<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, 2000

                                       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 November 10, 2000.

             Class                                            Outstanding
-------------------------------------                      -----------------
   Common stock, par value $.001                              12,643,649



                                       1
<PAGE>   2

                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
Part I.    Financial Information

  Item 1.  Financial Statements (Unaudited)

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

           Condensed 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...........................................   8

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk......  11

Part II.   Other Information

  Item 6.  Exhibits and Reports on Form 8-K................................  12

Signature..................................................................  13

Exhibit Index..............................................................  14



                                       2


<PAGE>   3



                         PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                           PENWEST PHARMACEUTICALS CO.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                           SEPTEMBER 30,    DECEMBER 31,
                                                                2000           1999
                                                           -------------    ------------
                                                             (Unaudited)      (Note 2)
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents..........................         $  6,627        $   739
  Trade accounts receivable, net of allowance for
     doubtful accounts of  $263 and $245.............            7,330          5,043
  Inventories:
     Raw materials and other.........................            1,684          1,513
     Finished goods..................................            5,128          6,136
                                                              --------        -------
                                                                 6,812          7,649
  Prepaid expenses and other current assets..........              732            629
  Deferred income taxes..............................              234            297
                                                              --------        -------
     Total current assets............................           21,735         14,357
Fixed assets, net....................................           17,870         18,942
Other assets.........................................            5,266          5,118
                                                              --------        -------
     Total assets....................................         $ 44,871        $38,417
                                                              ========        =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................         $  2,037         $3,296
  Accrued expenses...................................            5,691          2,707
  Taxes payable......................................              332            344
                                                              --------        -------
       Total current liabilities.....................            8,060          6,347

Loans payable refinanced in March 2000...............               --          6,700
Deferred income taxes................................              429            520
Other long-term liabilities..........................            2,478          2,341
                                                              --------        -------
       Total liabilities.............................           10,967         15,908
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
     12,643,649  shares in 2000 and 11,148,718
     shares in 1999..................................               13             11
  Additional paid in capital.........................           77,170         59,718
  Accumulated deficit................................          (41,702)       (36,159)
  Accumulated other comprehensive loss...............           (1,577)        (1,061)
                                                              --------        -------
       Total shareholders' equity ...................           33,904         22,509
                                                              --------        -------
       Total liabilities and shareholders' equity....         $ 44,871        $38,417
                                                              ========        =======
</TABLE>

                       See accompanying notes to condensed
                       consolidated financial statements.

                                       3
<PAGE>   4


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


                                                 THREE MONTHS
                                              ENDED SEPTEMBER 30,
                                             2000           1999
                                           --------       ---------
                                                  (UNAUDITED)
<S>                                        <C>            <C>
Revenues
  Product sales .....................      $ 10,090       $  9,457
  Royalties and licensing fees ......         1,152            264
                                           --------       --------
    Total revenues ..................        11,242          9,721
Cost of product sales ...............         7,050          6,611
                                           --------       --------
    Gross profit ....................         4,192          3,110
Operating expenses
  Selling, general and administrative         2,828          3,151
  Research and product development ..         3,464          1,754
                                           --------       --------
    Total operating expenses ........         6,292          4,905
                                           --------       --------
Loss from operations ................        (2,100)        (1,795)
Investment income ...................            83             --
Interest expense ....................            15             92
                                           --------       --------
Loss before income taxes ............        (2,032)        (1,887)
Income tax expense (benefit) ........            65            (10)
                                           --------       --------
Net loss ............................      $ (2,097)      $ (1,877)
                                           ========       ========
Basic and diluted net loss per
    share............................      $  (0.17)      $  (0.17)
                                           ========       ========
Weighted average shares of common
    stock outstanding ...............        12,636         11,121
                                           ========       ========
</TABLE>

<TABLE>
<CAPTION>

                                                  NINE MONTHS
                                              ENDED SEPTEMBER 30,
                                             2000           1999
                                           --------       ---------
                                                 (UNAUDITED)
<S>                                        <C>            <C>
Revenues
  Product sales .....................      $ 28,247       $ 27,468
  Royalties and licensing fees ......         3,165            414
                                           --------       --------
    Total revenues ..................        31,412         27,882
Cost of product sales ...............        19,072         19,409
                                           --------       --------
    Gross profit ....................        12,340          8,473
Operating expenses
  Selling, general and administrative         8,775          8,701
  Research and product development ..         8,894          5,253
                                           --------       --------
    Total operating expenses ........        17,669         13,954
                                           --------       --------
Loss from operations ................        (5,329)        (5,481)
Investment income ...................           151             --
Interest expense ....................           156            226
                                           --------       --------
Loss before income taxes ............        (5,334)        (5,707)
Income tax expense (benefit) ........           209            (29)
                                           --------       --------
Net loss ............................      $ (5,543)      $ (5,678)
                                           ========       ========
Basic and diluted net loss per
    share............................      $  (0.45)      $  (0.51)
                                           ========       ========
Weighted average shares of common
    stock outstanding ...............        12,223         11,094
                                           ========       ========
</TABLE>


                       See accompanying notes to condensed
                       consolidated financial statements.

                                       4
<PAGE>   5


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

<TABLE>
<CAPTION>


                                                                  NINE MONTHS
                                                              ENDED SEPTEMBER 30,
                                                              2000           1999
                                                            ---------      ---------
                                                                    (UNAUDITED)

<S>                                                         <C>            <C>
Net cash used in operating activities ................      $ (3,169)      $ (3,696)

Investing activities:
  Acquisitions of fixed assets, net ..................        (1,213)          (401)
  Other ..............................................          (304)          (299)
                                                            --------       --------
Net cash used in investing activities ................        (1,517)          (700)

Financing activities:
  Borrowings from credit facility ....................         2,800          8,200
  Repayments of credit facility ......................        (9,500)        (5,200)
  Issuance of common stock, net ......................        17,378            445
                                                            --------       --------
 Net cash provided by financing activities ...........        10,678          3,445

Effect of exchange rate changes on cash and cash
 equivalents .........................................          (104)           (82)
                                                            --------       --------
Net increase (decrease) in cash and cash equivalents .         5,888         (1,033)
Cash and cash equivalents at beginning of period .....           739          1,476
                                                            --------       --------
Cash and cash equivalents at end of period ...........      $  6,627       $    443
                                                            ========       ========
</TABLE>

                       See accompanying notes to condensed
                       consolidated financial statements.



                                       5

<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. Based on its extensive expertise in developing
    and manufacturing tableting ingredients for the pharmaceutical industry, the
    Company has developed TIMERx(R) ("TIMERx"), a proprietary controlled release
    druG delivery technology and PROSOLV(TM) ("PROSOLV"), another drug delivery
    technology which improves the performance characteristics OF tablets. The
    Company's product portfolio ranges from excipients that are sold in bulk, to
    more technically advanced and patented excipient technologies that are
    licensed to customers. 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, 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 nine month period ended September 30, 2000
    are not necessarily indicative of the results that may be expected for the
    year ending December 31, 2000. For further information, refer to the
    consolidated financial statements and footnotes thereto included in the
    Company's Annual Report on Form 10-K for the year ended December 31, 1999.

         The balance sheet at December 31, 1999 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.       RECENT ACCOUNTING DEVELOPMENTS

         In December 1999, the Securities and Exchange Commission ("SEC") issued
    Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
    Statements" which provides guidance related to revenue recognition based on
    interpretations and practices followed by the SEC. SAB 101A was released on
    March 24, 2000 and deferred the effective date of SAB 101 to no later than
    the second fiscal quarter beginning after December 15, 1999. In June 2000,
    the SEC issued SAB 101B which delayed the implementation date of SAB 101
    until no later than the fourth quarter of fiscal years beginning December
    15, 1999. SAB 101 requires companies to report any change in revenue
    recognition as a cumulative change in accounting principle at the time of
    implementation in accordance with Accounting Principles Board Opinion No.
    20, "Accounting Changes." Accordingly, any change made for the adoption of
    SAB 101 will result in a non-cash charge to operations for the cumulative
    effect of the change as of January 1, 2000. Based on its current evaluation,
    the Company intends to make a change in its accounting policy for up-front
    non-refundable fees, as required, in the fourth quarter of 2000, however,
    the change is not expected to have a material effect on the Company's
    financial condition or results of operations.


                                       6
<PAGE>   7


4.  INCOME TAXES

         The effective tax rates for the quarters ended September 30, 2000 and
1999, was an expense of 3% and a benefit of 1%, respectively. The effective tax
rates for the nine months ended September 30, 2000 and 1999, was an expense of
4% and a benefit of 1%, respectively. The effective tax rates are higher than
the federal statutory rate of a 34% benefit, due primarily to the valuation
allowance recorded to offset deferred tax assets relating to the Company's net
operating losses, and state and foreign income taxes.

5.  COMPREHENSIVE LOSS

    The components of comprehensive loss for the three-month and nine-month
periods ended September 30, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>

                                                         THREE MONTHS                          NINE MONTHS
                                                     ENDED SEPTEMBER 30,                    ENDED SEPTEMBER 30,
                                                     2000             1999                2000           1999
                                                   --------         --------          -------          --------
                                                           (IN THOUSANDS)                       (IN THOUSANDS)
<S>                                                <C>              <C>               <C>              <C>
    Net loss                                       $(2,097)         $(1,877)          $(5,543)         $(5,678)
    Foreign currency translation adjustments          (301)             164              (516)            (276)
                                                     -----          -------          --------         --------

    Comprehensive loss                             $(2,398)         $(1,713)          $(6,059)         $(5,954)
                                                   ========         ========          ========         ========
</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.

6.       ISSUANCE OF COMMON STOCK

         On March 6, 2000, the Company completed a private placement of its
    common stock to selected institutional and other accredited investors,
    resulting in the sale of 1,399,232 shares for approximately $18.2 million.
    The Company received approximately $17 million after expenses, of which $7.7
    million of these proceeds was used to repay the existing outstanding balance
    under the Company's unsecured revolving credit facility as required by its
    terms. The credit facility is no longer available to the Company.

7.       COLLABORATION AGREEMENT

    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 those called for in Penwest's original
agreement with Mylan for Nifedipine XL, a generic equivalent to Procardia XL.
Mylan has retained the marketing rights to the 30 mg strength of Nifedipine XL.
During the quarter ended September 30, 2000 and in connection with its March
2000 agreement with Mylan, the Company recognized approximately $2.2 million in
revenue from a final shipment of formulated bulk TIMERx manufactured for
Nifedipine XL, as well as royalty revenue that was recorded on Mylan's sales of
the 30mg strength of generic Procardia XL.


8.  CONTINGENCIES

         In 1994, the Boots Company PLC ("Boots") filed an opposition to a
    patent granted by the European Patent Office (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 would not be expected to materially adversely affect the Company's
    business, financial condition, cash flows and results of operations.

         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

                                       7
<PAGE>   8

    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. On
August 31, 1998 (the "Distribution Date"), Penwest became an independent,
publicly owned company when Penford Corporation ("Penford") the Company's former
parent company, 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 has incurred net losses since 1994. As of September 30, 2000,
the Company's accumulated deficit was approximately $41.7 million. The Company
expects net losses to continue at least into early 2003. 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, Mylan's sales of Pfizer's 30 mg generic version of
Procardia XL, sales growth of the Company's other pharmaceutical excipients
products, as well as the level of investment in research and development
activities. 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.

    On March 2, 2000, Mylan announced that it had signed a supply and
distribution agreement with 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 those
called for in Penwest's original agreement with Mylan for Nifedipine XL, the
TIMERx-based generic equivalent to Procardia XL. Mylan has retained the
marketing rights to the 30 mg strength of Nifedipine XL. During the quarter
ended September 30, 2000 and in connection with its March 2000 agreement with
Mylan, the Company recognized approximately $2.2 million in revenue from a final
shipment of formulated bulk TIMERx manufactured for Nifedipine XL, as well as
royalty revenue that was recorded on Mylan's sales of the 30mg strength of
generic Procardia 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.

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101A was released on
March 24, 2000 and deferred the effective date of SAB 101 to no later than the
second fiscal quarter beginning after December 15, 1999. In June 2000, the SEC
issued SAB 101B which delayed the implementation date of SAB 101 until no later
than the fourth quarter of fiscal years beginning December 15, 1999. SAB 101
requires companies to report any change in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes." Accordingly,
any change made for the adoption of SAB 101 will result in a non-cash charge to
operations for the cumulative effect of the change as of January 1, 2000. Based
on its current evaluation, the Company intends to make a change in its
accounting policy for up-front non-refundable fees, as required, in the fourth
quarter of 2000, however, the change is not expected to have a material effect
on the Company's financial condition or results of operations.

                                       8
<PAGE>   9


    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,
royalty payments, as well as the level of investment in research and development
activities. 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.

    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

    Quarters Ended September 30, 2000 and 1999

    Total revenues increased 15.6% for the quarter ended September 30, 2000 to
$11.2 million from $9.7 million for the quarter ended September 30, 1999.
Product sales increased to $10.1 million for the quarter ended September 30,
2000 compared to $9.5 million for the quarter ended September 30, 1999,
representing an increase of 6.7%. The increase in product sales was due to the
recognition of $2.2 million of revenue from a final shipment of formulated bulk
TIMERx to Mylan Pharmaceuticals as part of Penwest's March 2000 agreement
regarding the manufacture of Nifedipine XL, a generic version of Procardia XL,
using Penwest's TIMERx technology. The increase in bulk TIMERx sales was
partially offset by reduced revenues from the Company's excipients business
primarily due to a softness in sales, particularly in the first month of the
quarter. This softness is due to lower sales volumes to two primary customers,
as well as some pricing pressure on Emcocel products, primarily in Europe.
Royalties and licensing revenues increased $900,000 as a result of royalties
earned primarily on Mylan's sales of the 30 mg strength of generic Procardia XL.

    Gross profit increased to $4.2 million, or 37.3% of total revenues for the
quarter ended September 30, 2000 from $3.1 million, or 32.0% of total revenues
for the quarter ended September 30, 1999. The increase in gross profit was
primarily due to royalties and licensing fees which increased to $1.2 million
from $300,000 for the quarters ended September 30, 2000 and 1999, respectively.
Gross profit percentage on product sales was unchanged at 30.1% for each of the
quarters ended September 30, 2000 and 1999.

    Selling, general and administrative expenses decreased by 10.3% for the
quarter ended September 30, 2000 to $2.8 million from $3.2 million for the
quarter ended September 30, 1999. The decrease was primarily attributable to
reduced professional fees and travel expenses.

    Research and product development expenses increased by 97.5% for the quarter
ended September 30, 2000 to $3.5 million from $1.8 million for the quarter ended
September 30, 1999. This increase was primarily due to increased expenses
associated with the advancement of Penwest's collaboration with Endo
Pharmaceuticals Inc. ("Endo") in the development of a narcotic analgesic product
which has recently completed Phase II clinical trials, as well as increased
activity in the Company's drug development pipeline.

    The effective tax rates for the quarters ended September 30, 2000 and 1999,
were an expense of 3% and a benefit of 1%, respectively. The effective rates are
higher than the federal statutory rate of a 34% benefit, due primarily to the
valuation allowance recorded to offset deferred tax assets relating to the
Company's net operating losses, and state and foreign income taxes.

    Nine Months Ended September 30, 2000 and 1999

    Total revenues increased 12.7% for the nine months ended September 30, 2000
to $31.4 million from $27.9 million for the nine months ended September 30,
1999. Product sales increased to $28.2 million for the nine months ended
September 30, 2000 compared to $27.5 million for the nine months ended September
30, 1999. The increase in product sales was due to shipments of formulated bulk
TIMERx to Mylan in the first and third quarters of 2000. The first quarter's
shipments to Mylan were in anticipation of their launch of Nifedipine XL, and
prior to Mylan signing the supply and distribution agreement with Pfizer. The
third quarter's shipments to Mylan were in connection with Penwest's March 2000
agreement with Mylan noted above. Partially offsetting the increased sales of
formulated bulk TIMERx included in product sales was a decrease in excipients
revenues during the nine months ended September


                                       9
<PAGE>   10


30, 2000. This softness in excipient revenues was due to a milder-than-expected
cough/cold season resulting in reduced orders from customers, a decrease in
sales volumes to two primary customers, as well as pricing pressure on Emcocel
products, primarily in Europe. The increase in royalties and licensing fees to
$3.2 million from $414,000 for the nine months ended September 30, 2000 and
1999, respectively, was primarily attributable to royalties from Mylan on
generic Procardia XL.

    Gross profit increased to $12.3 million or 39.3% of total revenues for the
nine months ended September 30, 2000 from $8.5 million, or 30.4% of total
revenues for the nine months ended September 30, 1999. The increase in gross
profit was primarily due to increased royalties and licensing fees noted above.
Gross profit percentage on product sales increased to 32.5% from 29.3% for the
nine months ended September 30, 2000 and 1999, respectively, due to lower
production costs from volume manufacturing efficiencies, as well as increased
sales of formulated bulk TIMERx and PROSOLV, which have higher overall margins.

    Selling, general and administrative expenses increased by 1% for the nine
months ended September 30, 2000 to $8.8 million from $8.7 million for the nine
months ended September 30, 1999.

    Research and product development expenses increased by 69.3% for the nine
months ended September 30, 2000 to $8.9 million from $5.3 million for the nine
months ended September 30, 1999. This increase was primarily due to increased
expenses associated with the advancement of Penwest's collaboration with Endo
Pharmaceuticals Inc. ("Endo") in the development of a narcotic analgesic product
which has recently completed Phase II clinical trials, as well as increased
activity in the Company's drug development pipeline.

    The effective tax rates for the nine months ended September 30, 2000 and
1999, were an expense of 4% and a benefit of 1%, respectively. The effective
rates are higher than the federal statutory rate of a 34% benefit, due primarily
to the valuation allowance 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 the Distribution, the Company has funded its operations and
capital expenditures with cash from operations, advances under a credit facility
and the issuance of additional shares of common stock.

    The Company had an available revolving credit facility of $15.0 million of
unsecured financing (the "Credit Facility"), which was guaranteed by Penford. On
March 6, 2000, the Company completed a private placement of its common stock to
selected institutional and other accredited investors, resulting in the sale of
1,399,232 shares for approximately $18.2 million. The Company received net
proceeds of approximately $17 million after fees, of which $7.7 million was used
to repay the existing outstanding balance under the Company's Credit Facility as
required by its terms. The Credit Facility was subsequently terminated and is no
longer available to the Company.

    As of September 30, 2000, the Company had cash and cash equivalents of $6.6
million. The Company has no committed sources of capital. As of September 30,
2000, the Company did not have any material commitments for capital
expenditures. At September 30, 2000, the Company's trade receivables were $7.3
million, an increase of $2.3 million from the December 31, 1999 balance of $5.0
million. This increase was primarily due to amounts due from Mylan relating to
the third quarter's shipments of bulk TIMERx noted above and royalties due from
Mylan for the third quarter of 2000. At September 30, 2000, the Company's
accrued expenses and accounts payable totaled $7.7 million, an increase of $1.7
million from the December 31, 1999 balance of $6.0 million. This increase is due
to the Company's funding obligation under its strategic alliance agreement with
Endo. In connection with its agreement with Endo, the Company expects to expend
an additional $9 million, primarily in the last quarter of 2000 and 2001 on the
development of a drug. The Company also has announced its intention to increase
its level of research and product development in 2001 to approximately $18-$20
million. The Company intends to utilize available cash and cash from operations,
and is also evaluating other funding sources to fund expenditures. If the
Company is unable to secure adequate funding, this increase in research and
product development will likely be delayed. Under the Endo agreement, 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 Company had negative cash flow from operations in each of the periods
presented, primarily due to net losses for the periods, as well as significantly
higher trade receivables at September 30, as compared to December 31. Funds
expended for the acquisition of fixed assets were primarily related to efforts
at the Company's manufacturing facility in Iowa to increase capacity, and to a
lesser extent, to procure equipment used in research and product development.
Funds expended for intangible assets include costs to secure and defend patents
on technology developed by the Company and to secure trademarks.


                                       10
<PAGE>   11

    The Company anticipates that its existing capital resources, as well as
internally generated funds, will enable it to maintain currently planned
operations at least into early 2001. The Company is currently reviewing various
funding alternatives and anticipates securing additional financing in the next
six months. The Company's requirements for additional capital could be
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 development of manufacturing,
marketing and sales capabilities.

    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.

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 Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the matters set forth under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, which
are expressly incorporated by reference herein.

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 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.

                                       11

<PAGE>   12



                          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



                                       12
<PAGE>   13



                                    SIGNATURE



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 10, 2000                     /s/ Jennifer L. Good
        -----------------                     ----------------------------------
                                              Jennifer L. Good
                                              Vice President Finance and Chief
                                              Financial Officer
                                              (Principal Financial Officer)



                                       13
<PAGE>   14

                                  EXHIBIT INDEX


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

     27        Financial Data Schedule

     99*       Pages 31 through 40 of the Company's Annual Report on Form 10-K
               for the year ended December 31, 1999 as filed with the Securities
               and Exchange Commission on March 21, 2000 (which is not deemed
               filed except to the extent that portions thereof are expressly
               incorporated by reference herein)


* Incorporated by reference from Exhibit 99 to the Company's quarterly report on
  Form 10-Q for the quarter ended March 31, 2000.



                                       14