##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2002

OR

(BOX)      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             |  | 12563-2335                          
|                                         |  |                                     
|(Address of principal executive offices) |  | (Zip Code)                          

(845) 878-3414

---

(Registrants telephone number, including area code.)


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

Yes(X BOX)     No(BOX)

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of August 9, 2002.

|                              |  |            
|----------------------------- |  | -----------
|Class                         |  | Outstanding
|                              |  |            
|Common stock, par value $.001 |  | 15,485,670 



---

TABLE OF CONTENTS



|                                                   |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                    
|                                                   | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                   |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION                       
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                                         
|EXHIBIT INDEX                                     
|Ex-10.1 Amend. & Restated Strategic Alliance Agmnt
|Ex-99.1 Section 906 Certification                 



---



##### Table of Contents



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                            |  |                                                      | 18 |     
|             
|             
|             
|             
|Part II       |  | Other Information                                                                     |  |                                                      |    |     
|             
|             
|             
|             
|Item 4        |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                      | 19 |     
|             
|             
|             
|             
|Item 6        |  | Exhibits and Reports on Form 8-K                                                      |  |                                                      | 20 |     
|             
|             
|             
|             
|Signature     |  |                                                                                       |  |                                                      | 21 |     
|             
|             
|             
|             
|Exhibit Index |  |                                                                                       |  |                                                      | 22 |     

2



---



##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |        |        |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------ | ----------------- | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                     |                                                                                                                                                                   |                         |                                            |                   |        | June 30,    |        | December 31,
|                                     |                                                                                                                                                                   |                         |                                            |                   |        | 2002        |        | 2001        
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |             
|                                     |                                                                                                                                                                   |                         |                                            |                   |        | (Unaudited) |        | (Note 2)    
|ASSETS                               |                                                                                                                                                                   |                         |                                            |                   |        |             |        |             
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                                                   |                         |                                            |                   |        |             |        |             
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                                         |                         | $                                          | 8,697             |        |             | $      | 12,903       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Marketable securities                                                                                                                                             |                         |                                            | 6,281             |        |             |        | 9,609        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Trade accounts receivable, net of allowance for
doubtful accounts of $214 at June 30, 2002 and $220 at
December 31, 2001                                          |                         |                                            | 7,283             |        |             |        | 6,228        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories:                                                                                                                                                      |                         |                                            |                   |        |             |        |              |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                   | Raw materials and other |                                            |                   | 1,611  |             |        |              | 1,558  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                   | Finished goods          |                                            |                   | 6,600  |             |        |              | 6,299  |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   |                         | 8,211                                      |                   |        |             | 7,857  |             
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets                                                                                                                         |                         |                                            | 679               |        |             |        | 1,166        |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   | Total current assets    |                                            |                   | 31,151 |             |        |              | 37,763 |       
|                                    
|                                    
|                                    
|                                    
|Fixed assets, net                    |                                                                                                                                                                   |                         | 14,420                                     |                   |        |             | 15,567 |             
|                                    
|                                    
|                                    
|                                    
|Patents, net                         |                                                                                                                                                                   |                         | 3,929                                      |                   |        |             | 3,545  |             
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                                                                                                                                                   |                         | 2,808                                      |                   |        |             | 2,738  |             
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   | Total assets            |                                            | $                 | 52,308 |             |        | $            | 59,613 |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                                   |                         |                                            |                   |        |             |        |             
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                                                   |                         |                                            |                   |        |             |        |             
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                                                  |                         | $                                          | 2,548             |        |             | $      | 2,174        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses                                                                                                                                                  |                         |                                            | 1,772             |        |             |        | 2,275        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued development costs                                                                                                                                         |                         |                                            | 3,110             |        |             |        | 3,139        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Taxes payable                                                                                                                                                     |                         |                                            | 393               |        |             |        | 448          |       
|                                    
|                                    
|                                    
|                                    
|                                     | Loan payable                                                                                                                                                      |                         |                                            | 2,838             |        |             |        | 2,668        |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   |                         | Total current liabilities                  |                   |        | 10,661      |        |              |        | 10,704 |       
|                                    
|                                    
|                                    
|                                    
|Deferred income taxes                |                                                                                                                                                                   |                         | 205                                        |                   |        |             | 205    |             
|                                    
|                                    
|                                    
|                                    
|Deferred revenue                     |                                                                                                                                                                   |                         | 323                                        |                   |        |             | 369    |             
|                                    
|                                    
|                                    
|                                    
|Deferred compensation                |                                                                                                                                                                   |                         | 2,798                                      |                   |        |             | 2,711  |             
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   |                         |                                            | Total liabilities |        |             | 13,987 |              |        |        | 13,989 | 
|                                    
|                                    
|                                    
|                                    
|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 15,480,670 shares
at June 30, 2002 and 15,276,630 shares at
December 31, 2001 |                         |                                            | 16                |        |             |        | 15           |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid in capital                                                                                                                                        |                         |                                            | 109,769           |        |             |        | 108,054      |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                                                                               |                         |                                            | (70,562           | )      |             |        | (60,926      | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                                                                                                              |                         |                                            | (902              | )      |             |        | (1,519       | )     
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   |                         | Total shareholders equity                 |                   |        | 38,321      |        |              |        | 45,624 |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       
|                                     |                                                                                                                                                                   |                         | Total liabilities and shareholders equity |                   | $      | 52,308      |        |              | $      | 59,613 |       
|                                     |                                                                                                                                                                   |                         |                                            |                   |        |             |        |              |       

See accompanying notes to condensed consolidated financial statements.

3



---



##### Table of Contents






PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                                    |                                     |                          |        |                |        |      |        |       |       | 
|--------------------------------------------------- | ----------------------------------- | ------------------------ | ------ | -------------- | ------ | ---- | ------ | ----- | ----- | 
|                                                    |                                     |                          |        | Three Months  
|                                                    |                                     |                          |        | Ended June 30,
|                                                    |                                     |                          |        |               
|                                                    |                                     |                          |        | 2002           |        | 2001
|                                                    |                                     |                          |        |                |        |     
|                                                    |                                     |                          |        | (Unaudited)   
|Revenues                                            |                                     |                          |        |                |        |      |        |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Product sales                       |                          | $      | 8,943          |        |      | $      | 8,378 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Royalties and licensing fees        |                          |        | 1,318          |        |      |        | 1,137 |      
|                                                    |                                     |                          |        |                |        |      |        |       |      
|                                                    |                                     | Total revenues           |        |                | 10,261 |      |        |       | 9,515 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Cost of product sales                               |                                     |                          | 6,230  |                |        |      | 5,817  |      
|                                                    |                                     |                          |        |                |        |      |        |       |      
|                                                    |                                     | Gross profit             |        |                | 4,031  |      |        |       | 3,698 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Operating expenses                                  |                                     |                          |        |                |        |      |        |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Selling, general and administrative |                          |        | 3,776          |        |      |        | 3,742 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Research and product development    |                          |        | 5,540          |        |      |        | 2,960 |      
|                                                    |                                     |                          |        |                |        |      |        |       |      
|                                                    |                                     | Total operating expenses |        |                | 9,316  |      |        |       | 6,702 | 
|                                                    |                                     |                          |        |                |        |      |        |       |      
|Loss from operations                                |                                     |                          | (5,285 | )              |        |      | (3,004 | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Investment income                                   |                                     |                          | 112    |                |        |      | 20     |      
|                                                   
|                                                   
|                                                   
|                                                   
|Interest expense                                    |                                     |                          | 62     |                |        |      | 78     |      
|                                                    |                                     |                          |        |                |        |      |        |       |      
|Loss before income taxes                            |                                     |                          | (5,235 | )              |        |      | (3,062 | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Income tax expense                                  |                                     |                          | 83     |                |        |      | 104    |      
|                                                    |                                     |                          |        |                |        |      |        |       |      
|Net loss                                            |                                     | $                        | (5,318 | )              |        | $    | (3,166 | )    
|                                                    |                                     |                          |        |                |        |      |        |       |      
|Basic and diluted net loss per share                |                                     | $                        | (0.34  | )              |        | $    | (0.25  | )    
|                                                    |                                     |                          |        |                |        |      |        |       |      
|Weighted average shares of common stock outstanding |                                     |                          | 15,466 |                |        |      | 12,700 |      
|                                                    |                                     |                          |        |                |        |      |        |       |      

|                                                    |                                     |                          |        |                |        |      |        |        |        | 
|--------------------------------------------------- | ----------------------------------- | ------------------------ | ------ | -------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                    |                                     |                          |        | Six Months    
|                                                    |                                     |                          |        | Ended June 30,
|                                                    |                                     |                          |        |               
|                                                    |                                     |                          |        | 2002           |        | 2001
|                                                    |                                     |                          |        |                |        |     
|                                                    |                                     |                          |        | (Unaudited)   
|Revenues                                            |                                     |                          |        |                |        |      |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Product sales                       |                          | $      | 18,118         |        |      | $      | 17,614 |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Royalties and licensing fees        |                          |        | 2,456          |        |      |        | 2,840  |       
|                                                    |                                     |                          |        |                |        |      |        |        |       
|                                                    |                                     | Total revenues           |        |                | 20,574 |      |        |        | 20,454 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Cost of product sales                               |                                     |                          | 12,824 |                |        |      | 12,380 |       
|                                                    |                                     |                          |        |                |        |      |        |        |       
|                                                    |                                     | Gross profit             |        |                | 7,750  |      |        |        | 8,074  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Operating expenses                                  |                                     |                          |        |                |        |      |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Selling, general and administrative |                          |        | 7,149          |        |      |        | 6,737  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Research and product development    |                          |        | 10,129         |        |      |        | 6,283  |       
|                                                    |                                     |                          |        |                |        |      |        |        |       
|                                                    |                                     | Total operating expenses |        |                | 17,278 |      |        |        | 13,020 | 
|                                                    |                                     |                          |        |                |        |      |        |        |       
|Loss from operations                                |                                     |                          | (9,528 | )              |        |      | (4,946 | )     
|                                                   
|                                                   
|                                                   
|                                                   
|Investment income                                   |                                     |                          | 242    |                |        |      | 60     |       
|                                                   
|                                                   
|                                                   
|                                                   
|Interest expense                                    |                                     |                          | 120    |                |        |      | 152    |       
|                                                    |                                     |                          |        |                |        |      |        |        |       
|Loss before income taxes                            |                                     |                          | (9,406 | )              |        |      | (5,038 | )     
|                                                   
|                                                   
|                                                   
|                                                   
|Income tax expense                                  |                                     |                          | 230    |                |        |      | 251    |       
|                                                    |                                     |                          |        |                |        |      |        |        |       
|Net loss                                            |                                     | $                        | (9,636 | )              |        | $    | (5,289 | )     
|                                                    |                                     |                          |        |                |        |      |        |        |       
|Basic and diluted net loss per share                |                                     | $                        | (0.62  | )              |        | $    | (0.42  | )     
|                                                    |                                     |                          |        |                |        |      |        |        |       
|Weighted average shares of common stock outstanding |                                     |                          | 15,432 |                |        |      | 12,689 |       
|                                                    |                                     |                          |        |                |        |      |        |        |       

See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents






PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                             |                                                   |   |                |         |      |   |        |         |  
|------------------------------------------------------------ | ------------------------------------------------- | - | -------------- | ------- | ---- | - | ------ | ------- | -
|                                                             |                                                   |   | Six Months    
|                                                             |                                                   |   | Ended June 30,
|                                                             |                                                   |   |               
|                                                             |                                                   |   | 2002           |         | 2001
|                                                             |                                                   |   |                |         |     
|                                                             |                                                   |   | (Unaudited)   
|Net cash used in operating activities                        |                                                   | $ | (8,703         | )       |      | $ | (3,405 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Investing activities:                                        |                                                   |   |                |         |      |   |        |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Acquisitions of fixed assets, net                 |   |                | (259    | )    |   |        | (252    | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Intangible asset costs                            |   |                | (509    | )    |   |        | (411    | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from maturities of marketable securities |   |                | 3,250   |      |   |        |        |  
|                                                             |                                                   |   |                |         |      |   |        |        
|Net cash provided by (used in) investing activities          |                                                   |   | 2,482          |         |      |   | (663   | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Financing activities:                                        |                                                   |   |                |         |      |   |        |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Borrowings from credit facility                   |   |                | 12,284  |      |   |        | 17,558  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayments of credit facility                     |   |                | (12,115 | )    |   |        | (14,845 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Issuance of common stock, net                     |   |                | 1,714   |      |   |        | 357     |  
|                                                             |                                                   |   |                |         |      |   |        |        
|Net cash provided by financing activities                    |                                                   |   | 1,883          |         |      |   | 3,070  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of exchange rate changes on cash and cash
equivalents |                                                   |   | 132            |         |      |   | (60    | )      
|                                                             |                                                   |   |                |         |      |   |        |        
|Net decrease in cash and cash equivalents                    |                                                   |   | (4,206         | )       |      |   | (1,058 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents at beginning of period             |                                                   |   | 12,903         |         |      |   | 2,204  |        
|                                                             |                                                   |   |                |         |      |   |        |        
|Cash and cash equivalents at end of period                   |                                                   | $ | 8,697          |         |      | $ | 1,146  |        
|                                                             |                                                   |   |                |         |      |   |        |        

See accompanying notes to condensed consolidated financial statements.

5



---



##### Table of Contents






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

1. BUSINESS

Penwest Pharmaceuticals Co. (Penwest or the Company) is engaged in the
development of pharmaceutical products based on novel oral drug delivery
technologies. The Company is also a leader in the development, manufacture, and
distribution of branded pharmaceutical excipients which are the inactive
ingredients in tablets and capsules. Based on its fundamental expertise in
tabletting ingredients, the Company has developed its proprietary TIMERx®
controlled release drug delivery technology, which is applicable to a broad
range of orally administered drugs, and ProSolv®, a high functionality
excipient based on co-processing technology, which, among other things,
improves the performance characteristics of tablets. The Company has
manufacturing facilities in Iowa and Finland and has customers primarily
throughout North America and Europe.

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

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation for the interim periods presented have been included.
All such adjustments are of a normal recurring nature. Operating results for
the three-month and six-month periods ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. 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, 2001.

The balance sheet at December 31, 2001 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 PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their estimated useful lives, if they have a finite useful life. The Company
adopted the new rules on accounting for goodwill and other intangible assets in
the first quarter of 2002. The adoption of the new standards did not affect the
results of operations, financial position, or cash flows of the Company.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The primary objectives of SFAS No. 144 are to
develop one accounting model based on the framework established in SFAS No. 121
for long-lived assets to be disposed of by sale, and to address significant
implementation issues. The Companys adoption of SFAS No. 144 in the first
quarter of 2002 did not affect the results of operations, financial position,
or cash flows of the Company.

6



---



##### Table of Contents



4. CREDIT FACILITY

On January 17, 2001, the Company completed arrangements for a revolving
line of credit (Revolver) with a financial institution. Under the terms of
the Revolver, the Company may borrow up to $10.0 million (Line of Credit) as
determined by a formula based on the Companys Eligible Accounts Receivable and
Eligible Saleable Inventory, as defined in the agreement. Under the formula,
generally 85% of the Companys U.S. and Canadian receivables, as well as
generally 60% of the Companys U.S. saleable inventories, are included in the
borrowing base. Amounts outstanding under the Revolver are collateralized by
the Companys U.S. and Canadian accounts receivable, the Companys inventory
and general intangibles. The Revolver has an initial term of three years,
ending in January 2004, and provides for annual renewals thereafter.

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

The Revolver contains covenants, including the requirement that the
Company maintain at all times, certain minimum levels of tangible net worth as
defined, at varying specified amounts during the initial term of the agreement,
and restrictions on the incurrence of additional indebtedness and the payment
of dividends. The Revolver includes a lockbox requirement under the control of
the lender, whereby collections of certain trade receivables are used to
immediately reduce the balance of the Revolver.

The interest rate on the Revolver at June 30, 2002 was 5.75%.

5. INCOME TAXES

The effective tax rates for the quarters ended June 30, 2002 and 2001,
were expenses of 2% and 3%, respectively. The effective tax rates for the six
months ended June 30, 2002 and 2001 were expenses of 2% and 5%, respectively.
The effective tax rates are higher than the federal statutory rate of a 34%
benefit, due primarily to valuation allowances recorded to offset deferred tax
assets relating to the Companys net operating losses, and state and foreign
income taxes.

6. COMPREHENSIVE LOSS

The components of comprehensive loss for the three-month and six-month
periods ended June 30, 2002 and 2001 are as follows (in thousands):

|                                                        |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------- | ------ | -------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Three Months   |        | Six Months    
|                                                        |  | Ended June 30, |        | Ended June 30,
|                                                        |  |                |        |               
|                                                        |  | 2002           |        | 2001           |  | 2002 |        | 2001
|                                                        |  |                |        |                |  |      |        |     
|                                                        |  | (unaudited)    |        | (unaudited)   
|Net loss                                                |  | $              | (5,318 | )              |  | $    | (3,166 | )    |  | $ | (9,636 | ) |  | $ | (5,289 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Foreign currency translation
adjustments                |  |                | 722    |                |  |      | (111   | )    |  |   | 608    |   |  |   | (417   | )
|                                                       
|                                                       
|                                                       
|                                                       
|Change in unrealized net gains on
marketable securities |  |                | 26     |                |  |      |       |      |  |   | 9      |   |  |   |       |  
|                                                        |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                                      |  | $              | (4,570 | )              |  | $    | (3,277 | )    |  | $ | (9,019 | ) |  | $ | (5,706 | )
|                                                        |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  

Accumulated other comprehensive loss equals the cumulative translation
adjustment and unrealized net gains on marketable securities which are the only
components of other comprehensive loss included in the Companys financial
statements.

7



---



##### Table of Contents






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

The following Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Companys actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those described below under Certain Factors That
May Affect Future Results.

OVERVIEW

Penwest is engaged in the development of pharmaceutical products based on
novel oral drug delivery technologies. The Company is also a leader in the
development, manufacture, and distribution of branded pharmaceutical excipients
which are the inactive ingredients in tablets and capsules. Based on its
fundamental expertise in tabletting ingredients, the Company has developed its
proprietary TIMERx® controlled release drug delivery technology, which is
applicable to a broad range of orally administered drugs, and its ProSolv® line
of products, high functionality excipients based on co-processing technology,
which, among other things, improve the performance characteristics of tablets.

The Company has incurred net losses since 1994. As of June 30, 2002, the
Companys accumulated deficit was approximately $70.6 million. The Company
expects operating losses and negative cash flows to continue until substantial
sales of products commercialized utilizing TIMERx technology occur. A
substantial portion of the Companys revenues to date have been generated from
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, including in
particular oxymorphone ER, a narcotic analgesic for the treatment of moderate
to severe pain, being developed with Endo Pharmaceuticals Inc.; royalties from
Mylan Pharmaceuticals, Inc.s sales of Pfizer, Inc.s 30 mg generic version of
Procardia XL; sales growth of the Companys pharmaceutical excipients products;
royalties received on third parties
sales of products containing ProSolv; and the level of the Companys
investment in research and development activities. The Companys strategy
includes a significant commitment to spending on research and development
targeted at identifying and developing extended release products which can be
formulated using the Companys TIMERx technologies. The Company also expects
to expend significant resources on the development of new drug delivery
technologies, both internally and through in-licenses or acquisition. The
Companys spending in the area of new technology, however, is discretionary and
is subject to the Company identifying appropriate opportunities as well as the
availability of funds from the Companys operations, cash resources,
collaborative research and development arrangements, and external financing.
There can be no assurance when or if the Company will achieve profitability or
if it will be able to sustain profitability on a quarterly basis, if at all.

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

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

The Companys results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Companys pharmaceutical
excipients and formulated bulk TIMERx, royalties on Mylans sales of Pfizers
30 mg generic version of Procardia XL, royalties received on third parties
sales of products containing ProSolv, 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, and currency exchange rate fluctuations.

8



---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Areas where significant judgments are made include, but are not limited to,
revenue recognition, allowance for doubtful accounts, inventory, deferred
taxes, valuation allowance, and impairment of intangible assets. Actual results
could differ materially from these estimates. For a more detailed explanation
of the judgments made in these areas, refer to our Annual Report on Form 10-K
for the year ended December 31, 2001.

RESULTS OF OPERATIONS

Quarters Ended June 30, 2002 and 2001

Total revenues increased by $746,000 or 7.8% for the second quarter ended
June 30, 2002 to $10.3 million, from $9.5 million for the comparable quarter
ended June 30, 2001. Product sales increased by 6.7% to $8.9 million for the
quarter ended June 30, 2002 from $8.4 million for the quarter ended June 30,
2001. The increase in product sales reflects increased sales of the Companys
ProSolv® products primarily attributable to additional approvals of customers
products containing ProSolv® in the ethical pharmaceutical market, and growth
in the Companys European excipients business as a whole. This increase was
offset slightly by lower sales of formulated bulk TIMERx. Royalties and
licensing fees increased by $181,000 for the second quarter of 2002 to $1.3
million from $1.1 million in the second quarter of 2001, primarily due to higher
royalties from Mylan attributable to increased sales of Pfizers 30 mg generic
version of Procardia XL, as well as higher royalties from the licensing of
ProSolv®.

Gross profit increased to $4.0 million, or 39.3% of total revenues, for
the second quarter of 2002 from $3.7 million, or 38.9% of total revenues, for
the second quarter of 2001. The Companys gross profit increased primarily due
to increased excipient sales, and higher royalties from Mylan and from the
licensing of ProSolv, as noted above, but was partially offset by decreased sales of
formulated bulk TIMERx. Gross profit percentage on product sales decreased to
30.3% for the second quarter of 2002 from 30.6% for the second quarter of 2001.
This decrease was primarily attributable to lower sales in the second quarter
of 2002 of formulated bulk TIMERx, which has higher overall margins than the
Companys excipient products.

Selling, general and administrative expenses were essentially flat at
approximately $3.8 million for the second quarter of 2002 and 2001.

Research and product development expenses increased by $2.6 million or
87.2% for the second quarter of 2002 to $5.5 million, from $3.0 million for the
second quarter of 2001. In addition to the significant costs of Phase III
clinical trials for oxymorphone ER being developed with Endo which were
incurred in the second quarter, the Company increased its investment in the
development of new products utilizing TIMERx technology and in the research of
new drug delivery technologies.

As of June 30, 2002, the Company had several product candidates utilizing
TIMERx technology in various stages of clinical trials. Completion of clinical
trials and commercialization of these product candidates may take several years
and the length of time can vary substantially according to the type,
complexity, and novelty of a product candidate.

The most advanced of these product candidates is oxymorphone ER, which the Company is developing with Endo. Endo, which is
conducting the clinical trials of the product, completed the pivotal Phase III clinical trial of the product in July 2002. Assuming favorable results of the ongoing clinical
trials and that all other FDA requirements for filing are met, the Company
expects that Endo will submit the NDA with the FDA for this product in the
second half of 2002. The Company anticipates spending an additional $2.5
million on the oxymorphone program during the remainder of 2002.

There can be no assurance that any of the Companys products will be
successfully developed, will receive regulatory approval, or will be
successfully commercialized.

The effective tax rates for the quarters ended June 30, 2002 and 2001,
were expenses of 2% and 3%, respectively. The effective tax rates are higher
than the federal statutory rate of a 34% benefit, due primarily to valuation
allowances recorded to offset deferred tax assets relating to the Companys net
operating losses, and state and foreign income taxes.

9



---



##### Table of Contents



Six Months Ended June 30, 2002 and 2001

Total revenues increased 0.6% for the six months ended June 30, 2002 to
$20.6 million from $20.5 million for the six months ended June 30, 2001.
Product sales increased by 2.9% to $18.1 million for the six months ended June
30, 2002 compared to $17.6 million for the six months ended June 30, 2001. The
increase in product sales was due to increased sales of excipient products,
primarily in Europe, and was partially offset by lower revenues on sales of
formulated bulk TIMERx. Royalties and licensing revenues decreased by
$384,000 to $2.5 million for the first six months of 2002 as compared to $2.8
million in the comparable period in 2001, primarily due to lower royalties from
Mylan as a result of increased competition for Mylans generic Procardia XL from another generic version of Procardia XL.

Gross profit decreased to $7.8 million, or 37.7% of total revenues, for
the first six months of 2002 from $8.1 million, or 39.5% of total revenues, for
the first six months of 2001. This decrease was primarily due to lower
royalties from Mylan as noted above.

Selling, general and administrative expenses increased by 6.1% for the
first six months of 2002, to $7.1 million as compared with $6.7 million for the
first six months of 2001. The increase was primarily due to increased
compensation expense due to hiring additional drug delivery personnel,
increased costs for the Companys annual report, and increased business
insurance costs.

Research and product development expenses increased by 61.2% for the first
six months of 2002 to $10.1 million from $6.3 million for the first six months
of 2001. This increase was primarily due to the Companys share of the costs
of clinical trials for oxymorphone ER being developed with Endo and the
Companys increased investment in the development of new products utilizing
TIMERx technology and in the research of new drug delivery technologies.

The effective tax rates for the first six months of 2002 and 2001 were
expenses of 2% and 5%, respectively. The effective tax rates are higher than
the federal statutory rate of a 34% benefit, due primarily to valuation
allowances recorded to offset deferred tax assets relating to the Companys net
operating losses, and state and foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Subsequent to August 31, 1998, the date the Company became an independent,
publicly-owned company, the Company has funded its operations and capital
expenditures with revenues from the sale of excipients, sale of formulated bulk
TIMERx, royalties and milestone payments from Mylan and other collaborators,
advances under credit facilities and proceeds from the sale and issuance of
shares of common stock.

As of June 30, 2002, the Company had cash, cash equivalents, and
short-term investments of $15.0 million. The Company had no committed sources
of capital at June 30, 2002 other than the Companys revolving line of credit
(Revolver) with CIT Group/Business Credit, Inc. Under the Revolver, generally
85% of the Companys U.S. and Canadian receivables, as well as generally 60% of
the Companys U.S. saleable inventories, are included in the borrowing base.
Amounts outstanding under the Revolver are collateralized by the Companys U.S.
and Canadian accounts receivable, and its inventory and general intangibles.
The Revolver has an initial term of three years ending January 2004, and
provides for annual renewals thereafter. The Revolver bears interest at a
specified banks prime rate plus 1% per annum, on the greater of $3.0 million
or on the average outstanding balance. The Revolver also requires that fees be
paid of 0.5% per annum on unused portions of the Line of Credit and provides
for early termination fees of up to 0.75% in the event the Company terminates
the Revolver prior to the end of the initial term. The Revolver contains
covenants, including the requirement that the Company maintain at all times,
certain minimum levels of tangible net worth as defined, at varying specified
amounts during the initial term of the agreement, and restrictions on the
incurrence of additional indebtedness and the payment of dividends. The
Revolver includes a lockbox requirement under the control of the lender,
whereby collections of certain trade receivables are used to immediately reduce
the balance of the Revolver. Under the terms of the Revolver, the Company may
borrow up to $10.0 million (Line of Credit) as determined by a formula based
on the Companys Eligible Accounts Receivable and Eligible Saleable Inventory,
as defined in the agreement. As of August 9, 2002, there was approximately $3.0 million outstanding under the Revolver.

As of June 30, 2002, the Company did not have any material commitments for
capital expenditures. As of June 30, 2002, the Companys trade receivables were
$7.3 million, an increase of $1.1 million from the $6.2 million in trade
receivables at December 31, 2001. This increase was primarily due to higher
sales of excipient products as well as increased royalties for the quarter. In
connection with its strategic alliance agreement with Endo, the Company expects
to expend approximately an additional $2.5 million in 2002 on the development
and pre-marketing costs of oxymorphone ER.

The Company had negative cash flow from operations for the six months
ended June 30, 2002 of $8.7 million, primarily due to the

10Table of Contentsnet loss in the period. Funds expended during the first six months of
2002 for the acquisition of fixed assets were primarily related to additions at
the Companys manufacturing facility in Iowa, laboratory equipment for drug
development activities, and information technology associated with the Company
strengthening its technology infrastructure to prepare for increasing drug
development activities. Funds expended for intangible assets include costs to
secure patents on technology developed by the Company and to secure trademarks.The Company intends to utilize available cash and short-term investments,
cash from operations, and funds available under the Revolver to fund future
operations. The Companys requirements for additional capital are substantial
and will depend on many factors, including (i) the timing and amount of
payments received under existing and possible future collaborative agreements;
(ii) the structure of any future collaborative or development agreements,
including the costs of funding research and development and clinical trials as
part of cost-sharing arrangements with collaborators such as Endo; (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 and other
development activities; (vi) the prosecution, defense and enforcement of
potential patent claims and other intellectual property rights; and (vii) the
costs and timing of adding drug development capabilities.The Company anticipates that its existing capital resources, including
funds available under the Revolver as well as anticipated internally generated
funds from the sale of excipients and formulated bulk TIMERx, royalties from
Mylan and other payments from collaborators, will enable the Company to
maintain currently planned operations through mid 2003. The Company may need to
raise additional funds to maintain its operations beyond such date. The Company
may seek to obtain additional funds through transactions relating to its
business lines and/or debt or equity financings. The additional financing may
not be available to the Company on acceptable terms, if at all. If adequate
funds are not available, Penwest may be required to (i) significantly curtail
its product commercialization efforts, including terminating existing
collaborative agreements; (ii) obtain funds through arrangements with
collaborators or others on adverse terms to Penwest that may require Penwest to
relinquish rights to certain of its technologies, product candidates, or
products which Penwest would otherwise pursue on its own or that would
significantly dilute the Companys stockholders; (iii) significantly scale back
or terminate operations and/or; (iv) seek relief under applicable bankruptcy
laws.CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTSThis Quarterly Report on Form 10-Q contains or incorporates
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements, other than statements of historical facts,
included or incorporated in this report regarding our strategy, future
operations, financial position, future revenues, projected costs, prospects,
plans and objectives of management are forward-looking statements. The words
believes, anticipates, estimates, plans, expects, intends, may,
projects, will, and would and similar expressions are intended to
identify forward-looking statements, although not all forward-looking
statements contain these identifying words. We cannot guarantee that we
actually will achieve the plans, intentions or expectations disclosed in our
forward-looking statements and you should not place undue reliance on our
forward-looking statements. There are a number of important factors that could
cause actual results or events to differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements we make. These important factors include the factors set forth below. In addition, any forward-looking statements represent Penwests estimates
only as of the date this Quarterly Report is first filed with the Securities
and Exchange Commission and should not be relied upon as representing Penwests
estimates as of any subsequent date. We do not assume any obligation to update
any forward-looking statements.RISK FACTORSWE HAVE NOT BEEN PROFITABLEWe have incurred net losses since 1994, including net losses of
approximately $9.6 million for the first six months of 2002 and of $15.9 million,
$8.8 million, and $7.7 million, during 2001, 2000, and 1999, respectively. As
of June 30, 2002, our accumulated deficit was approximately $70.6 million. The
Company expects net losses to continue until substantial sales of products
commercialized utilizing TIMERx technology occur. A substantial portion of our
revenues have been generated from the sales of our pharmaceutical excipients.
Our future profitability will depend on several factors, including:
        
        the successful
commercialization of TIMERx controlled release products, including in
particular oxymorphone ER, a narcotic analgesic for the treatment of moderate
to severe pain, being developed with Endo Pharmaceuticals Inc.;
        
        royalties from Mylans sales of Pfizers 30mg generic version of Procardia XL;
        
        royalties received on third parties sales of products containing ProSolv;
        
        sales growth of our pharmaceutical excipient products; and
        
        the level of investment in research and development activities.11Table of ContentsWE ARE DEPENDENT ON COLLABORATORS TO CONDUCT FULL-SCALE BIOEQUIVALENCE STUDIES
AND CLINICAL TRIALS, OBTAIN REGULATORY APPROVALS FOR, AND MANUFACTURE, MARKET,
AND SELL OUR TIMERx CONTROLLED RELEASE PRODUCTSCertain of our TIMERx controlled release products we develop and commercialize in
collaboration with pharmaceutical companies. We are parties to collaborative
agreements with third parties relating to most of our current products. Under these
collaborations, depending on the structure of the collaboration, we are
dependent on our collaborators to fund some portion of development, to conduct full-scale bioequivalence
studies and clinical trials, obtain regulatory approvals for, and manufacture,
market and sell products utilizing our TIMERx controlled release technology. We
are also dependent on Mylan with respect to the marketing and sale of the 30 mg
strength of Pfizers generic version of Procardia XL. Our collaborators may not
devote the resources necessary or may otherwise be unable to complete
development and commercialization of these potential products. Our existing
collaborations are subject to termination without cause on short notice under
certain circumstances.If we cannot maintain our existing collaborations or establish new
collaborations, we would be required to terminate the development and
commercialization of products or undertake product development and
commercialization activities at our own expense. Moreover, we have limited
experience in conducting full-scale bioequivalence studies and clinical trials,
preparing and submitting regulatory applications and manufacturing, marketing
and selling the TIMERx controlled release products. We may not be successful in
performing these activities.Our existing collaborations and any future collaborations with third
parties may not be scientifically or commercially successful. Factors that may
affect the success of our collaborations include the following:
        
        our collaborators may be pursuing alternative technologies or
developing alternative products, either on their own or in collaboration
with others, that may be competitive with the product as to which they
are collaborating with us, which could affect our collaborators
commitment to the collaboration with us;
        
        reductions in marketing or sales efforts or a discontinuation of
marketing or sales of our products by our collaborators would reduce our
revenues, which will be based on a percentage of net sales by the
collaborator;
        
        our collaborators may terminate their collaborations with us, which
could make it difficult for us to attract new collaborators or adversely
affect our perception in the business and financial communities; and
        
        our collaborators may pursue higher priority programs or change the
focus of their development programs, which could affect the
collaborators commitment to us.WE FACE SIGNIFICANT COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DOThe pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability
of financing, litigation and other factors. Many of our competitors have longer
operating histories and greater financial, marketing, legal and other resources
than we do and than certain of our collaborators do.Our TIMERx business faces competition from numerous public and private
companies and their controlled release technologies, including Johnson &
Johnsons oral osmotic pump (OROS®) technology, multiparticulate systems
marketed by Elan and Biovail, traditional matrix systems marketed by
SkyePharma, plc and other controlled release technologies marketed or under
development by Andrx Corporation, among others.Our TIMERx products in development will face competition from products
with the same indication as the TIMERx products being developed by Penwest. For
instance, we expect extended release Oxymorphone ER will face
competition from Purdue Pharmas OxyContin®.In addition to developing controlled release versions of immediate release
products, we concentrated a significant portion of our initial development
efforts on generic versions of branded controlled release products. The success
of generic versions of branded controlled release products based on our TIMERx
technology will depend, in large part, on the intensity of competition from the
12Table of Contentsbranded controlled release product, other generic versions of the branded
controlled release product and other drugs and technologies that compete with
the branded controlled release product, as well as the timing of product
approval.The generic drug industry is characterized by frequent litigation between
generic drug companies and branded drug companies. Those companies with
significant financial resources will be better able to bring and defend any
such litigation.In our excipients business, we compete with a number of large
manufacturers and other distributors of excipient products, many of which have
substantially greater financial, marketing and other resources than the
Company. Our principal competitor in this market is FMC Corporation, which
markets its own line of MCC excipient products, and J. Rettenmaier & Sohne GmbH,
a European manufacturer and marketer of MCC and sodium starch glycolate
products.WE REQUIRE ADDITIONAL FUNDINGOur requirements for additional capital are substantial and will depend on
many factors, including:
        
        the structure of any future collaborative or development agreements;
        
        the progress of our collaborative and independent development projects and funding obligations with respect to the projects;
        
        revenues from our excipients products;
        
        the costs to us of clinical studies for our products;
        
        the costs and timing of adding drug development capabilities;
        
        royalties received from Mylan;
        
        royalties from sales of TIMERx products;
        
        the timing and amount of payments received under existing and possible future collaborative agreements; and
        
        the prosecution, defense and enforcement of patent claims and other intellectual property rights.The Company has no committed sources of capital except for the CIT credit
facility. The Company anticipates its existing capital resources, including the
amount available (as determined by a formula based on the Companys Eligible
Accounts Receivable and Eligible Saleable Inventory, as defined in the
agreement,) under the $10 million financing arrangement with CIT Credit, will
be sufficient to fund operations through mid 2003.Additional financing may not be available to Penwest on acceptable terms,
if at all. If adequate funds are not available, Penwest may be required to (i)
significantly curtail its product commercialization efforts, including
terminating existing collaborative agreements; (ii) obtain funds through
arrangements with collaborators or others on adverse terms to Penwest that may
require Penwest to relinquish rights to certain of its technologies, product
candidates, or products which Penwest would otherwise pursue on its own or that
would significantly dilute the Companys stockholders; (iii) significantly
scale back or terminate operations and/or; (iv) seek relief under applicable
bankruptcy laws.IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE
EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE CERTAIN OF OUR PRODUCTSIn order to obtain regulatory approvals for the commercial sale of certain
of our potential products, including controlled release versions of immediate
release drugs and new chemical entities, our collaborators will be required to
complete clinical trials in humans to demonstrate the safety and efficacy of
the products. Our collaborators may not be able to obtain authority from the
FDA or other regulatory agencies to commence or complete these clinical trials.The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may
not be predictive of results that will be obtained in larger scale advanced
stage clinical trials. Furthermore, we, one of our collaborators, or the FDA
may suspend clinical trials at any time if the subjects or patients
participating in such trials are being exposed to unacceptable health risks, or
for other reasons.13Table of ContentsThe rate of completion of clinical trials is dependent in part upon the
rate of enrollment of patients. Patient accrual is a function of many factors
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment may result in
increased costs and program delays.We and our collaborators may not be able to successfully complete any
clinical trial of a potential product within any specified time period. In some
cases, we may not be able to complete the trial at all. Moreover, clinical
trials may not show any potential product to be safe or efficacious. Thus, the
FDA and other regulatory authorities may not approve any of our potential
products for any indication.Our business, financial condition, or results of operations could be
materially adversely affected if:
        
        we or our collaborators are unable to complete a clinical trial of one of our potential products;
        
        the results of any clinical trial are unfavorable; or
        
        the time or cost of completing the trial exceeds our expectations.WE MAY NOT OBTAIN REGULATORY APPROVAL; THE APPROVAL PROCESS CAN BE
TIME-CONSUMING AND EXPENSIVEThe development, clinical testing, manufacture, marketing and sale of
pharmaceutical products are subject to extensive federal, state and local
regulation in the United States and other countries. This regulatory approval
process can be time-consuming and expensive.We may encounter delays or rejections during any stage of the regulatory
approval process based upon the failure of clinical data to demonstrate
compliance with, or upon the failure of the product to meet, the FDAs
requirements for safety, efficacy and quality; and those requirements may
become more stringent due to changes in regulatory agency policy or the
adoption of new regulations. After submission of a marketing application, in
the form of an NDA or an ANDA, the FDA may deny the application, may require
additional testing or data and/or may require postmarketing testing and
surveillance to monitor the safety or efficacy of a product. While the U.S.
Food, Drug and Cosmetic Act, or FDCA, provides for a 180-day review period, the
FDA commonly takes one to two years to grant final approval to a marketing
application (NDA or ANDA). Further, the terms of approval of any marketing
application, including the labeling content, may be more restrictive than we
desire and could affect the marketability of products incorporating our
controlled release technology.Some of the controlled release products that we are developing with our
collaborators are generic versions of branded controlled release products,
which require the filing of ANDAs. Certain ANDA procedures for generic versions
of controlled release products are the subject of petitions filed by brand name
drug manufacturers, which seek changes from the FDA in the approval process for
generic drugs. These requested changes include, among other things, tighter
standards for certain bioequivalence studies and disallowance of the use by a
generic drug manufacturer in its ANDA of proprietary data submitted by the
original manufacturer as part of an original new drug application. Any changes
in FDA regulations that make ANDA approvals more difficult may have a material
adverse effect on our business, financial condition and results of operations.Other products containing our TIMERx controlled release technology require
the filing of an NDA. A full NDA must include complete reports of preclinical,
clinical and other studies to prove adequately that the product is safe and
effective, which involves, among other things, full clinical testing, and as a
result requires the expenditure of substantial resources. In certain cases
involving controlled release versions of FDA-approved immediate release drugs,
we may be able to rely on existing publicly available safety and efficacy data
to support an NDA for controlled release products under Section 505(b)(2) of
the FDCA when such data exists for an approved immediate release version of the
same chemical entity. However, we can provide no assurance that the FDA will
accept such section 505(b)(2) NDA, or that we will be able to obtain publicly
available data that is useful. The section 505(b)(2) NDA process is a highly
uncertain avenue to approval because the FDAs policies on section 505(b)(2)
NDAs have not yet been fully developed. There can be no assurance that the FDA
will approve an application submitted under section 505(b)(2) in a timely
manner or at all.The FDA also has the authority to revoke or suspend approvals of
previously approved products for cause, to debar companies and individuals from
participating in the drug-approval process, to request recalls of allegedly
violative products, to seize allegedly volative products, to obtain injunctions
to close manufacturing plants allegedly not operating in conformity with
current Good Manufacturing Practices and to stop shipments of allegedly
violative products. The FDA may seek to impose pre-clearance14Table of Contentsrequirements on products currently being marketed without FDA approval,
and there can be no assurance that the Company or its third-party manufacturers
or collaborators will be able to obtain approval for such products within the
time period specified by the FDA.EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO ONGOING
REGULATORY REVIEWIf regulatory approval of a product is granted, such approval may be
subject to limitations on the indicated uses for which the product may be
marketed or contain requirements for costly post-marketing follow-up studies.
As to products for which marketing approval is obtained, the manufacturer of
the product and the manufacturing facilities will be subject to continual
review and periodic inspections by the FDA and other regulatory authorities.
The subsequent discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecution.OUR CONTROLLED RELEASE PRODUCTS THAT ARE GENERIC VERSIONS OF BRANDED CONTROLLED
RELEASE PRODUCTS THAT ARE COVERED BY ONE OR MORE PATENTS MAY BE SUBJECT TO
LITIGATIONWe expect that our collaborators will file ANDAs for our controlled
release products that are generic versions of branded controlled release
products that are covered by one or more patents. It is likely that the owners
of the patents covering the brand name product or the sponsors of the NDA with
respect to the branded product will sue or undertake regulatory initiatives to
preserve marketing exclusivity, as Pfizer did with respect to Nifedipine XL.
Any significant delay in obtaining FDA approval to market our product
candidates as a result of litigation, as well as the expense of such
litigation, whether or not we or our collaborators are successful, could have a
material adverse effect on our business, financial condition and results of
operations.THE MARKET MAY NOT BE RECEPTIVE TO PRODUCTS INCORPORATING OUR TIMERx CONTROLLED
RELEASE TECHNOLOGYThe commercial success of products incorporating our controlled release
technology that are approved for marketing by the FDA and other regulatory
authorities will depend upon their acceptance by the medical community and
third party payors as clinically useful, cost-effective and safe. No product
based on the TIMERx technology is marketed in the United States, so there can
be no assurance as to market acceptance.Other factors that we believe could materially affect market acceptance of
these products include:
        
        the timing of the receipt of marketing approvals and the countries in which such approvals are obtained;
        
        the safety and efficacy of the product as compared to competitive products; and
        
        the cost-effectiveness of the product and the ability to receive third party reimbursement.OUR SUCCESS DEPENDS ON OUR PROTECTING OUR PATENTS AND PATENTED RIGHTSOur success depends in significant part on our ability to develop
patentable products, to obtain patent protection for our products, both in the
United States and in other countries, and to enforce these patents. The patent
positions of pharmaceutical firms, including us, are generally uncertain and
involve complex legal and factual questions. As a result, patents may not issue
from any patent applications that we own or license. If patents do issue, the
claims allowed may not be sufficiently broad to protect our technology. In
addition, issued patents that we own or license may be challenged, invalidated
or circumvented. Our patents also may not afford us protection against
competitors with similar technology.Our success also depends on our not infringing patents issued to
competitors or others. We are aware of patents and patent applications
belonging to competitors and others that may require us to alter our products
or processes, pay licensing fees or cease certain activities.15Table of ContentsWe may not be able to obtain a license to any technology owned by a third
party that we require to manufacture or market one or more products. Even if we
can obtain a license, the financial and other terms may be disadvantageous.Our success also depends on our maintaining the confidentiality of our
trade secrets and patented know-how. We seek to protect such information by
entering into confidentiality agreements with employees, consultants, licensees
and pharmaceutical companies. These agreements may be breached by such parties.
We may not be able to obtain an adequate, or perhaps, any remedy to such a
breach. In addition, our trade secrets may otherwise become known or be
independently developed by our competitors.WE MAY BECOME INVOLVED IN PATENT LITIGATION OR OTHER INTELLECTUAL PROPERTY
PROCEEDINGS RELATING TO OUR PRODUCTS OR PROCESSES WHICH COULD RESULT IN
LIABILITY FOR DAMAGE OR STOP OUR DEVELOPMENT AND COMMERCIALIZATION EFFORTSThe pharmaceutical industry has been characterized by significant
litigation and interference and other proceedings regarding patents, patent
applications and other intellectual property rights. The types of situations in
which we may become parties to such litigation or proceedings include:
        
        We or our collaborators may initiate litigation or other proceedings
against third parties to enforce our patent rights.
        
        We or our collaborators may initiate litigation or other proceedings
against third parties to seek to invalidate the patents held by such
third parties or to obtain a judgment that our products or processes do
not infringe such third parties patents.
        
        If our competitors file patent applications that claim technology also
claimed by us, we or our collaborators may participate in interference or
opposition proceedings to determine the priority of invention.
        
        If third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
and our collaborators will need to defend against such proceedings.An adverse outcome in any litigation or other proceeding could subject us
to significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable
terms or at all.The cost of any patent litigation or other proceeding, even if resolved in
our favor, could be substantial. Although the legal costs of defending
litigation relating to a patent infringement claim are generally the
contractual responsibility of our collaborators, (unless such claim relates to
TIMERx in which case such costs are our responsibility) we could nonetheless
incur significant unreimbursed costs in participating and assisting in the
litigation. Some of our competitors may be able to sustain the cost of such
litigation and proceedings more effectively than we can because of their
substantially greater resources. Uncertainties resulting from the initiation
and continuation of patent litigation or other proceedings could have a
material adverse effect on our ability to complete in the marketplace. Patent
litigation and other proceedings may also absorb significant management time.WE HAVE ONLY LIMITED MANUFACTURING CAPABILITIES AND WILL BE DEPENDENT ON THIRD
PARTY MANUFACTURERSWe lack commercial scale facilities to manufacture our TIMERx material in
accordance with current GMP requirements prescribed by the FDA. We currently
rely on Draxis Pharma, Inc. for the bulk manufacture of our TIMERx material for
delivery to our collaborators under a contract that expires in September 2004.
The agreement shall be automatically renewed for successive one-year periods,
unless either party gives notice of its intent not to renew the contract, at
least six months prior to the end of the then-current term.There are a limited number of manufacturers that operate under GMP
regulations capable of manufacturing our TIMERx material. We have not yet
qualified a second source of supply. In the event that our current manufacturer
is unable to manufacture the TIMERx material in the required quantities, on a
timely basis or at all, we may be unable to obtain alternative contract
manufacturing, or obtain such manufacturing on commercially reasonable terms.If our third party manufacturer fails to perform its obligations, we may
be adversely affected in a number of ways, including:
        
        our collaborators may not be able to meet commercial demands for our products on a timely basis;16Table of Contents
        
        our collaborators may not be able to initiate or continue clinical trials of products that are under development; and
        
        our collaborators may be delayed in submitting applications for regulatory approvals of our products.We have limited experience in manufacturing TIMERx material on a
commercial scale and no facilities or equipment to do so. If we determine to
develop our own manufacturing capabilities, we will need to recruit qualified
personnel and build or lease the requisite facilities and equipment. We may not
be able to successfully develop our own manufacturing capabilities. Moreover,
it may be very costly and time consuming for us to develop such capabilities.The manufacture of any of our products (both TIMERx material and
excipients) is subject to regulation by the FDA and comparable agencies in
foreign countries. Any delay in complying or failure to comply with such
manufacturing requirements could materially adversely affect the marketing of
our products and our business, financial condition and results of operations.WE ARE DEPENDENT UPON A LIMITED NUMBER OF SUPPLIERS FOR THE GUMS USED IN OUR
TIMERx MATERIAL AND UPON A LIMITED NUMBER OF SUPPLIERS FOR THE WOOD PULP USED
IN THE MANUFACTURE OF OUR EXCIPIENTSOur TIMERx drug delivery system is a hydrophilic matrix combining
primarily two polysaccharides, xanthan and locust bean gums, in the presence of
dextrose. We purchase these gums from a sole source supplier. Emcocel and
Prosolv, our two largest selling excipients, are manufactured from a specialty
grade of wood pulp. We have qualified alternate suppliers with respect to such
materials, but we can provide no assurance that interruptions in supplies will
not occur in the future or that we will not have to obtain substitute
suppliers. Any interruption in these supplies could have a material adverse
effect on our ability to manufacture bulk TIMERx for delivery to our
collaborators or to manufacture these excipients.IF OUR COLLABORATORS FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT BY THIRD
PARTY PAYORS FOR OUR CONTROLLED RELEASE PRODUCTS, THEY MAY NOT BE ABLE TO
SUCCESSFULLY COMMERCIALIZE CONTROLLED RELEASE PRODUCTS IN CERTAIN MARKETSThe availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of health care by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the
pricing of prescription pharmaceuticals is subject to governmental control.The generic versions of controlled release products being developed by us
and our collaborators may be assigned an AB rating if the FDA considers the
product to be therapeutically equivalent to the branded controlled release
drug. Failure to obtain an AB rating from the FDA would indicate that for
certain purposes the drug would not be deemed to be therapeutically equivalent,
would not be fully substitutable for the branded controlled release drug and
would not be relied upon by Medicaid and Medicare formularies for
reimbursement.In both the U.S. and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care
system. Further proposals are likely. The potential for adoption of these
proposals may affect our ability to raise capital, obtain additional
collaborative partners and market our products.If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health maintenance organizations and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.WE WILL BE EXPOSED TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE PRODUCT LIABILITY INSURANCEOur business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of pharmaceutical
products. Product liability claims might be made by consumers, health care
providers, pharmaceutical companies, or others that sell our products. These
claims may be made even with respect to those products that are manufactured in
licensed and regulated facilities or that otherwise possess regulatory approval
for commercial sale.17Table of ContentsWe are currently covered by primary product liability insurance in the
amount of $1 million per occurrence and $2 million annually in the aggregate on
a claims-made basis and by umbrella liability insurance in excess of $25
million which can also be used for product liability insurance. This coverage
may not be adequate to cover any product liability claims. Product liability
coverage is expensive. In the future, we may not be able to maintain or obtain
such product liability insurance at a reasonable cost or in sufficient amounts
to protect us against losses due to liability claims. Any claims that are not
covered by product liability insurance could have a material adverse effect on
our business, financial condition and results of operations.THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILEThe market price of our common stock, like the market prices for
securities of pharmaceutical, biopharmaceutical and biotechnology companies,
have historically been highly volatile. The market from time to time
experiences significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
our operating results, future sales of our common stock, announcements of
technological innovations or new therapeutic products by us or our competitors,
announcements regarding collaborative agreements, clinical trial results,
government regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, changes in
reimbursement policies, comments made by securities analysts and general market
conditions may have a significant effect on the market price of the common
stock.CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
WASHINGTON LAW, AS WELL AS THE RIGHTS AGREEMENT TO WHICH WE ARE A PARTY, MAKE A
TAKEOVER OF PENWEST MORE DIFFICULTProvisions of our Certificate of Incorporation, our Bylaws and Washington
law, as well as the Rights Agreement to which we are a party, may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of our company, including transactions in which our
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMARKET RISK AND RISK MANAGEMENT POLICIESMarket risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates and other market
changes. Market risk is attributed to all market sensitive financial
instruments, including debt instruments. The operations of the Company are
exposed to financial market risks, including changes in interest rates and
foreign currency exchange rates. The Companys interest rate risk primarily
relates to its investments in marketable securities and its revolving line of
credit which bears interest at variable rates. The Companys foreign currency
exchange risk primarily relates to its international subsidiaries. The Company
does not use derivatives to hedge the impact of fluctuations in foreign
currencies or interest rates.The primary objectives for the Companys investment portfolio are
liquidity and safety of principal. Investments are made to achieve the highest
rate of return to the Company, consistent with these two objectives. The
Companys investment policy limits investments to certain types of instruments
issued by institutions with investment grade credit ratings and places
restrictions on maturities and concentration by issuer. Marketable securities
consist of corporate debt and approximated $6.3 million at June 30, 2002. These
securities have contractual maturity dates of up to fourteen months. Due to the
relatively short-term maturities of these securities, management believes there
is no significant market risk. At June 30, 2002, market values approximated
carrying values. At June 30, 2002, the Company had approximately $15.0 million
in cash, cash equivalents and investments in marketable securities, and
accordingly, a sustained decrease in the rate of interest earned of 1% would
cause a decrease in the annual amount of interest earned of18Table of Contentsup to approximately $150,000.The Company has a revolving line of credit with a financial institution
which bears interest at a specified banks prime rate plus 1% per annum (5.75%
at June 30, 2002) on the greater of $3.0 million or on the average outstanding
balance. At June 30, 2002, there was $2.8 million outstanding under the line
and, accordingly, a sustained increase in the interest rate of 1% would cause
increased annual interest expense of approximately $30,000.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. Where practical, the Company seeks to manage
expected local currency revenues in relation to local currency costs, and
manage local currency assets in relation to local currency liabilities. The
Company does not believe that the potential exposure is significant in light of
the size of the Company and its business. The effect of an immediate 10% change
in exchange rates would not have a material effect on the Companys results of
operations, financial position or cash flows.
PART II  OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSAt the Companys Annual Meeting of Shareholders held on June 5, 2002, the
following proposals were adopted by the vote
specified below:a.
        
        Election of Class II directors for a term of three years:

|                |  |     |            |          |  |  |         | 
|--------------- |  | --- | ---------- | -------- |  |  | ------- | 
|                |  | For |            | Withhold
|                |  |     |            |         
|Jere E. Goyan   |  |     | 12,255,968 |          |  |  | 412,613 | 
|               
|               
|               
|               
|Anne M. VanLent |  |     | 12,254,629 |          |  |  | 413,952 | 



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following directors did not stand for reelection as their terms
in office continued after the Annual Meeting:
Paul E. Freiman, Tod R. Hamachek, Rolf H. Henel, Robert J. Hennessey,
N. Stewart Rogers, and John N. Staniforth.



| | b. |  | Approval of an amendment to the Companys 1997 Equity
Incentive Plan to increase the number of shares of Common Stock
that may be issued thereunder from 2,660,000 shares to 3,410,000
shares:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |  |         |           |         |  |                  |         |  |  |      |  | 
|--------- |  | ------- | --------- | ------- |  | ---------------- | ------- |  |  | ---- |  | 
|For       |  | Against |           | Abstain |  | Broker Non-Votes
|          |  |         |           |         |  |                 
|8,853,117 |  |         | 3,694,948 |         |  |                  | 120,516 |  |  | None



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

|           |  |         |           |         |  |                  |        |  |  |      |  | 
|---------- |  | ------- | --------- | ------- |  | ---------------- | ------ |  |  | ---- |  | 
|For        |  | Against |           | Abstain |  | Broker Non-Votes
|           |  |         |           |         |  |                 
|11,462,742 |  |         | 1,154,932 |         |  |                  | 50,907 |  |  | None

19



---



##### Table of Contents






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.                                                                                                                                            
|  
|   |  | On May 7, 2002, the Company filed a report on Form 8-K announcing its results
for the first quarter ended March 31, 2002.                                       

20



---



##### Table of Contents






SIGNATURE

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

|                      |  |                                                                                                         
|--------------------- |  | --------------------------------------------------------------------------------------------------------
|Date: August 12, 2002 |  | PENWEST PHARMACEUTICALS CO.
/s/ Jennifer L. Good                                                        
|                      |  |                                                                                                         
|                      |  | Jennifer L. GoodSenior Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)

21



---



##### Table of Contents






EXHIBIT INDEX

|               |  |                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                    
|               |  |                                                                                                                                                
|*10.1          |  | Amended and Restated Strategic Alliance Agreement, dated as
of April 2, 2002, by and between Endo Pharmaceuticals
Holdings Inc. and the Company
|              
|              
|              
|              
|              
|99.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002                         



---

|* |  | Confidential treatment
requested for certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

22