<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 September 30, 1998

                                       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)


                                  (914)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 October 31, 1998.

            Class                                                Outstanding
-----------------------------                                    -----------
Common stock, par value $.001                                    11,055,462



<PAGE>   2
                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           ----
<S>                                                                                                          <C>

Part I.          Financial Information

       Item 1--  Financial Statements

                 Consolidated Balance Sheets..............................................................   3

                 Consolidated Statements of Operations....................................................   4

                 Condensed Consolidated Statements of Cash Flows..........................................   5

                 Notes to Condensed Consolidated Financial Statements.....................................   6

       Item 2--  Management's Discussion and Analysis of Financial Condition and Results of Operations....  10



Part II.         Other Information


       Item 6--  Exhibits and Reports on Form 8-K.........................................................  15

Signature.................................................................................................  16

Exhibit Index.............................................................................................  16
</TABLE>




                                       2
<PAGE>   3
                         PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,   SEPTEMBER 30,
                                                                   1997            1998
                                                               ------------   -------------
                                                                               (UNAUDITED)
<S>                                                            <C>            <C>

ASSETS
Current assets:
  Cash and cash equivalents                                     $    938        $  1,137
  Trade accounts receivable, net                                   3,005           4,066
  Inventories:
    Raw materials and other                                        1,545           1,207
    Finished goods                                                 7,146           7,724
                                                                --------        --------
                                                                   8,691           8,931
Prepaid expenses and other current assets                            358             684
                                                                --------        --------
     Total current assets                                         12,992          14,818

Fixed assets, net                                                 22,311          22,537
Other assets                                                       2,133           4,591
                                                                --------        --------
     Total assets                                               $ 37,436        $ 41,946
                                                                ========        ========

LIABILITIES AND SHAREHOLDERS'  EQUITY (DEFICIT)
Current liabilities:
   Accounts payable and accrued expenses                        $  3,410        $  4,134
   Taxes payable                                                     361             448
   Payable to Penford                                             42,654             ---
                                                                --------        --------
     Total current liabilities                                    46,425           4,582
Deferred taxes                                                     2,967           2,900
Other long-term liabilities                                          341           2,321
                                                                --------        --------
     Total liabilities                                            49,733           9,803

Shareholders' equity (deficit)
  Common stock, par value $.001, authorized 39,000,000
   shares, issued and outstanding 11,055,462 shares                   11              11
  Preferred stock, par value $.001, authorized
   1,000,000 shares, none outstanding
  Additional paid-in capital                                       8,079          58,536
  Accumulated deficit                                            (19,649)        (25,937)
  Accumulated other comprehensive income                            (738)           (467)
                                                                --------        --------
     Total Shareholders' equity (deficit)                        (12,297)         32,143
                                                                --------        --------
     Total liabilities and Shareholders' equity (deficit)       $ 37,436        $ 41,946
                                                                ========        ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.




                                       3
<PAGE>   4
                           PENWEST PHARMACEUTICALS CO.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                            THREE MONTHS
                                                         ENDED SEPTEMBER 30
                                                        ---------------------
                                                          1997         1998
                                                        --------     --------
                                                             (UNAUDITED)
<S>                                                     <C>          <C>
Revenues
  Product sales                                         $  6,645     $  6,180
  Royalties and licensing fees                               325           50
                                                        --------     --------
    Total revenues                                         6,970        6,230
Cost of product sales                                      4,891        4,511
                                                        --------     --------
    Gross profit                                           2,079        1,719
Operating expenses
  Selling, general and administrative                      2,044        2,865
  Research and product development                           851        1,455
                                                        --------     --------
    Total operating expenses                               2,895        4,320
                                                        --------     --------
Loss before income taxes                                    (816)      (2,601)
Income tax expense (benefit)                                 525         (329)
                                                        --------     --------
Net loss                                                $ (1,341)    $ (2,272)
                                                        ========     ========

Basic and diluted net loss per share                    $  (0.12)    $  (0.21)
                                                        ========     ========

Weighted average shares of common stock outstanding       11,055       11,055
                                                        ========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                             NINE MONTHS
                                                         ENDED SEPTEMBER 30
                                                        ---------------------
                                                          1997         1998
                                                        --------     --------
                                                                   (UNAUDITED)
<S>                                                     <C>          <C>
Revenues
  Product sales                                         $ 19,876     $ 21,429
  Royalties and licensing fees                               911          143
                                                        --------     --------
    Total revenues                                        20,787       21,572
Cost of product sales                                     14,660       15,615
                                                        --------     --------
    Gross profit                                           6,127        5,957
Operating expenses
  Selling, general and administrative                      5,747        7,892
  Research and product development                         2,994        4,278
                                                        --------     --------
    Total operating expenses                               8,741       12,170
                                                        --------     --------
Loss before income taxes                                  (2,614)      (6,213)
Income tax expense                                           561           75
                                                        --------     --------
Net loss                                                $ (3,175)    $ (6,288)
                                                        ========     ========

Basic and diluted net loss per share                    $  (0.29)    $  (0.57)
                                                        ========     ========

Weighted average shares of common stock outstanding       11,055       11,055
                                                        ========     ========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.




                                       4
<PAGE>   5
                           PENWEST PHARMACEUTICALS CO.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                   NINE MONTHS
                                                                ENDED SEPTEMBER 30
                                                               --------------------
                                                                 1997        1998
                                                               --------    --------
                                                                         (UNAUDITED)
<S>                                                            <C>         <C>

Net cash used in operating activities                          $(1,322)    $(3,966)
Investing activities:
  Acquisitions of fixed assets, net                             (2,953)     (2,015)
  Other                                                           (625)         29
                                                               -------     -------
Net cash used in investing activities                           (3,578)     (1,986)
Financing activities:
  Increase (decrease) in payable to Penford                      5,403       6,105
Effect of exchange rate changes on cash and cash equivalents      (110)         46
                                                               -------     -------
Net increase in cash and cash equivalents                          393         199
Cash and cash equivalents at beginning of period                   695         938
                                                               -------     -------
Cash and cash equivalents at end of period                     $ 1,088     $ 1,137
                                                               =======     =======
</TABLE>


     See accompanying notes to condensed consolidated financial statements.




                                       5
<PAGE>   6
                           PENWEST PHARMACEUTICALS CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   BUSINESS

     Penwest Pharmaceuticals Co. (the "Company" or "Penwest") is engaged in the
     research, development, and commercialization of novel drug delivery
     products and technologies. The Company has developed TIMERx proprietary
     controlled release drug delivery technology. The Company also manufactures
     and distributes pharmaceutical excipients, the inactive ingredients in
     tablets and capsules. 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. These risks and uncertainties include, but are not
     limited to, a history of net losses, technological changes, dependence on
     collaborators and key personnel, no assurance of successful completion of
     development efforts and of obtaining regulatory approval, 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 generally accepted accounting principles
     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 generally accepted accounting
     principles 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 three month period and
     nine month period ended September 30, 1998 are not necessarily indicative
     of the results that may be expected for the year ending December 31, 1998.
     For further information, refer to the consolidated financial statements and
     footnotes thereto included in Penwest Pharmaceuticals Co.'s Registration
     Statement on Form 10 (declared effective on July 31, 1998).

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

3.   INCOME TAXES

     The effective tax rates for the three month period and the nine month
     period ended September 30, 1998 were a 13% benefit and a 1% expense,
     respectively. The effective rates are higher than the federal statutory
     rate of a 34% benefit due primarily to the effect of tax benefits utilized
     by Penford Corporation (the Company's former parent company) through August
     31, 1998 for which Penwest was not reimbursed and state and foreign income
     taxes.

4.   EARNINGS PER COMMON SHARE

     The Company follows the provisions of Statement of Financial Accounting
     Standards (SFAS) No. 128, "Earnings per Share." Statement No. 128 replaced
     the previous requirement to report primary and fully diluted earnings per
     share with basic and diluted earnings per share. Basic earnings per share
     reflects only the weighted average common shares outstanding. Diluted
     earnings per share reflects weighted average common shares outstanding and
     the effect, if any, of dilutive common stock equivalent shares. SFAS No.
     128 does not impact the Company's net loss per share.



                                       6
<PAGE>   7
5.   COMPREHENSIVE LOSS

     As of January 1, 1998, the Company adopted Financial Accounting Standards
     Board Statement No. 130 "Reporting Comprehensive Income". Statement No. 130
     establishes new rules for the reporting and display of comprehensive income
     (loss) and its components; however, the adoption of this Statement had no
     impact on the Company's net loss or Shareholders' equity (deficit).

     The components of comprehensive loss, for the three and nine month periods
     ended September 30, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30   NINE MONTHS ENDED SEPTEMBER 30
                                            1997                   1998       1997                  1998
                                          --------               --------   --------              --------
                                             (IN THOUSANDS OF DOLLARS)         (IN THOUSANDS OF DOLLARS)
<S>                                       <C>                    <C>        <C>                   <C>

Net loss                                  $(1,341)               $(2,272)   $(3,175)              $(6,288)
Foreign currency translation adjustments      157                    200       (491)                  271
                                          -------                -------    -------               -------

Comprehensive loss                        $(1,184)               $(2,072)   $(3,666)              $(6,017)
                                          =======                =======    =======               =======
</TABLE>


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

6.   CREDIT FACILITY

     On July 2, 1998 the Company obtained a $15 million unsecured revolving
     credit facility (the "Credit Facility") which is guaranteed by Penford 
     Corporation, the Company's former parent corporation ("Penford"). The
     proceeds may be used to fund working capital and for general corporate
     purposes, including capital expenditures. On August 31, 2000, all
     outstanding amounts under the Credit Facility will become automatically due
     and payable. Penford has agreed that, for a period ending August 31, 2000,
     it will guarantee the Company's indebtedness under the Credit Facility.
     Borrowings under the Credit Facility bear interest at a rate equal to
     LIBOR, plus 1.25%. The Credit Facility provides that the maximum amount
     available to the Company under the Credit Facility will be reduced by the
     amount of any net proceeds from any financing conducted by the Company, and
     that the Company will be required to repay any outstanding amounts under
     the Credit Facility in excess of the new maximum amount. The Credit
     Facility contains a number of financial covenants that relate to Penford
     (and not Penwest), including requirements that Penford maintain certain
     levels of financial performance and capital structure. The Credit Facility
     also contains certain covenants applicable to both Penford and Penwest
     including restrictions on the incurrence of additional debt and the payment
     of dividends. Accordingly, the Company is substantially dependent on
     Penford's compliance with such covenants in order to access and maintain
     the Credit Facility. Any breach by Penford of these covenants would
     constitute a default by the Company under the Credit Facility, which would
     have a material adverse effect on the Company's business, financial
     condition and results of operation.

     As of September 30, 1998, the Company had no outstanding borrowings under
     the Credit Facility.

7.   CONTINGENCIES

     In May 1997, one of the Company's collaborators, Mylan Pharmaceuticals,
     Inc. ("Mylan") filed an Abbreviated New Drug Application ("ANDA") with the
     U.S. Food and Drug Administration ("FDA") for the 30 mg dosage strength of
     Nifedipine XL, a generic version of Procardia XL, a controlled release
     formulation of nifedipine. Bayer AG ("Bayer") and ALZA Corporation ("ALZA")
     own patents listed for Procardia XL (the last of which expires in 2010),
     and Pfizer, Inc. ("Pfizer is the sponsor of the New Drug Application
     ("NDA") and markets the product. In connection with the ANDA filing, Mylan
     certified to the FDA that Nifedipine XL does not infringe these Bayer or
     ALZA patents and notified Bayer, ALZA and Pfizer of such certification.
     Bayer and Pfizer sued Mylan in the United States District Court for the
     Western District of Pennsylvania, alleging that Mylan's product infringes
     Bayer's patent. The Company has been informed by Mylan that ALZA does not
     believe that the notice given to it complied with the requirements of the
     Waxman-Hatch Act, and there can be no assurance that ALZA will not sue
     Mylan for patent infringement or take any other actions with respect to
     such notice. Mylan has advised the Company that it intends to contest
     vigorously the allegations made in the lawsuit. However, there can be no
     assurance that Mylan will prevail in this litigation or that it will
     continue to contest the lawsuit. If the litigation results in a
     determination that Nifedipine XL infringes Bayer's patent, Nifedipine XL
     could not be marketed in the United States until such patent expired. An
     unfavorable outcome or protracted litigation for Mylan would materially
     adversely affect the Company's business, financial condition, cash flows
     and results of operations. Delays in the commercialization of Nifedipine XL
     could also occur because the FDA will not grant final marketing approval of
     Nifedipine XL until a final judgment on the patent suit is rendered in
     favor of Mylan by the district court, or in the



                                       7
<PAGE>   8
     event of an appeal, by the court of appeals, or until 30 months have
     elapsed from the date of Mylan's certification, whichever is sooner.

     In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming that
     its Procardia XL formulation constituted a unique delivery system and that
     a drug with a different release mechanism such as the TIMERx controlled
     release system cannot be considered the same dosage form and approved in an
     ANDA as bioequivalent to Procardia XL. In August 1997, the FDA rejected
     Pfizer's citizen's petition. In July 1997, Pfizer also sued the FDA in the
     District Court of the District of Columbia, claiming that the FDA's
     acceptance of Mylan's ANDA filing for Nifedipine XL was contrary to law,
     based primarily on the arguments stated in its citizen's petition. Mylan
     and the Company intervened as defendants in this suit. In April 1998 the
     District Court of the District of Columbia rejected Pfizer's claim, and in
     May 1998, Pfizer appealed the District Court's decision. There can be no
     assurance that the FDA, Mylan and the Company will prevail in this
     litigation. An outcome in this litigation adverse to Mylan and the Company
     would result in Mylan being required to file a suitability petition in
     order to maintain the ANDA filing or to file an NDA with respect to
     Nifedipine XL, each of which would be expensive and time consuming. An
     adverse outcome also would result in Nifedipine XL becoming ineligible for
     an "AB" rating from the FDA. Failure to obtain an AB rating from the FDA
     would indicate that for certain purposes Nifedipine XL would not be deemed
     to be therapeutically equivalent to the referenced branded drug, would not
     be fully substitutable for the referenced branded drug and would not be
     relied upon by Medicaid and Medicare formularies for reimbursement. Any
     such failure would have a material adverse effect on the Company's
     business, financial condition, cash flows and results of operations. If any
     of such events occur, Mylan may terminate its efforts with respect to
     Nifedipine XL, which would have a material adverse effect on the Company's
     business, financial condition, cash flows and results of operations.

     In 1994, the Boots Company PLC ("Boots") filed in the European Patent
     Office (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
     has appealed this decision to the EPO Board of Appeals. There can be no
     assurance that the Company will prevail in this matter. An unfavorable
     outcome could materially adversely affect the Company's business, financial
     condition, cash flows and results of operations.

     Substantial patent litigation exist 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
     (unless such claim relates to TIMERx, in which case such costs are the
     responsibility of the Company) are generally the contractual responsibility
     of the Company's collaborators, the Company could nonetheless incur
     significant unreimbursed costs in participating and assisting in the
     litigation.

     Testing, manufacturing, marketing and selling pharmaceutical products
     entail a risk of product liability. The Company faces the risk of product
     liability claims in the event that the use of its products is alleged to
     have resulted in harm to a patient or subject. Such risks exist even with
     respect to those products that are manufactured in licensed and regulated
     facilities or that otherwise possess regulatory approval for commercial
     sale. Product liability insurance coverage is expensive, difficult to
     obtain and may not be available in the future on acceptable terms, if at
     all. The Company is covered by primary product liability insurance in the
     amount of $2.0 million in the aggregate on a claims-made basis and by
     umbrella liability insurance in excess of $20.0 million which can also be
     used for product liability insurance. There can be no assurance that this
     coverage is adequate to cover potential liability claims and may not be
     adequate as the Company develops additional products. As the Company
     receives regulatory approvals for products under development, there can be
     no assurance that additional liability insurance coverage for any such
     products will be available in the future on acceptable terms, if at all.
     The Company's business, financial condition, cash flows and results of
     operations could be materially adversely affected by the assertion of a
     product liability claim.

8.   RIGHTS AGREEMENT

     On June 25, 1998, the Board of Directors declared a dividend of one right
     for each outstanding share of the Company's Common Stock (the "Right") to
     shareholders of record at the close of business on July 28, 1998. Each
     Right entitles the registered holder to purchase from the Company one
     one-thousandth of a share of the Series A Preferred Stock, at a purchase
     price of $60 in cash, subject to adjustment.

     The Rights are not currently exercisable and will not be exercisable until
     the earlier of (I) 10 business days (or such later date as



                                       8
<PAGE>   9
     may be determined by the Board) following the later of (a) a public
     announcement that a person or group of affiliated or associated persons (a
     "Rights Acquiring Person") has acquired, or obtained the right to acquire,
     beneficial ownership of 15% or more of the outstanding shares of Common
     Stock or (b) the first date on which an executive officer of the Company
     has actual knowledge that a Rights Acquiring Person has become such, or
     (ii) 10 business days (or such later date as may be determined by the
     Board) following the commencement of a tender offer or exchange offer that
     would result in a person or group beneficially owning 15% or more of such
     outstanding shares of Common Stock. The Rights will expire upon the close
     of business on July 27, 2008 unless earlier redeemed or exchanged.

     In the event that any Person becomes a Rights Acquiring Person, unless the
     event causing the 15% threshold to be crossed is a permitted offer, as
     defined in the agreement, then, promptly following the first occurrence of
     such event, each holder of a Right (except as provided below and under
     certain circumstances) shall thereafter have the right to receive, upon
     exercise, that number of shares of Common Stock of the Company (or, in
     certain circumstances, cash, property or other securities of the Company)
     which equals the exercise price of the Right divided by 50% of the current
     market price per share of Common Stock at the date of the occurrence of
     such event. However, Rights are not exercisable following such event until
     such time as the Rights are no longer redeemable by the Company.
     Notwithstanding any of the foregoing, following the occurrence of such
     event, all Rights that are, or (under certain circumstances) were,
     beneficially owned by any Rights Acquiring Person will be null and void.

     In the event that, at any time after any Person becomes a Rights Acquiring
     Person, (i) the Company is consolidated with, or merged with and into,
     another entity and the Company is not the surviving entity of such
     consolidation or merger (other than a consolidation or merger which follows
     a Permitted Offer) or if the Company is the surviving entity, but shares of
     its outstanding Common Stock are changed or exchanged for stock or
     securities (of any other person) or cash or any other property, or (ii) 50%
     or more of the Company's assets or earning power is sold or transferred,
     each holder of a Right (except Rights which previously have been voided as
     set forth above) shall thereafter have the right to receive, upon exercise,
     that number of shares of common stock of the acquiring company which equals
     the exercise price of the Right divided by 50% of the current market price
     of such common stock at the date of the occurrence of the event.

9.   REVERSE STOCK SPLIT

     On June 19, 1998, the Company effected a 0.76-for-1 reverse stock split of
     its Common Stock. Accordingly, all share and per share data have been
     retroactively adjusted to give effect to the reverse stock split.

10.  DISTRIBUTION AND CAPITAL CONTRIBUTION

     On August 31, 1998, Penford distributed to the shareholders of record of
     Penford common stock on August 10, 1998 all of the shares of the Company's
     Common Stock (the "Distribution"). Pursuant to the Distribution, each
     Penford shareholder of record received three shares of the Company's
     Common Stock for every two shares of Penford common stock held by them. In
     connection with the Distribution (i) the Company's Common Stock was
     registered under the Securities Exchange Act of 1934, as amended, pursuant
     to the registration statement on Form 10 which was declared effective on
     July 31, 1998, (ii) the Company's Common Stock was listed with and began
     trading on the National Market on August 10, 1998 and (iii) Penford
     obtained a private letter ruling from the Internal Revenue Service to the
     effect that, among other things, the Distribution qualified as tax-free
     under Sections 355 and 368 of the Internal Revenue Code of 1986, as
     amended, and that the receipt of shares of the Company's Common Stock in
     the Distribution would not result in the recognition of income, gain or
     loss to Penford's shareholders for federal income tax purposes.
        
     In connection with the Distribution, the Company and Penford have entered
     into agreements that govern various interim and ongoing relationships.
     These agreements include (i) a Separation and Distribution Agreement
     setting forth the agreement of the parties with respect to the principal
     corporate transactions which were required to effect the separation of
     Penford's pharmaceutical business from its specialty carbohydrate-based
     chemical business and the Distribution, including without limitation
     Penford's agreement to guarantee the Company's indebtedness under the
     Credit Facility referred to above; (ii) a Services Agreement pursuant to
     which Penford will continue on an interim basis to provide specified
     services to the Company until June 30, 1999 or until Penwest does not need
     the services, of which costs will be charged to the Company on an actual or
     allocated basis, plus a specified profit percentage; (iii) a Tax Allocation
     Agreement relating to, among other things, the allocation of tax liability
     between the Company and Penford in connection with the Distribution, all
     pre-distribution liabilities are the responsibility of Penford and all post
     distribution liabilities are those of the respective entities; (iv) an
     Excipient Supply Agreement pursuant to which Penford will manufacture and
     supply exclusively to the Company, and the Company will purchase
     exclusively from



                                       9
<PAGE>   10
     Penford, subject to certain exceptions, all the Company's requirements for
     two excipients marketed by the Company under quantity and pricing terms
     that the Company believes approximate fair market value; and (v) an
     Employee Benefits Agreement setting forth the parties' agreements as to the
     continuation of certain Penford benefit arrangements for the employees of
     the Company. Subsequent to the Distribution, no terminating liabilities
     were incurred by Penwest related to the Penford defined benefit plan.

     On August 31, 1998, in connection with the separation of its pharmaceutical
     business, Penford contributed to the capital of the Company all existing
     intercompany indebtedness of the Company which approximated $50.5 million.

11.  STOCK OPTIONS

     On September 4, 1998 there were 1,010,000 options to purchase common stock
     granted to management. These options were priced at market and will vest
     over a four-year period.


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

OVERVIEW

     Since 1991, Penwest has been engaged in the research, development and
commercialization of novel drug delivery technologies, including the development
of its TIMERx controlled release drug delivery technology. The Company also
develops, manufactures, distributes and sells excipients to the pharmaceutical
and nutritional industries. Penwest was incorporated under the name Edward
Mendell Co., Inc. in the State of Washington in 1991 following Penford's
acquisition of substantially all the assets of its predecessor company. On
August 31, 1998, Penford distributed (the "Distribution") to the shareholders of
record of Penford common stock on August 10, 1998 all of the shares of the
Company's Common Stock. Pursuant to the Distribution, each Penford shareholder
of record received three shares of the Company's Common Stock for every two
shares of Penford common stock held by them.

     The Company's principal development focus to date has been the development
of controlled release drugs based on the TIMERx technology. The Company's
collaborator, Leiras Oy ("Leiras"), received marketing approval in Finland for
Cystrin CR (oxybutynin), a TIMERx formulation for the treatment of urge urinary
incontinence in October 1997 and began marketing the product in Finland in
January 1998. In addition, Synthelabo Groupe ("Synthelabo") has received 
marketing approval in the Netherlands, Austria and Ireland for Ditropan CR, a 
controlled release formulation of Cystrin CR, which Synthelabo licensed from the
Company and Leiras. Synthelabo has not yet begun marketing this product. In May
1997, the Company's collaborator, Mylan, filed an ANDA with the FDA for the 30
mg dosage strength of Nifedipine XL, the first generic version of Procardia XL.
Subsequent to the filing of Mylan's ANDA, Bayer and Pfizer sued Mylan alleging
patent infringement and Pfizer sued the FDA claiming that the FDA's acceptance
of Mylan's ANDA filing was contrary to law. Pfizer's claim against the FDA was
rejected by a district court in April 1998 and in May 1998 Pfizer appealed the
district court's decision. There can be no assurance that Mylan or the FDA will
prevail in these matters or that they will continue to contest these matters. An
unfavorable outcome or protracted litigation with respect to either of these
matters would have a material adverse effect on the Company's business,
financial condition and results of operations.

     The Company is a party to collaborative agreements with Mylan, Leiras,
Sanofi Winthrop International S.A. ("Sanofi"), Synthelabo and Endo
Pharmaceuticals, Inc. ("Endo") with respect to the development and
commercialization of TIMERx controlled release products. Under these
collaborative agreements, the Company's collaborators are generally responsible
for conducting full scale bioequivalence studies and clinical trials, preparing
and submitting all regulatory applications and submissions and manufacturing,
marketing and selling the TIMERx controlled release products. There can be no
assurance that the Company's collaborations will be commercially successful.
During the third quarter, the Company was notified by Kremers Urban Development
Company that it was terminating the Covera HS (Verapamil) collaboration due to
market considerations. The Company intends to seek to license this product to
another collaborator. The Company cannot control the amount and timing of
resources which its collaborators devote to the Company's programs or potential
products. If any of the Company's collaborators breach or terminate their
agreements with the Company or otherwise fail to conduct their collaborative
activities in a timely manner, the development and commercialization of product
candidates would either be terminated or delayed, or the Company would be
required to undertake product development and commercialization activities on
its own and at its own expense, which would increase the Company's capital
requirements or require the Company to limit the scope of its development and
commercialization activities.

     Under most of these collaborative agreements, the Company has received
upfront fees and milestone payments. In connection with the receipt of certain
upfront fees, the Company was required to perform pilot bioequivalence studies
and only recognized such fees upon delivery of the results of such studies to
the collaborators. In addition, under most of these collaborative agreements,
the Company is entitled to receive additional milestone payments, royalties on
the sale of the products covered by such collaborative agreements and payments
for the purchase of formulated TIMERx material. Because the timing and the
amount of each of these payments are dependent on the continued development and
commercialization of the products covered by such agreements, as to



                                       10
<PAGE>   11
which the Company has limited control, there can be no assurance as to the
timing of receipt of some or all of these payments or as to the amount of
payments to be received by the Company.

     Except for Cystrin CR, which received marketing approval in Finland in
October 1997, and Ditropan CR, which received marketing approval in the
Netherlands, Austria and Ireland in June 1998, no product based on TIMERx
technology has ever received regulatory approval for commercial sale.
Substantially all the TIMERx revenues generated to date have been milestone fees
received for products under development. 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 has incurred net losses since 1994. As of September 30, 1998,
the Company's accumulated deficit was approximately $25.9 million. The Company
expects net losses to continue at least into late 1999. 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, and, to a lesser extent, an increase in sales of
its pharmaceutical excipients products. 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.

     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 and on variations in payments under the Company's collaborative
agreements including payments upon the achievement of specified milestones. The
Company's quarterly operating results may also fluctuate depending on other
factors, including variations in gross margins of the Company's products, the
mix of products sold, competition, regulatory actions, litigation and currency
exchange rate fluctuations.

     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.

RESULTS OF OPERATIONS

     Three Months Ended September 30, 1998 and 1997

     Total revenues decreased 10.6% for the three months ended September 30,
1998 to $6.2 million from $7.0 million for the three months ended September 30,
1997. Product sales decreased to $6.2 million for the three months ended
September 30, 1998 from $6.6 million for the three months ended September 30,
1997 representing a decrease of 7.0%. The decrease in product sales was
primarily due to lower sales in North America of EMCOCEL, one of the Company's
principal excipient products, which occurred in part because the Company
declined to continue serving a high volume, low margin account due to pricing
pressures. Royalties and licensing fees relating to the TIMERx drug delivery
system decreased to $50,000 for the three months ended September 30, 1998 from
$325,000 for the three months ended September 30, 1997 due to the timing of
when development milestones were earned.

     Gross profit decreased to $1.7 million or 27.6% of total revenues for the
three months ended September 30, 1998 from $2.1 million or 29.8% of total
revenues for the three months ended September 30, 1997. The decrease in gross
profit percentage was primarily due to the decrease in royalty and licensing
fees for the period. This decrease however, was partially offset by an overall
improvement in the gross profit percentage on product sales from 26.4% for the
three months ended September 30, 1997 to 27.0% for the three months ended
September 30, 1998 due to improving margins on Emcocel products from volume
manufacturing efficiencies, as well as product mix.

     Selling, general and administrative expenses increased by 40.2% for the
three months ended September 30, 1998 to $2.9 million from $2.0 million for the
three months ended September 30, 1997. The increase in 1998 was primarily due to
higher compensation expenses related to the employment of additional employees
in 1998 and depreciation on a new computer system.

     Research and development expenses increased by 71.0% for the three months
ended September 30, 1998 to $1.5 million from $850,000 for the three months
ended September 30, 1997. This increase was due to increased spending under the
Company's



                                       11
<PAGE>   12
collaborative agreement with Endo and increased spending related to the
development of TIMERx controlled release products.

     For the three months ended September 30, 1998 the Company recorded an
income tax benefit of 12.7%. This tax benefit was less than the statutory rate
because operating losses generated by the Company in such period prior to
August 31, 1998 were utilized by Penford, without any compensation being paid to
the Company by Penford for these tax benefits. In addition, the Company's
provision for income taxes includes state and foreign income taxes.

     Nine Months Ended September 30, 1998 and 1997

     Total revenues increased 3.8% for the nine months ended September 30, 1998
to $21.6 million from $20.8 million for the nine months ended September 30,
1997. Product sales increased to $21.4 million for the nine months ended
September 30, 1998 from $19.9 million for the nine months ended September 30,
1997 representing an increase of 7.8%. The increase in product sales was
primarily due to increased sales volumes of EMCOCEL. Royalties and licensing
fees relating to the TIMERx drug delivery system decreased to $143,000 for the
nine months ended September 30, 1998 from $911,000 for the nine months ended
September 30, 1997 due to the timing of when development milestones were earned.

     Gross profit decreased to $6.0 million or 27.6% of total revenues for the
nine months ended September 30, 1998 from $6.1 million or 29.5% of total
revenues for the nine months ended September 30, 1997. The decrease in gross
profit percentage was primarily due to the decrease in royalty and licensing
fees for the period. This decrease, however, was partially offset by an overall
improvement in the gross profit percentage on product sales from 26.2% for the
nine months ended September 30, 1997 to 27.1% for the nine months ended
September 30, 1998 due to improving margins on EMCOCEL products from volume
manufacturing efficiencies as well as product mix.

     Selling, general and administrative expenses increased by 37.3% for the
nine months ended September 30, 1998 to $7.9 million from $5.7 million for the
nine months ended September 30, 1997. These lower expenses in the 1997 period
reflected unusually low general and administrative expenses as a result of a
property tax refund recorded in the second quarter of 1997 on the Patterson
facility. The higher expense in 1998 was also due to higher compensation
expenses and relocation expenses associated with the hiring of additional
employees, and higher depreciation on a new computer system.

     Research and development expenses increased by 42.9% for the nine months
ended September 30, 1998 to $4.3 million from $3.0 million for the nine months
ended September 30, 1997. This increase was due to increased spending related to
the development of TIMERx controlled release products including the Company's
collaborative agreement with Endo.

     For the nine months ended September 30, 1998 the Company recorded an income
tax expense of 1%, higher than the statutory rate of a 34% benefit because
operating losses generated by the Company in such period prior to August 31,
1998 were utilized by Penford, without any compensation being paid to the
Company by Penford for these tax benefits. In addition, the Company's provisions
for income taxes includes state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

     Through August 31, 1998 (the "Distribution Date"), the Company received 
inter-company advances from Penford to fund the Company's operations, capital
expenditures and the original acquisition of the Company's predecessor, which
aggregated to $50.5 million. On the Distribution Date Penford contributed the
outstanding inter-company indebtedness to the capital of the Company. Although
Penford has guaranteed the Company's indebtedness under the Credit Facility, in
no other respects has Penford or will Penford provide financial support to the
Company after the Distribution. Subsequent to the Distribution through
September 30, 1998 the Company has funded its operations with cash from
operations. 

     As of September 30, 1998, the Company had cash and cash equivalents of $1.1
million, and no outstanding borrowings under the Credit Facility. The Company
did begin drawing on the Credit Facility in October 1998. The Company has no
committed sources of capital other than the Credit Facility and no indebtedness
to any third or related parties other than under the Credit Facility. As of
September 30, 1998, the Company did not have any material commitments for
capital expenditures.

     The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the period as well as increasing trade
receivables. As of December 31, 1997 there was a temporary decrease in accounts
receivable due primarily to the timing of customer purchases and improved
collection efforts. However, accounts receivable as of September 30, 1998
increased by 35% from December 31, 1997 primarily due to the increase and the
timing of customer purchases.



                                       12
<PAGE>   13
     Funds expended for the acquisition of fixed assets were primarily related
to the expansion and improvement of the Company's manufacturing facilities and
laboratory space as well as the purchase of equipment used principally for
research and development efforts. Funds expended for intangible assets include
costs to secure and defend patents on technology developed by the Company and
secure trademarks.

     The Company anticipates that its existing capital resources, together with
the funds available under the Credit Facility and internally generated funds,
will enable it to maintain currently planned operations through at least 1999.
However, this expectation is based on the Company's current operating plan,
which could change as a result of many factors and the Company could require
additional funding sooner than anticipated. The Company's requirements for
additional capital could be substantial and will depend on many factors,
including the timing and amount of payments received under existing and possible
future collaborative agreements; the structure of any future collaborative or
development agreements; the progress of the Company's collaborative and
independent development projects; revenues from the Company's excipients
business, including from the introduction of ProSolv, an excipient marketed by
the Company; the costs to the Company of bioequivalence studies for the
Company's products; the prosecution, defense and enforcement of patent claims
and other intellectual property rights; and the development of manufacturing,
marketing and sales capabilities. The Company has no committed sources of
capital other than the Credit Facility. There can be no assurance that the
Company will be able to access the Credit Facility at such times as it desires
or needs capital.

     To the extent capital resources are insufficient to meet future
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, if at all. The Credit Facility restricts the
incurrence of additional indebtedness by the Company and provides that the
maximum amount available to Penwest under the Credit Facility, $15.0 million,
will be reduced by the amount of any net proceeds from any financing conducted
by the Company and that the Company will repay any outstanding amounts under the
Credit Facility in excess of the new maximum amount. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
unable to comply with its obligations under its collaborative agreements, which
could result in the termination of such collaborative agreements. In addition,
the Company may be required to curtail operations significantly or obtain funds
through entering into collaborative agreements on unfavorable terms. The
Company's inability to raise capital would have a material adverse effect on the
Company's business, financial condition and results of operations.

     Under the Company's strategic alliance agreement with Endo, the Company
expects to expend approximately $9 million, primarily in 1999 and 2000. The
Company expects to rely on funds available under the Credit Facility and cash
from operations to fund expenditures. However, as noted above the Company may be
required to raise additional funds to continue its development activities,
including its activities under the Endo agreement. However, either the Company
or Endo may terminate the agreement upon 30 days' prior written notice, at which
time the Company's funding obligations would cease.

     The Credit Facility is a revolving Loan Facility with a maximum principal
amount of $15.0 million of unsecured financing. On August 31, 2000, all
outstanding amounts under the Credit Facility will become automatically due and
payable. Penford has agreed that, for a period ending August 31, 2000, it will
guarantee the Company's indebtedness under the Credit Facility. Borrowings under
the Credit Facility bear interest at a rate equal to LIBOR, plus 1.25%. The
Credit Facility contains a number of non-financial covenants that are applicable
to Penwest, including without limitation, restrictions on the incurrence of
additional debt and on the payment of dividends. Any breach of these covenants
by the Company would constitute a default by the Company under the Credit
Facility. In addition, the Credit Facility provides that a breach by Penford of
its guarantee of the Company's indebtedness under the Credit Facility or the
occurrence of a default under any credit agreement with Penford under which the
lender is either the sole or a participating lender, including without
limitation an event of default arising from the failure of Penford to satisfy
certain financial conditions requiring, among other things, the maintenance of a
minimum net worth and of certain financial ratios, would constitute a default by
the Company under the Credit Facility. Accordingly, the Company will be
substantially dependent on Penford in order to access and maintain the Credit
Facility. Any default under the Credit Facility would have a material adverse
effect on the Company's business, financial condition and result of operations.

YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware or other equipment that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.


                                       13
<PAGE>   14
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and contingency planning. The Company
has completed approximately 75% of its overall anticipated assessment of
programs, hardware or other equipment that could be significantly affected by
the Year 2000. The completed assessment indicated that most of the Company's
significant information technology systems will not be affected. The Company
recently installed a new integrated computer system for all domestic operations
that is Year 2000 compliant. The underlying hardware is also Year 2000
compliant according to vendor certification. The international information
technology system primarily consists of personal computers, the majority of
which will require replacement. The assessment also indicated that software and
hardware (embedded chips) used in production and manufacturing systems
(hereafter also referred to as operating equipment) may be Year 2000
non-compliant. Affected systems include process control software used at the
Company's two manufacturing plants, which produce the Company's Emcocel
products, which account for approximately 50% of the Company's revenues. A
failure in either of the plants could cause significant disruption to such
operations, which would have a material adverse effect on the Company's
business, financial position, results of operations or cash flows.

Although the Company has not completed its Year 2000 assessment, it has begun
the remediation and testing phases with respect to the Year 2000 issues it has
identified with respect to its information technology systems. The Company has
completed approximately 75% of the required remediation and expects to complete
replacement of personal computers no later than June 30, 1999. The Company also
needs to complete testing of its software and hardware systems to ensure
compliance. The Company estimates that it has tested approximately 25% of such
systems. The Company expects completion of the testing phase for all significant
systems by February 1999.

The required remediation of operating equipment primarily relates to
manufacturing and laboratory equipment. The Company is currently assessing the
laboratory equipment, and to date, has not identified any material remediation
issues. The Company estimates that it is approximately 60% complete with this
assessment, that the assessment will be completed by December 1998 and that any
required remediation will be completed by June 1999.

The Company has not yet completed the assessment of the process control system
in its two manufacturing facilities, but anticipates that such assessment will
be completed by March 1999 and that any remediation and testing will be
completed by September 1999.

The Company does not have any system interfaces with third party vendors or
customers. The Company is in the process of identifying and obtaining
documentation from its significant suppliers and subcontractors none of which
share information systems with the Company to determine the extent to which such
suppliers and subcontractors will be affected by any significant Year 2000
issues. The Company has not sought to obtain such documentation from its
strategic customers. To date, the Company is not aware of any supplier,
subcontractor or strategic customers with a Year 2000 issue that could have a
material adverse effect on the Company's business, financial position, results
of operations or cash flows. However, as of November 1, 1998 the Company has
only received responses from approximately 25% of the third parties to whom
such communications were made.




<PAGE>   15

There can be no guarantee, however, that third parties of business importance to
the Company will successfully and timely evaluate and address their own Year
2000 issues. The failure of any of these third parties to achieve Year 2000
compliance in a timely fashion could have a material adverse effect on the
Company's business, financial position, results of operations or cash flows.

The costs of the Company's Year 2000 compliance efforts are being funded by
Penford, through August 31, 1998 and thereafter with cash flows from operations
as well as the Company's Credit Facility. Although the Company has not completed
the Year 2000 assessment of its computer systems and software, based upon its
assessment efforts to date, the Company does not anticipate that the costs of
becoming Year 2000 compliant will have a material adverse effect upon the
Company's business, financial position, results of operations or cash flows. The
Company does not expect that the costs of replacing or modifying the computer
equipment and software will be substantially different, in the aggregate, from
the normal, recurring costs incurred by the Company for systems development,
implementation and maintenance in the ordinary course of business. In this
regard, in the ordinary course of replacing computer equipment and software, the
Company attempts to obtain replacements that are Year 2000 compliant. For
example, the Company recently installed a computer system, which was purchased
and installed irrespective of Year 2000 and cost approximately $4.0 million. As
of November 1, 1998, additional costs incurred by the Company for the
replacement of computer equipment and software that was not Year 2000 compliant
(i.e. the costs incurred in excess of the costs that would have been incurred by
the Company in the ordinary course of replacing computer equipment and software)
have not been material. The Company expects to incur total costs of less than
$100,000 to become Year 2000 compliant.

The Company does not presently believe that the Year 2000 issue will pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows or adversely affect the Company's relationships with
customers, suppliers or others.

The Company has not yet developed a contingency plan for dealing with
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by the Company and certain third
parties to achieve Year 2000 compliance on a timely basis. The Company currently
plans to complete its analysis of the problems and costs associated with the
failure to achieve Year 2000 compliance and to establish a contingency plan in
the event of such failure by December 31, 1999.

The foregoing assessment of the impact of the Year 2000 issue on the Company
is based on management's best estimates as of the date of this Quarterly Report,
which are based on numerous assumptions as to future events. There can be no
assurance that these estimates will prove accurate and actual results could
differ materially from those estimated if these assumptions prove inaccurate.


<PAGE>   16

COMMON EUROPEAN CURRENCY

     The Treaty on European Economic and Monetary Union (the "Maastricht
Treaty") provides for the introduction of a single European currency, the Euro,
in substitution for the national currencies of the member states of the European
Union that adopt the Euro. In May 1998, the European Council determined (i) the
11 member states that met the requirement for the Monetary Union, and (ii) the
currency exchange rates among the currencies for the members states joining the
Monetary Union. The transitory period for the Monetary Union starts on January
1, 1999. According to Council Resolution of July 7, 1997, the introduction of
the Euro will be made in three steps: (i) a transitory period from January 1,
1999 to December 31, 2001, in which current accounts may be opened and financial
statements may be drawn in Euros, and local currencies and Euros will coexist;
(ii) from January 1, 2002 to June 30, 2002, in which local currencies will be
exchanged for Euros; and (iii) from July 1, 2002 in which local currencies will
disappear. Although there can be no assurance that a single European currency
will be adopted or, if adopted, on what time schedule and with what success
substantial transitional costs could result as the Company redesigns its
software systems to reflect the adoption of the new currency. In addition, there
can be no assurance as to the effect of the adoption of the Euro on the
Company's payment obligations under commercial agreements in such currencies.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends", "may", and other
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by forward-looking statements
contained in this report and presented elsewhere by management from time to
time. These factors include the matters discussed in the Overview to this Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Conditions and the matters set forth under the heading "Risk Factors" in the
Company's Registration Statement on Form 10 (declared effective on July 31,
1998), which matters are incorporated herein by reference.




                                       14
<PAGE>   17
                          PART II. -- OTHER INFORMATION



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.




                                       15
<PAGE>   18
                                   SIGNATURES

Pursuant to the requirements of the Securities and 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: November 16, 1998             By: /s/ Tod R. Hamachek
                                        -------------------------------
                                        Tod R. Hamachek
                                        Chairman of the Board and
                                        Chief Executive Officer




                                  EXHIBIT INDEX

     Exhibit Number                Description
     --------------                -----------
         27                   Financial Data Schedule

         99                   Pages 12 through 22 of Amendment No. 2 to the
                              Company's Registration Statement on Form 10/A as
                              filed with the Securities and Exchange Commission
                              on July 28, 1998 (which is not deemed filed
                              except to the extent that portions thereof are
                              expressly incorporated by reference herein).
        














                                       16