<PAGE>   1

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

                                    FORM 10-Q

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

                  For the quarterly period ended March 31, 2001

                                       OR

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

For the transition period from ________________________ to ___________________


                          Commission File No. 000-23467


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

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

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


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



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

                                 Yes  X         No

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 11, 2001.

<TABLE>
<CAPTION>
                        Class                                 Outstanding
            -----------------------------                  -----------------
<S>                                                           <C>
            Common stock, par value $.001                     12,692,892
</TABLE>

<PAGE>   2

                           PENWEST PHARMACEUTICALS CO.

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                                  <C>
Part I.           Financial Information

       Item 1.    Financial Statements (Unaudited)

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

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

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

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

       Item 2.    Management's Discussion and Analysis of Financial Condition and
                  Results of Operations.................................................               8

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

Part II.          Other Information

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

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

Exhibit Index...........................................................................              14
</TABLE>


                                       2
<PAGE>   3

                         PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                      MARCH 31,    DECEMBER 31,
                                                                                        2001           2000
                                                                                      --------       --------
                                                                                     (Unaudited)      (Note 2)
<S>                                                                                   <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                           $  5,035       $  2,204
  Trade accounts receivable, net of allowance for
     doubtful accounts of  $240 and $235                                                 7,208          8,154
  Inventories:
     Raw materials and other                                                             1,584          2,611
     Finished goods                                                                      5,959          5,585
                                                                                      --------       --------
                                                                                         7,543          8,196
  Prepaid expenses and other current assets                                                730            745
                                                                                      --------       --------
     Total current assets                                                               20,516         19,299
Fixed assets, net                                                                       16,812         17,473
Intangible assets, net                                                                   2,936          2,899
Other assets                                                                             2,623          2,623
                                                                                      --------       --------
     Total assets                                                                     $ 42,887       $ 42,294
                                                                                      ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                    $  4,447       $  3,199
  Accrued expenses                                                                       1,820          1,790
  Accrued development costs                                                              1,790          2,911
  Taxes payable                                                                            351            270
  Loan payable                                                                           2,583           --
                                                                                      --------       --------
       Total current liabilities                                                        10,991          8,170

Deferred income taxes                                                                      194            205
Deferred revenue                                                                           404            378
Deferred compensation                                                                    2,570          2,524
                                                                                      --------       --------
       Total liabilities                                                                14,159         11,277
Shareholders' equity:
  Preferred stock, par value $.001, authorized
     1,000,000 shares, none outstanding                                                   --             --
  Common stock, par value $.001, authorized
     39,000,000 shares, issued and outstanding
     12,692,892 shares in 2001 and 12,669,780
      shares in 2000                                                                        13             13
  Additional paid in capital                                                            77,416         77,276
  Accumulated deficit                                                                  (47,068)       (44,945)
  Accumulated other comprehensive loss                                                  (1,633)        (1,327)
                                                                                      --------       --------
       Total shareholders' equity                                                       28,728         31,017
                                                                                      --------       --------
       Total liabilities and shareholders' equity                                     $ 42,887       $ 42,294
                                                                                      ========       ========
</TABLE>


                See accompanying notes to condensed consolidated
                             financial statements.


                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                                       THREE MONTHS
                                                                      ENDED MARCH 31,
                                                                  2001           2000
                                                                --------       --------
                                                                      (Unaudited)
<S>                                                             <C>            <C>
Revenues
  Product sales                                                 $  9,236       $ 10,481
  Royalties and licensing fees                                     1,703            894
                                                                --------       --------
     Total revenues                                               10,939         11,375
Cost of product sales                                              6,563          6,817
                                                                --------       --------
       Gross profit                                                4,376          4,558
Operating expenses
  Selling, general and administrative                              2,995          3,025
  Research and product development                                 3,323          2,620
                                                                --------       --------
     Total operating expenses                                      6,318          5,645
                                                                --------       --------
Loss from operations                                              (1,942)        (1,087)
Investment income                                                     40           --
Interest expense                                                      74            126
                                                                --------       --------
Loss before income taxes and cumulative effect
    of change in accounting principle                             (1,976)        (1,213)
Income tax expense                                                   147             96
                                                                --------       --------
Loss before cumulative effect of change in
    accounting principle                                          (2,123)        (1,309)
Cumulative effect of change in accounting
    principle (Note 3)                                              --             (410)
                                                                --------       --------
Net loss                                                        $ (2,123)      $ (1,719)
                                                                ========       ========

Basic and diluted amounts per share:
  Loss before cumulative effect of change in
     accounting principle                                       $  (0.17)      $  (0.11)
  Cumulative effect of change in accounting
    principle (Note 3)                                              --            (0.04)
                                                                --------       ========
Net loss                                                        $  (0.17)      $  (0.15)
                                                                ========       ========
Weighted average shares of common stock
    outstanding                                                   12,678         11,554
                                                                ========       ========

Proforma amounts assuming the accounting change is applied
   retroactively:
Net loss                                                        $ (2,123)      $ (1,309)
                                                                ========       ========
Basic and diluted net loss per share                            $  (0.17)      $  (0.11)
                                                                ========       ========
</TABLE>


                See accompanying notes to condensed consolidated
                             financial statements.


                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                                                                THREE MONTHS
                                                                                                ENDED MARCH 31,
                                                                                              2001           2000
                                                                                            -------       --------
                                                                                                  (UNAUDITED)
<S>                                                                                         <C>           <C>
Net cash provided by (used in) operating activities                                         $   352       $   (743)

Investing activities:
  Acquisitions of fixed assets, net                                                             (93)          (490)
  Other                                                                                         (95)           (56)
                                                                                            -------       --------
Net cash used in investing activities                                                          (188)          (546)

Financing activities:
  Borrowings from credit facility                                                             9,730          2,800
  Repayments of credit facility                                                              (7,147)        (9,500)
  Issuance of common stock, net                                                                 139         17,227
                                                                                            -------       --------
Net cash provided by financing activities                                                     2,722         10,527

Effect of exchange rate changes on cash and cash
 equivalents                                                                                    (55)           (23)
                                                                                            -------       --------
Net increase in cash and cash equivalents                                                     2,831          9,215
Cash and cash equivalents at beginning of period                                              2,204            739
                                                                                            -------       --------
Cash and cash equivalents at end of period                                                  $ 5,035       $  9,954
                                                                                            =======       ========
</TABLE>


                See accompanying notes to condensed consolidated
                             financial statements.


                                       5
<PAGE>   6

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

1.  BUSINESS

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

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

2.  BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation for
the interim periods presented have been included. All such adjustments are of a
normal recurring nature. Operating results for the three-month period ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.

    Based on anticipated levels of operations and currently available capital
resources, management expects operating losses and negative cash flows during
2001. Management anticipates that its existing capital resources, as well as
internally generated funds, will not enable the Company to maintain currently
planned operations through 2001. Management's plans in regard to these matters
include various available business and financing alternatives. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets, or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

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

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

3.  ACCOUNTING CHANGE

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


                                       6
<PAGE>   7

$18,000. The pro forma amounts presented on the statements of operations were
calculated assuming the accounting change was made retroactively to prior
periods. During the quarters ended March 31, 2001 and 2000, the Company
recognized $15,000 and $79,000, respectively, of revenue/income that is included
in its cumulative effect adjustment as of January 1, 2000.

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, and its inventory and general
intangibles. The Revolver has an initial term of three years, and provides for
annual renewals thereafter.

    The Revolver bears interest at a specified bank's prime rate plus 1% per
annum, on the greater of $3.0 million or on the average outstanding balance. The
Revolver also requires fees be paid of .5% per annum on unused portions of the
Line of Credit. It also provides for early termination fees of up to .75%, in
the event the Company terminates the Revolver prior to the end of the initial
term.

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

    The interest rate on the Revolver at March 31, 2001 was 9.0%. As of May 10,
2001, there was approximately $3.0 million outstanding under the terms of the
Revolver.

5.  INCOME TAXES

    The effective tax rates for the quarters ended March 31, 2001 and 2000, were
expenses of 7% and 6%, 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 periods ended March
31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS
                                                                                    ENDED MARCH 31,
                                                                                   2001          2000
                                                                                 -------       -------
                                                                                     (IN THOUSANDS)
<S>                                                                              <C>           <C>
Net loss                                                                         $(2,123)      $(1,719)
Foreign currency translation adjustments                                            (306)         (187)
                                                                                 -------       -------
Comprehensive loss                                                               $(2,429)      $(1,906)
                                                                                 =======       =======
</TABLE>

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

7.  CONTINGENCIES

    In 1994, the Boots Company PLC ("Boots") filed an opposition to a patent
granted by the European Patent Office (the "EPO") to the Company relating to its
TIMERx technology. In June 1996, the EPO dismissed Boots' opposition, leaving
intact all claims included in the patent. Boots has appealed this decision to
the EPO Board of Appeals and a hearing date for this case has been set for June
2001. There can be no assurance that the Company will prevail in this matter.
Management believes that estimates of the possible loss or range of loss
relating to this matter cannot be made at this time. An unfavorable outcome
would not be expected to materially adversely affect the Company's business,
financial condition, cash flows and results of operations.


                                       7
<PAGE>   8

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

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

OVERVIEW

    Penwest Pharmaceuticals Co. is engaged in the research, development and
commercialization of novel oral drug delivery technologies. The Company has
extensive experience in developing and manufacturing tableting ingredients for
the pharmaceutical industry. The Company's product portfolio ranges from
excipients that are sold in bulk, to more technically advanced and patented drug
delivery technologies based on excipients that are licensed to customers. On
August 31, 1998 (the "Distribution Date"), Penwest became an independent,
publicly owned company when Penford Corporation ("Penford") the Company's former
parent company, distributed (the "Distribution") to the shareholders of record
of Penford common stock on August 10, 1998, all of the shares of the Company's
common stock. Pursuant to the Distribution, each Penford shareholder of record
received three shares of the Company's common stock for every two shares of
Penford common stock held by them.

    The Company has incurred net losses since 1994. As of March 31, 2001, the
Company's accumulated deficit was approximately $47.1 million. Management
expects net losses in 2001 and anticipates that its existing capital resources,
as well as internally generated funds, will not enable the Company to maintain
currently planned operations through 2001 without the Company obtaining
additional financing. A substantial portion of the Company's revenues to date
have been generated from the sales of the Company's pharmaceutical excipients.
The Company's future profitability will depend on several factors, including the
successful commercialization of TIMERx controlled release products, sales growth
of the Company's other pharmaceutical excipients products, as well as the level
of investment in research and development activities. There can be no assurance
that the Company will achieve profitability or that it will be able to sustain
any profitability on a quarterly basis, if at all. Continuation of the Company
as a going concern, and the realization of its assets and satisfaction of its
liabilities are dependent upon the Company's ability to obtain additional
funding sources. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

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

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

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


                                       8
<PAGE>   9

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


RESULTS OF OPERATIONS

    Quarters Ended March 31, 2001 and 2000

    Total revenues decreased 3.8% for the quarter ended March 31, 2001 to $10.9
million from $11.4 million for the quarter ended March 31, 2000. Product sales
decreased to $9.2 million for the quarter ended March 31, 2001 compared to $10.5
million for the quarter ended March 31, 2000, representing a decrease of 11.9%.
The decrease in product sales was largely due to lower revenues from the
Company's excipients business and lower shipments of formulated bulk TIMERx
during the first quarter of 2001. The lower excipients sales in 2001 reflect
strong excipients sales in the first quarter of 2000, which the Company believes
were related to Y2K issues, as well as somewhat lower selling prices in the
first quarter of 2001 as compared with the first quarter of 2000. The lower
revenues on bulk TIMERx in the first quarter of 2001 reflect the large bulk
TIMERx shipments to Mylan that were recorded in the first quarter of 2000, in
anticipation of their launch of Nifedipine XL, a generic version of Procardia
XL, using Penwest's TIMERx technology. Royalties and licensing revenues
increased $809,000 primarily as a result of increased royalties earned on
Mylan's sales of the 30 mg strength of generic Procardia XL, as Mylan captures
greater market share.

    Gross profit decreased to $4.4 million, or 40.0% of total revenues for the
quarter ended March 31, 2001 from $4.6 million, or 40.1% of total revenues for
the quarter ended March 31, 2000. Gross profit percentage on product sales
decreased to 28.9% for the first quarter of 2001 from 35.0% for the first
quarter of 2000. This decrease was primarily due to lower sales volumes in 2001,
of formulated bulk TIMERx (as noted above) and of ProSolv, which have higher
overall margins, as well as competitive pressures on selling prices, as compared
to the first quarter of 2000. Despite the decrease in gross profit on product
sales, overall gross profit percentage was largely unchanged from the first
quarter of 2000 to the first quarter of 2001 primarily due to increased
royalties in 2001.

    Selling, general and administrative expenses decreased by 1% for the quarter
ended March 31, 2001, approximating $3.0 million for each of the quarters ended
March 31, 2001 and 2000, and reflects management's continued efforts to control
these costs.

    Research and product development expenses increased by 26.8% for the quarter
ended March 31, 2001 to $3.3 million from $2.6 million for the quarter ended
March 31, 2000. This increase was primarily due to the Company's share of
increased expenses associated with recently completed clinical trials and other
studies being conducted for the development of extended release oxymorphone
under the Company's collaboration with Endo, as well as increased activity in
the Company's drug development pipeline.

    The effective tax rates for the quarters ended March 31, 2001 and 2000 were
expenses of 7% and 6%, 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
<PAGE>   10

LIQUIDITY AND CAPITAL RESOURCES

    Subsequent to the Distribution, the Company has funded its operations and
capital expenditures with cash from operations, advances under credit facilities
and the issuance of additional shares of common stock.

    As of March 31, 2001, the Company had cash and cash equivalents of $5.0
million. On January 17, 2001, the Company secured a revolving line of credit
("Revolver") with CIT Group/Business Credit, Inc. Under the terms of the
Revolver, the Company may borrow up to $10.0 million ("Line of Credit") as
determined by a formula based on the Company's Eligible Accounts Receivable and
Eligible Saleable Inventory, as defined in the agreement. As of May 10, 2001,
the Company has drawn down approximately $3.0 million on the Revolver. Under the
Revolver, generally 85% of the Company's U.S. and Canadian receivables, as well
as generally 60% of the Company's U.S. saleable inventories, are included in the
borrowing base. Amounts outstanding under the Revolver are collateralized by the
Company's U.S. and Canadian accounts receivable, and its inventory and general
intangibles. The Revolver has an initial term of three years, and provides for
annual renewals thereafter. The Revolver bears interest at a specified bank's
prime rate plus 1% per annum, on the greater of $3.0 million or on the average
outstanding balance. The Revolver also requires fees be paid of .5% per annum on
unused portions of the Line of Credit. It also provides for early termination
fees of up to .75%, in the event the Company terminates the Revolver prior to
the end of the initial term. The Revolver contains covenants, including the
requirement that the Company maintain at all times, certain minimum levels of
tangible net worth as defined, at varying specified amounts during the initial
term of the agreement, and restrictions on the incurrence of additional
indebtedness. Other than the Revolver, the Company has no committed sources of
capital.

    As of March 31, 2001, the Company did not have any material commitments for
capital expenditures. At March 31, 2001, the Company's trade receivables were
$7.2 million, a decrease of $1.0 million from the December 31, 2000 balance of
$8.2 million. This decrease was primarily due to amounts received from Mylan in
the first quarter of 2001, relating to sales of bulk TIMERx in 2000. In
connection with its strategic alliance agreement with Endo, the Company expects
to expend approximately an additional $10 million in 2001 and 2002 on the
development of extended release oxymorphone, subject to the receipt by the
Company of additional funding. The Company intends to utilize available cash and
cash from operations, and funds available under the Revolver, and is also
evaluating other funding alternatives. If the Company is unable to secure
adequate funding, the Company has the option to terminate the agreement upon 30
days' prior written notice, at which time the Company's funding obligations
would cease. This would reduce the Company's future net royalties on this
product once it is marketed.

    The Company had positive cash flow from operations in the first quarter of
2001 of $352,000, primarily due to net reductions of accounts receivable as
noted above, and inventory, partially offset by the net loss in the period. The
Company had negative cash flow from operations in the first quarter of 2000 of
$743,000, primarily due to net losses for the period. Funds expended for the
acquisition of fixed assets were primarily related to additions at the Company's
manufacturing facilities in Iowa and Finland. Funds expended for intangible
assets include costs to secure and defend patents on technology developed by the
Company and to secure trademarks.

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

    The Company anticipates that its existing capital resources, including funds
available under the Revolver, as well as internally generated funds, will not
enable the Company to maintain currently planned operations during 2001 and
thereafter. Penwest will need to raise additional funds. Penwest is currently
seeking additional funds through transactions relating to its business lines
and/or private financings. The 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 collaborative partners or others on favorable terms 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.


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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

    This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends", "may", and other
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by forward-looking statements
contained in this report and presented elsewhere by management from time to
time. These factors include the matters discussed in the Overview to
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Quarterly Report and the matters set forth under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, which are expressly incorporated by reference
herein. 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. While Penwest may elect to update
forward-looking statements at some point in the future, Penwest specifically
disclaims any obligation to do so, even if its estimates change.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND RISK MANAGEMENT POLICIES

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


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<PAGE>   12

                          PART II. -- OTHER INFORMATION


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

       a.       Exhibits.

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

       b.       Reports on Form 8-K.

                On January 30, 2001, the Company filed a report on Form 8-K
                reporting that it had completed arrangements for a new revolving
                line of credit with CIT Business Credit, a division of CIT.


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<PAGE>   13

                                    SIGNATURE


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


                                        PENWEST PHARMACEUTICALS CO.


Date:   May 11, 2001                        /s/ Jennifer L. Good
                                            -----------------------------------
                                            Jennifer L. Good
                                            Vice President Finance and Chief
                                            Financial Officer
                                            (Principal Financial Officer)


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<PAGE>   14

                                  EXHIBIT INDEX

         EXHIBIT NUMBER                      DESCRIPTION

               10.23       Financing Agreement dated January 17, 2001 between
                           The CIT Group/Business Credit, Inc. and the
                           Registrant.

               99          Pages 31 through 40 of the Company's Annual Report on
                           Form 10-K for the year ended December 31, 2000 as
                           filed with the Securities and Exchange Commission on
                           April 2, 2001 (which is not deemed filed except to
                           the extent that portions thereof are expressly
                           incorporated by reference herein)


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