1, 2000. The cumulative effect of the change in accounting
principle was reported as a change in the quarter ended March 31, 2000. The
cumulative effect was initially recorded as deferred revenue that will be
recognized as revenue over the remaining related collaborative or licensing and
supply agreements, as appropriate. For the quarter ended March 31, 2000, the
cumulative effect of the change on prior periods was to increase the net loss by
$410,000 or $0.04 per share. The effect of the change on loss before cumulative
effect of the change for the three and six month periods ended June 30, 2000 was
to decrease


                                       4
<PAGE>   7

the net loss by $47,000 and $29,000, respectively. The pro forma amounts
presented on the statements of operations were calculated assuming the
accounting change was made retroactively to prior periods. During the quarters
ended June 30, 2001 and 2000, the Company recognized $15,000 and $40,000,
respectively, of revenue/income that is included in its cumulative effect
adjustment as of January 1, 2000. During the six month periods ended June 30,
2001 and 2000, the Company recognized $30,000 and $119,000, respectively, of
revenue/income that is included in its cumulative effect adjustment as of
January 1, 2000.

5. ACCOUNTING DEVELOPMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141") which supersedes Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and modifies
the application of the purchase accounting method. SFAS No. 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported separately from goodwill. The
elimination of the pooling-of-interests method is effective for transactions
initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be
effective for transactions accounted for using the purchase method that are
completed after June 30, 2001. Management does not anticipate the adoption of
this statement will have a significant effect on the Company's results of
operations, cash flows, or financial position.

     In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142") which supercedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 eliminates the current requirement to amortize goodwill
and indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS No. 142 will apply to goodwill and
intangible assets arising from transactions completed before and after the
effective date. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002.
Management does not anticipate the adoption of this statement will have a
significant effect on the Company's results of operations, cash flows, or
financial position.

     Other pronouncements issued by the FASB or other authoritative accounting
standards groups with future effective dates are either not applicable or not
significant to the financial statements of the Company.

6. CREDIT FACILITY

     On January 17, 2001, the Company completed arrangements for a revolving
line of credit ("Revolver") with a financial institution. Under the terms of the
Revolver, the Company may borrow up to $10.0 million ("Line of Credit") as
determined by a formula based on the Company's Eligible Accounts Receivable and
Eligible Saleable Inventory, as defined in the agreement. Under the formula,
generally 85% of the Company's U.S. and Canadian receivables, as well as
generally 60% of the Company's U.S. saleable inventories, are included in the
borrowing base. Amounts outstanding under the Revolver are collateralized by the
Company's U.S. and Canadian accounts receivable, and its inventory and general
intangibles. The Revolver has an initial term of three years, and provides for
annual renewals thereafter.

     The Revolver bears interest at a specified bank's prime rate plus 1% per
annum, on the greater of $3.0 million or on the average outstanding balance. The
Revolver also requires fees be paid of 0.5% per annum on unused portions of the
Line of Credit. It also provides for early termination fees of up to 0.75%, in
the event the Company terminates the Revolver prior to the end of the initial
term.

     The Revolver contains covenants, including the requirement that the Company
maintain at all times, certain minimum levels of tangible net worth as defined,
at varying specified amounts during the initial term of the agreement, and
restrictions on the incurrence of additional indebtedness.

     The interest rate on the Revolver at June 30, 2001 was 7.75%. As of August
9, 2001, there was approximately $3.0 million outstanding under the terms of the
Revolver.

7. INCOME TAXES

     The effective tax rates for the quarters ended June 30, 2001 and 2000, were
expenses of 3% and 2%, respectively. The effective tax rates for the six months
ended June 30, 2001 and 2000, were expenses of 5% and 4%, respectively. The
effective tax rates are


                                       5
<PAGE>   8

higher than the federal statutory rate of a 34% benefit, due primarily to
valuation allowances recorded to offset deferred tax assets relating to the
Company's net operating losses, and state and foreign income taxes.

8. COMPREHENSIVE LOSS

     The components of comprehensive loss for the three-month and six-month
periods ended June 30, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                THREE MONTHS             SIX MONTHS
                                               ENDED JUNE 30,          ENDED JUNE 30,
                                             2001        2000        2001        2000
                                           -------     -------     -------     -------
                                              (IN THOUSANDS)          (IN THOUSANDS)

<S>                                        <C>         <C>         <C>         <C>
Net loss                                   $(3,166)    $(2,108)    $(5,289)    $(3,827)
Foreign currency translation adjustments      (111)        (28)       (417)       (215)
                                           -------     -------     -------     -------

Comprehensive loss                         $(3,277)    $(2,136)    $(5,706)    $(4,042)
                                           =======     =======     =======     =======
</TABLE>

     Accumulated other comprehensive loss equals the cumulative translation
adjustment which is the only component of other comprehensive loss included in
the Company's financial statements.

9. CONTINGENCIES

     In 1994, the Boots Company PLC ("Boots") filed in the European Patent
Office, or the EPO, an opposition to a patent granted by the EPO to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots appealed
this decision to the EPO Board of Appeals, which conducted oral proceedings on
the appeal in June 2001. At the oral proceedings, the EPO Board of Appeals
upheld the validity of all the claims included in the patent other than three
claims which the Company cancelled during the oral proceedings. The Company
believes that the cancelled claims were duplicative in scope to the claims that
were upheld and that the cancellation of those claims did not result in any
change in the scope of the claims of the patent. The decision of the EPO Board
of Appeals is final and cannot be further appealed by Boots in the EPO.

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

     Penwest Pharmaceuticals Co. is engaged in the research, development and
commercialization of novel oral drug delivery technologies. The Company has
extensive experience in developing and manufacturing tableting ingredients for
the pharmaceutical industry. The Company's product portfolio ranges from
excipients that are sold in bulk, to more technically advanced and patented drug
delivery technologies based on excipients that are licensed to customers.

     The Company has incurred net losses since 1994. As of June 30, 2001, the
Company's accumulated deficit was approximately $50.2 million. A substantial
portion of the Company's revenues to date have been generated from the sales of
the Company's pharmaceutical excipients. The Company's future profitability will
depend on several factors, including the successful commercialization of TIMERx
controlled release products, sales growth of the Company's other pharmaceutical
excipients products, as well as the level of investment in research and
development activities, which the Company expects will continue to increase as
additional drugs advance into clinical development. There can be no assurance
that the Company will achieve profitability or that it will be able to sustain
any profitability on a quarterly basis, if at all.


                                       6
<PAGE>   9

     On March 2, 2000, Mylan Pharmaceuticals Inc. ("Mylan") announced that it
had signed a supply and distribution agreement with Pfizer, Inc. ("Pfizer") to
market a generic version of all three strengths (30 mg, 60 mg, 90 mg) of
Pfizer's Procardia XL. As a result of the agreement, Pfizer agreed to dismiss
all pending litigation against Mylan. In connection with that agreement, Mylan
agreed to pay Penwest a royalty on all future net sales of Pfizer's 30 mg
generic version of Procardia XL, which Mylan launched at the end of March 2000.
The royalty percentage is comparable to the percentage that Mylan is required to
pay to Penwest in connection with net sales of Nifedipine XL, a generic version
of Procardia XL based on the Company's TIMERx technology, and Penwest's original
agreement with Mylan. Mylan has retained the marketing rights to the 30 mg
strength of Nifedipine XL.

     The Company's collaborative agreements include licensing arrangements in
which the Company is entitled to receive milestone payments, royalties on the
sale of the products covered by such collaborative agreements and payments for
the purchase of formulated TIMERx material, as well as licensing arrangements
which include revenue and cost sharing components in which the Company shares in
the costs and profitability in predetermined percentages, but does not generally
receive milestone payments. There can be no assurance that the Company's
controlled release product development efforts will be successfully completed,
that required regulatory approvals will be obtained or that approved products
will be successfully manufactured or marketed.

     The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations. The Company does not use derivatives to
hedge the impact of fluctuations in foreign currencies.

     The Company's results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Company's pharmaceutical
excipients, Mylan's sales of the 30 mg strength of generic Procardia XL, and on
variations in payments under the Company's collaborative agreements, primarily
payment obligations of the Company in connection with its strategic alliance
agreements. The Company's quarterly operating results may also fluctuate
depending on other factors, including variations in gross margins of the
Company's products, mix of products sold, competition, regulatory actions,
litigation and currency exchange rate fluctuations.

RESULTS OF OPERATIONS

     Quarters Ended June 30, 2001 and 2000

     Total revenues increased by 6.9% for the quarter ended June 30, 2001 to
$9.5 million from $8.9 million for the quarter ended June 30, 2000. Product
sales increased to $8.4 million for the quarter ended June 30, 2001 from $7.8
million for the quarter ended June 30, 2000, representing an increase of 8.0%.
The increase in product sales was due to increased excipient sales for the
second quarter of 2001, as compared with the second quarter of 2000, when the
Company experienced softness in its excipients business. Royalties and licensing
revenues were comparable, approximating $1.1 million in each of the second
quarters of 2001 and 2000.

     Gross profit increased to $3.7 million, or 38.9% of total revenues, for the
quarter ended June 30, 2001 from $3.6 million, or 40.6% of total revenues, for
the quarter ended June 30, 2000. Gross profit percentage on product sales
decreased to 30.6% for the quarter ended June 30, 2001 from 31.9% for the
quarter ended June 30, 2000. This decrease was primarily due to competitive
pressures on selling prices of the Company's excipients in the quarter ended
June 30, 2001.

     Selling, general and administrative expenses increased by 28.1% for the
quarter ended June 30, 2001 to $3.7 million from $2.9 million for the quarter
ended June 30, 2000. This increase is primarily due to increased professional
fees, including those associated with the Company's evaluation and pursuit of
financing alternatives, and increased information technology costs associated
with the Company strengthening its technology infrastructure to prepare for
anticipated increasing drug development activities.

     Research and product development expenses increased by 5.3% for the quarter
ended June 30, 2001 to $3.0 million from $2.8 million for the quarter ended June
30, 2000. This increase was primarily due to the Company's share of increased
expenses associated with completed clinical trials and other studies being
conducted for the development of extended release oxymorphone under the
Company's collaboration with Endo Pharmaceuticals Inc. ("Endo"), as well as
increased activity in the Company's drug development pipeline.


                                       7
<PAGE>   10

     The effective tax rates for the quarters ended June 30, 2001 and 2000 were
expenses of 3% and 2%, respectively. The effective tax rates are higher than the
federal statutory rate of a 34% benefit, due primarily to valuation allowances
recorded to offset deferred tax assets relating to the Company's net operating
losses, and state and foreign income taxes.

     Six Months Ended June 30, 2001 and 2000

     Total revenues increased 0.9% for the six months ended June 30, 2001 to
$20.5 million from $20.3 million for the six months ended June 30, 2000. Product
sales decreased to $17.6 million for the six months ended June 30, 2001 compared
to $18.2 million for the six months ended June 30, 2000, representing a decrease
of 3.4%. The decrease in product sales was due to lower revenues on formulated
bulk TIMERx during the first quarter of 2001. The lower revenues on bulk TIMERx
reflect the large bulk TIMERx shipments to Mylan that were recorded in the first
quarter of 2000 in anticipation of Mylan's launch of Nifedipine XL, a generic
version of Procardia XL, using Penwest's TIMERx technology. Royalties and
licensing revenues increased $797,000 primarily as a result of increased
royalties earned on Mylan's sales of the 30 mg strength of generic Procardia XL,
as Mylan captured greater market share over the prior year. This royalty,
however, did trend down in the second quarter of 2001, as compared to the first
quarter of 2001, due to the entrant of a competitor.

     Gross profit decreased to $8.1 million, or 39.5% of total revenues, for the
first six months of 2001 from $8.2 million, or 40.3% of total revenues, for the
first six months of 2000. Gross profit percentage on product sales decreased to
29.7% for the first six months of 2001 from 33.6% for the first six months of
2000. This decrease was primarily due to lower sales volumes in 2001, of
formulated bulk TIMERx (as noted above) which has higher overall margins than
the Company's other products, as well as competitive pressures on selling prices
of our excipients in the six months ended June 30, 2001.

     Selling, general and administrative expenses increased by 13.3% for the
first six months of 2001, to $6.7 million as compared with $5.9 million for the
first six months of 2000. The increase is primarily due to increased
professional fees, including those associated with the Company's evaluation and
pursuit of financing alternatives, and increased information technology costs
associated with the Company strengthening its technology infrastructure to
prepare for anticipated increasing drug development activities.

     Research and product development expenses increased by 15.7% for the first
six months of 2001 to $6.3 million from $5.4 million for the first six months of
2000. This increase was primarily due to the Company's share of increased
expenses associated with completed clinical trials and other studies being
conducted for the development of extended release oxymorphone under the
Company's collaboration with Endo, as well as increased activity in the
Company's drug development pipeline.

     The effective tax rates for the first six months of 2001 and 2000 were
expenses of 5% and 4%, respectively. The effective tax rates are higher than the
federal statutory rate of a 34% benefit, due primarily to valuation allowances
recorded to offset deferred tax assets relating to the Company's net operating
losses, and state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

     Subsequent to August 31, 1998, the date the Company became an independent,
publicly-owned company, the Company has funded its operations and capital
expenditures with cash from operations, advances under credit facilities and the
issuance of additional shares of common stock.

     As of June 30, 2001, the Company had cash and cash equivalents of $1.1
million. On January 17, 2001, the Company secured a revolving line of credit
("Revolver") with CIT Group/Business Credit, Inc. Under the terms of the
Revolver, the Company may borrow up to $10.0 million ("Line of Credit") as
determined by a formula based on the Company's Eligible Accounts Receivable and
Eligible Saleable Inventory, as defined in the agreement. As of August 9, 2001,
the Company has drawn down approximately $3.0 million on the Revolver. Under the
Revolver, generally 85% of the Company's U.S. and Canadian receivables, as well
as generally 60% of the Company's U.S. saleable inventories, are included in the
borrowing base. Amounts outstanding under the Revolver are collateralized by the
Company's U.S. and Canadian accounts receivable, and its inventory and general
intangibles. The Revolver has an initial term of three years, and provides for
annual renewals thereafter. The Revolver bears interest at a specified bank's
prime rate plus 1% per annum, on the greater of $3.0 million or on the average
outstanding balance. The Revolver also requires fees be paid of 0.5% per annum
on unused portions of the Line of Credit. It also provides for early termination
fees of up to 0.75%, in the event the Company terminates the Revolver prior to
the end of the initial term. The Revolver contains covenants, including the
requirement that the Company maintain at all times, certain minimum levels of
tangible net worth as defined, at varying specified amounts during the initial
term of the agreement, and restrictions on the incurrence of additional
indebtedness. Other than the Revolver, the Company has no committed sources of
capital.


                                       8
<PAGE>   11

     On July 11, 2001, the Company completed a private placement of 2,447,187
shares of its common stock to selected institutional investors, resulting in
proceeds of approximately $30 million, less expenses. The Company intends to use
the net proceeds of this offering primarily for the development of drug delivery
programs as well as to fund the research and development of new oral drug
delivery technologies. With the addition of the proceeds from the offering to
the Company's existing capital resources, the Company anticipates that it will
be able to maintain currently planned operations through late 2002.

     As of June 30, 2001, the Company did not have any material commitments for
capital expenditures. At June 30, 2001, the Company's trade receivables were
$5.9 million, a decrease of $2.2 million from the December 31, 2000 balance of
$8.1 million. This decrease was primarily due to amounts received from Mylan in
the first six months of 2001, relating to sales of bulk TIMERx in 2000. In
connection with its strategic alliance agreement with Endo, the Company expects
to expend approximately an additional $8 million in 2001 and 2002 on the
development of extended release oxymorphone. The Company intends to utilize
available cash and cash from operations, and funds available under the Revolver.

     The Company had negative cash flow from operations in the six months ended
June 30, 2001 of $3.4 million, primarily due to the net loss in the period,
partially offset by net reductions of accounts receivable as noted above. The
Company had negative cash flow from operations in the six months ended June 30,
2000 of $4.2 million, primarily due to net losses for the period. Funds expended
for the acquisition of fixed assets were primarily related to additions at the
Company's manufacturing facilities in Iowa and Finland. Funds expended for
intangible assets include costs to secure and defend patents on technology
developed by the Company and to secure trademarks.

     The Company's requirements for additional capital are substantial and will
depend on many factors, including (i) the timing and amount of payments received
under existing and possible future collaborative agreements; (ii) the structure
of any future collaborative or development agreements; (iii) the progress of the
Company's collaborative and independent development projects; (iv) revenues from
the Company's sales of excipients; (v) the costs to the Company of
bioequivalence studies for the Company's products; (vi) the prosecution, defense
and enforcement of patent claims and other intellectual property rights; and
(vii) the timing of adding drug development capabilities.

     The Company anticipates that its existing capital resources, including
funds available under the Revolver and the proceeds of the private placement, as
well as internally generated funds, will enable the Company to maintain
currently planned operations into at least the fourth quarter of 2002. The
Company may need to raise additional funds to maintain its operations beyond
such date. The Company may seek to obtain additional funds through transactions
relating to its business lines and/or debt or equity financings. The additional
financing may not be available to the Company on acceptable terms, if at all.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Quarterly Report on Form 10-Q contains or incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included or incorporated
in this report regarding our strategy, future operations, financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words "believes", "anticipates",
"estimates", "plans", "expects", "intends", "may", "projects", "will" and
"would" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee that we actually will achieve the plans,
intentions or expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking statements. Actual
results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make. We have
included important factors in the cautionary statements contained or
incorporated in this report, particularly the matters discussed in the Overview
to Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Quarterly Report and the matters set forth under the caption
"Risk Factors" in Penwest's Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 25, 2001, which risk factors are filed with this
report as Exhibit 99 and incorporated herein by reference. In addition, any
forward-looking statements represent Penwest's estimates only as of the date
this Quarterly Report is first filed with the Securities and Exchange Commission
and should not be relied upon as representing Penwest's estimates as of any
subsequent date. We do not assume any obligation to update any forward-looking
statements.


                                       9
<PAGE>   12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND RISK MANAGEMENT POLICIES

     The operations of the Company are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates. The
Company's interest rate risk includes cash flow risk associated with borrowing
under its variable rate revolver. The Company invests its excess cash in mutual
funds investing in securities of, or collateralized by, short term U.S.
government securities and money market funds with strong credit ratings. As a
result, the Company's investment income is most sensitive to changes in the
general level of U.S. interest rates. The Company's international subsidiaries
transact a substantial portion of their sales and purchases in European
currencies other than their functional currency, which can result in the Company
having gains or losses from currency exchange rate fluctuations. The Company
does not use derivatives to hedge the impact of fluctuations in foreign
currencies or interest rates. The Company does not believe that the potential
exposure is significant in light of the size of the Company and its business.
Accordingly, the Company believes that, while the investment-grade securities it
holds are subject to changes in the financial standing of the issuer of such
securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, or other market
changes that affect market risk sensitive instruments.


                                       10
<PAGE>   13

                          PART II. -- OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     In 1994, the Boots Company PLC ("Boots") filed in the European Patent
Office, or the EPO, an opposition to a patent granted by the EPO to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots appealed
this decision to the EPO Board of Appeals, which conducted oral proceedings on
the appeal in June 2001. At the oral proceedings, the EPO Board of Appeals
upheld the validity of all the claims included in the patent other than three
claims which the Company cancelled during the oral proceedings. The Company
believes that the cancelled claims were duplicative in scope to the claims that
were upheld and that the cancellation of those claims did not result in any
change in the scope of the claims of the patent. The decision of the EPO Board
of Appeals is final and cannot be further appealed by Boots in the EPO.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the Company's Annual Meeting of Shareholders held on June 27, 2001, the
     following proposals were adopted by the vote specified below:

          a.   Election of Class I directors for a term of three years:

                                            FOR         WITHHOLD
                                         ----------     ---------
               Paul E. Freiman           11,057,107      24,525
               Rolf H. Henel             11,056,970      24,662
               N. Stewart Rogers         11,033,019      48,613

               The following directors did not stand for reelection as their
               terms in office continued after the Annual Meeting: Jere E.
               Goyan, Tod R. Hamachek, Robert J. Hennessey, John N. Staniforth,
               and Anne M. VanLent.

          b.   Ratification of selection of Ernst & Young LLP as independent
               auditors of the Company for the current year:

                                   FOR            AGAINST           ABSTAIN
                                ----------        -------           -------
                                11,052,095        6,016             23,521


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     a.   Exhibits.

          See exhibit index below for a list of the exhibits filed as part of
          this Quarterly Report on Form 10-Q, which exhibit index is
          incorporated herein by reference.

     b.   Reports on Form 8-K.

          None.


                                       11
<PAGE>   14

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                             PENWEST PHARMACEUTICALS CO.


Date:   August 10, 2001                         /s/ Jennifer L. Good
                                                -------------------------------
                                                Jennifer L. Good
                                                Senior Vice President, Finance,
                                                and Chief Financial Officer
                                                (Principal Financial Officer)


                                       12
<PAGE>   15

                                  EXHIBIT INDEX

EXHIBIT NUMBER                       DESCRIPTION
--------------                       -----------

     99             Pages 2 through 9 of the Company's Current Report on Form
                    8-K as filed with the Securities and Exchange Commission on
                    July 25, 2001 (which is not deemed filed except to the
                    extent that portions thereof are expressly incorporated by
                    reference herein)


                                       13