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

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 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                        12563-2335
----------------------------------------    ------------------------------------
(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        No
                     -----          ---

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 9, 2001.

                 Class                                    Outstanding
    ---------------------------------                   ----------------
      Common stock, par value $.001                       15,245,019



                                       1
<PAGE>
                           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 .........................................      9

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk ....     12

Part II.      Other Information

     Item 2.  Changes in Securities and Use of Proceeds .....................     13

     Item 6.  Exhibits and Reports on Form 8-K ..............................     13

Signature ...................................................................     14

Exhibit Index ...............................................................     15
</TABLE>


                                       2
<PAGE>
                         PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,   DECEMBER 31,
                                                                   2001           2000
                                                                (UNAUDITED)     (NOTE 2)
                                                               -------------   ------------
<S>                                                            <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents ................................     $  18,429      $   2,204
  Available-for-sale securities ............................         9,355             --
  Trade accounts receivable, net of allowance for
    doubtful accounts of  $215 and $235 ....................         6,578          8,154
 Inventories:
    Raw materials and other ................................         1,839          2,611
    Finished goods .........................................         6,444          5,585
                                                                 ---------      ---------
                                                                     8,283          8,196
 Prepaid expenses and other current assets .................         1,102            745
                                                                 ---------      ---------
   Total current assets ....................................        43,747         19,299
Fixed assets, net ..........................................        15,777         17,473
Intangible assets, net .....................................         3,504          2,899
Other assets ...............................................         2,662          2,623
                                                                 ---------      ---------
   Total assets ............................................     $  65,690      $  42,294
                                                                 =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable .........................................     $   2,077      $   3,199
  Accrued expenses .........................................         2,073          1,790
  Accrued development costs ................................         3,121          2,911
  Taxes payable ............................................           346            270
  Loan payable .............................................         2,760             --
                                                                 ---------      ---------
       Total current liabilities ...........................        10,377          8,170

Deferred income taxes ......................................           188            205
Deferred revenue ...........................................           396            378
Deferred compensation ......................................         2,664          2,524
                                                                 ---------      ---------
       Total liabilities ...................................        13,625         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
     15,245,019 shares in 2001 and 12,669,780 shares in 2000            15             13
  Additional paid in capital ...............................       107,792         77,276
  Accumulated deficit ......................................       (54,359)       (44,945)
  Accumulated other comprehensive loss .....................        (1,383)        (1,327)
                                                                 ---------      ---------
       Total shareholders' equity ..........................        52,065         31,017
                                                                 ---------      ---------
       Total liabilities and shareholders' equity ..........     $  65,690      $  42,294
                                                                 =========      =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


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

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS
                                                                                  ENDED SEPTEMBER 30,
                                                                                ----------------------
                                                                                  2001          2000
                                                                                --------      --------
                                                                                     (UNAUDITED)
<S>                                                                             <C>           <C>
Revenues
  Product sales ...........................................................     $  8,574      $ 10,120
  Royalties and licensing fees ............................................        1,227         1,104
                                                                                --------      --------
    Total revenues ........................................................        9,801        11,224
Cost of product sales .....................................................        6,168         7,080
                                                                                --------      --------
    Gross profit ..........................................................        3,633         4,144
Operating expenses
  Selling, general and administrative .....................................        3,312         2,828
  Research and product development ........................................        4,518         3,464
                                                                                --------      --------
    Total operating expenses ..............................................        7,830         6,292
                                                                                --------      --------
Loss from operations ......................................................       (4,197)       (2,148)
Investment income .........................................................          230            83
Interest expense ..........................................................           72            15
                                                                                --------      --------
Loss before income taxes ..................................................       (4,039)       (2,080)
Income tax expense ........................................................           86            65
                                                                                --------      --------
Net loss ..................................................................     $ (4,125)     $ (2,145)
                                                                                ========      ========

Basic and diluted net loss per share ......................................     $  (0.28)     $  (0.17)
                                                                                ========      ========

Weighted average shares of common stock outstanding .......................       14,949        12,636
                                                                                ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                      NINE MONTHS
                                                                                  ENDED SEPTEMBER 30,
                                                                                  2001          2000
                                                                                --------      --------
                                                                                     (UNAUDITED)
<S>                                                                             <C>           <C>
Revenues
  Product sales ...........................................................     $ 26,188      $ 28,355
  Royalties and licensing fees ............................................        4,067         3,147
                                                                                --------      --------
     Total revenues .......................................................       30,255        31,502
Cost of product sales .....................................................       18,548        19,181
                                                                                --------      --------
       Gross profit .......................................................       11,707        12,321
Operating expenses
  Selling, general and administrative .....................................       10,049         8,775
  Research and product development ........................................       10,801         8,894
                                                                                --------      --------
     Total operating expenses .............................................       20,850        17,669
                                                                                --------      --------
Loss from operations ......................................................       (9,143)       (5,348)
Investment income .........................................................          290           151
Interest expense ..........................................................          224           156
                                                                                --------      --------
Loss before income taxes and cumulative effect of change in accounting
  principle ...............................................................       (9,077)       (5,353)
Income tax expense ........................................................          337           209
                                                                                --------      --------
Loss before cumulative effect of change in  accounting principle ..........       (9,414)       (5,562)
Cumulative effect of change in accounting principle (Note 5) ..............           --          (410)
                                                                                --------      --------
Net loss ..................................................................     $ (9,414)     $ (5,972)
                                                                                ========      ========

Basic and diluted amounts per share:
  Loss before cumulative effect of change in accounting principle .........     $  (0.70)     $  (0.46)
  Cumulative effect of change in accounting principal (Note 5) ............           --         (0.03)
                                                                                --------      --------
Net loss ..................................................................     $  (0.70)     $  (0.49)
                                                                                ========      ========
Weighted average shares of common stock outstanding .......................       13,451        12,223
                                                                                ========      ========
Pro forma amounts assuming the accounting change  is applied retroactively:
Net loss ..................................................................     $ (9,414)     $ (5,562)
                                                                                ========      ========
Basic and diluted net loss per share ......................................     $  (0.70)     $  (0.46)
                                                                                ========      ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


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

<TABLE>
<CAPTION>
                                                            NINE MONTHS
                                                        ENDED SEPTEMBER 30,
                                                      -----------------------
                                                        2001           2000
                                                      --------       --------
                                                            (UNAUDITED)
<S>                                                   <C>            <C>
Net cash used in operating activities ..........      $ (6,520)      $ (3,169)

Investing activities:
  Acquisitions of fixed assets, net ............          (447)        (1,213)
  Intangible asset costs .......................          (792)          (304)
  Purchases of available-for-sale securities ...        (9,279)            --
                                                      --------       --------
Net cash used in investing activities ..........       (10,518)        (1,517)

Financing activities:
  Borrowings from credit facility ..............        23,499          2,800
  Repayments of credit facility ................       (20,739)        (9,500)
  Issuance of common stock, net ................        30,518         17,378
                                                      --------       --------
Net cash provided by financing activities ......        33,278         10,678

Effect of exchange rate changes on cash and cash
 equivalents ...................................           (15)          (104)
                                                      --------       --------
Net increase in cash and cash equivalents ......        16,225          5,888
Cash and cash equivalents at beginning of period         2,204            739
                                                      --------       --------
Cash and cash equivalents at end of period .....      $ 18,429       $  6,627
                                                      ========       ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>
                           PENWEST PHARMACEUTICALS CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    BUSINESS

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

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

2.    BASIS OF PRESENTATION

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

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

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

3.    ACCOUNTING POLICIES

Cash and Cash Equivalents

      Cash and cash equivalents primarily consist of demand deposits, money
market accounts and mutual funds, with remaining maturities of three months or
less when purchased.

Available-For-Sale Securities

      The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Company's available-for-sale
securities are stated at fair value and primarily consist of corporate bonds
and commercial paper. Unrealized holding gains or losses are included in
shareholders' equity as a separate component of accumulated other comprehensive
loss.


                                       6
<PAGE>
 The specific identification method is used to compute the realized gains and
losses on available-for-sale securities.

4.    ISSUANCE OF COMMON STOCK

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

5.    ACCOUNTING CHANGE

      In the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101")
effective January 1, 2000. The cumulative effect of the change in accounting
principle was reported as a change in the quarter ended March 31, 2000. The
cumulative effect was initially recorded as deferred revenue that will be
recognized as revenue over the remaining related collaborative or licensing and
supply agreements, as appropriate. For the quarter ended March 31, 2000, the
cumulative effect of the change on prior periods was to increase the net loss by
$410,000 or $0.04 per share. The effect of the change on loss before cumulative
effect of the change for the three and nine-month periods ended September 30,
2000 was to increase the net loss by $48,000 and $19,000, respectively. The pro
forma amounts presented on the statements of operations were calculated assuming
the accounting change was made retroactively to prior periods. During the
quarters ended September 30, 2001 and 2000, the Company recognized $15,000 and
$43,000, respectively, of revenue/income that is included in its cumulative
effect adjustment as of January 1, 2000. During the nine-month periods ended
September 30, 2001 and 2000, the Company recognized $45,000 and $162,000,
respectively, of revenue/income that is included in its cumulative effect
adjustment as of January 1, 2000.

6.    ACCOUNTING DEVELOPMENTS

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

      In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142") which supercedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 eliminates the current requirement to amortize goodwill
and indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS No. 142 will apply to goodwill and
intangible assets arising from transactions completed before and after the
effective date. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002.
Management does not anticipate the application of the non-amortization
provisions of SFAS 142 will have a significant effect on the Company's results
of operations, cash flows or financial position. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.

      In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which provides a single accounting
model for long-lived assets to be disposed of. Provisions outlined in this
Statement supercede SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and certain provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
These new rules significantly change the criteria that would have to be met to
classify an asset as held-for-sale. This is significant as assets classified as
held-for-sale are stated at the lower of carrying value or fair value and
depreciation is no longer recognized. This Statement will also allow for more
dispositions to qualify for discontinued operations treatment in the income
statement.


                                       7
<PAGE>
      SFAS No. 144 is effective for financials statements issued for fiscal
years beginning after December 15, 2001. The provisions of this Statement are
effective for disposal activities initiated by an entity's commitment to a plan
after the effective date of the Statement. The Company will adopt this Statement
effective January 1, 2002, as required. The Company currently believes that this
Statement will not have an effect on its results of operations, cash flows, or
financial position, once adopted.

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

7.    CREDIT FACILITY

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

      The Revolver bears interest at a specified bank's prime rate plus 1% per
annum, on the greater of $3.0 million or on the average outstanding balance. The
Revolver also requires fees be paid of 0.5% per annum on unused portions of the
Line of Credit 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.

      The interest rate on the Revolver at September 30, 2001 was 7.0%. As of
November 9, 2001, there was approximately $2.7 million outstanding under the
terms of the Revolver.

8.    INCOME TAXES

      The effective tax rates for the quarters ended September 30, 2001 and
2000, were expenses of 2% and 3%, respectively. The effective tax rates for the
nine months ended September 30, 2001 and 2000, were expenses of 4%. 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.    COMPREHENSIVE LOSS

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

<TABLE>
<CAPTION>
                                                          THREE MONTHS                 NINE MONTHS
                                                       ENDED SEPTEMBER 30,         ENDED SEPTEMBER 30,
                                                       2001          2000          2001          2000
                                                      -------       -------       -------       -------
                                                         (IN THOUSANDS)              (IN THOUSANDS)
<S>                                                   <C>           <C>           <C>           <C>
      Net loss .................................      $(4,125)      $(2,145)      $(9,414)      $(5,972)
      Foreign currency translation adjustments .          314          (301)         (103)         (516)
      Unrealized net gains on available-for-sale
       securities ..............................           47            --            47            --
                                                      -------       -------       -------       -------

      Comprehensive loss .......................      $(3,764)      $(2,446)      $(9,470)      $(6,488)
                                                      =======       =======       =======       =======
</TABLE>

      Accumulated other comprehensive loss equals the cumulative translation and
unrealized net gains on available-for-sale securities which are the only
components of other comprehensive loss included in the Company's financial
statements.


                                       8
<PAGE>
10.   CONTINGENCIES

      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, or
used in the development of the Company's own products.

      The Company has incurred net losses since 1994. As of September 30, 2001,
the Company's accumulated deficit was approximately $54.4 million. A substantial
portion of the Company's revenues to date have been generated from the sales of
the Company's pharmaceutical excipients. The Company's future profitability will
depend on several factors, including the successful commercialization of TIMERx
controlled release products and sales growth of the Company's other
pharmaceutical excipients products, as well as the level of investment in
research and development activities, which the Company expects will continue to
increase as additional drugs advance into clinical development. There can be no
assurance that the Company will achieve profitability or that it will be able to
sustain any profitability on a quarterly basis, if at all.

      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 its sales and purchases in European currencies other than its
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations. The Company does not use derivatives to
hedge the impact of fluctuations in foreign currencies.

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


                                       9
<PAGE>
margins of the Company's products, mix of products sold, competition, regulatory
actions, litigation and currency exchange rate fluctuations.


RESULTS OF OPERATIONS

      Quarters Ended September 30, 2001 and 2000

      Total revenues decreased by 12.7% for the quarter ended September 30, 2001
to $9.8 million from $11.2 million for the quarter ended September 30, 2000.
Product sales decreased to $8.6 million for the quarter ended September 30, 2001
from $10.1 million for the quarter ended September 30, 2000, representing a
decrease of 15.3%. The decrease in product sales was due to a $2.2 million final
shipment of formulated bulk TIMERx in the third quarter of 2000 to Mylan
Pharmaceuticals as part of the Company's arrangement with Mylan regarding
Nifedipine XL. This decrease was partially offset by increased excipient product
sales, reflecting greater sales of the Company's ProSolv(TM) products through
additional filings in the ethical pharmaceutical market and growth in its
European excipients business. Royalties and licensing revenues increased
slightly, approximating $1.2 million in the third quarter of 2001 and $1.1
million in the third quarter of 2000.

      Gross profit decreased to $3.6 million, or 37.1% of total revenues, for
the quarter ended September 30, 2001 from $4.1 million, or 36.9% of total
revenues, for the quarter ended September 30, 2000. The Company's gross profit
declined primarily due to the decrease in revenues relating to the shipment of
bulk TIMERx to Mylan in 2000, noted above, however the overall profit percentage
increased slightly due to increased royalties and licensing revenues. Gross
profit percentage on product sales decreased to 28.1% for the quarter ended
September 30, 2001 from 30.0% for the quarter ended September 30, 2000. This
decrease was primarily due to competitive pressures on selling prices of the
Company's excipients in the quarter ended September 30, 2001.

      Selling, general and administrative expenses increased by 17.1% for the
quarter ended September 30, 2001 to $3.3 million from $2.8 million for the
quarter ended September 30, 2000. This increase was primarily due to increased
professional fees, including those associated with the Company's business
development activities, as well as higher salary and recruiting costs as part of
the Company's hiring to build its drug delivery infrastructure.

      Research and product development expenses increased by 30.4% for the
quarter ended September 30, 2001 to $4.5 million from $3.5 million for the
quarter ended September 30, 2000. This increase was primarily due to the
Company's share of increased expenses associated with clinical trials being
conducted for the development of an extended release oxymorphone product under
the Company's collaboration with Endo Pharmaceuticals Inc. ("Endo"), as well as
increased formulation activity in the Company's drug development pipeline.

      The effective tax rates for the quarters ended September 30, 2001 and 2000
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.

      Nine Months Ended September 30, 2001 and 2000

      Total revenues decreased 4.0% for the nine months ended September 30, 2001
to $30.3 million from $31.5 million for the nine months ended September 30,
2000. Product sales decreased to $26.2 million for the nine months ended
September 30, 2001 compared to $28.4 million for the nine months ended September
30, 2000, representing a decrease of 7.6%. The decrease in product sales was due
to lower revenues on sales of formulated bulk TIMERx during 2001, and reflects
the formulated bulk TIMERx shipments to Mylan in 2000, totaling $3.2 million,
under the Company's arrangement with Mylan relating to Nifedipine XL. Royalties
and licensing revenues increased $920,000 primarily as a result of increased
royalties earned on Mylan's sales of the 30 mg strength of generic Procardia XL,
as Mylan captured greater market share over the prior year. This royalty,
however, did trend down in the second quarter of 2001, as compared to the first
quarter of 2001, due to the entrant of a competitor.

      Gross profit decreased to $11.7 million, or 38.7% of total revenues, for
the first nine months of 2001 from $12.3 million, or 39.1% of total revenues,
for the first nine months of 2000. Gross profit percentage on product sales
decreased to 29.2% for the first nine months of 2001 from 32.4% for the first
nine months of 2000. This decrease was primarily due to lower sales volumes in
2001, of formulated bulk TIMERx (as noted above) which has higher overall
margins than the Company's other products, as well as competitive pressures on
selling prices of the Company's excipients in the nine months ended September
30, 2001.


                                       10
<PAGE>
      Selling, general and administrative expenses increased by 14.5% for the
first nine months of 2001, to $10.0 million as compared with $8.8 million for
the first nine months of 2000. The increase is primarily due to increased
professional fees, including those associated with the Company's evaluation and
pursuit of financing alternatives, business development activities, and
increased information technology and hiring costs associated with the Company
strengthening its information technology infrastructure to prepare for
anticipated increasing drug development activities.

      Research and product development expenses increased by 21.4% for the first
nine months of 2001 to $10.8 million from $8.9 million for the first nine months
of 2000. This increase was primarily due to the Company's share of increased
expenses associated with clinical trials being conducted for the development of
an extended release oxymorphone product under the Company's collaboration with
Endo, as well as increased activity in the Company's drug development pipeline.

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

LIQUIDITY AND CAPITAL RESOURCES

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

      On July 11, 2001, the Company completed a private placement of 2,447,187
shares of its common stock to selected institutional investors, resulting in
proceeds of approximately $30 million, less expenses.

      As of September 30, 2001, the Company had cash, cash equivalents, and
short-term investments of $27.8 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 November 9, 2001, there was approximately $2.7 million
outstanding under the terms of the Revolver. Other than the Revolver, the
Company has no committed sources of capital.

      As of September 30, 2001, the Company did not have any material
commitments for capital expenditures. As of September 30, 2001, the Company's
trade receivables were $6.6 million, a decrease of $1.6 million from the
December 31, 2000 balance of $8.2 million. This decrease was primarily due to
amounts received from Mylan in the first half of 2001, relating to shipments of
formulated bulk TIMERx in 2000. In connection with its strategic alliance
agreement with Endo, the Company expects to expend approximately an additional
$13 million through the remainder of 2001 and 2002 on the development and
pre-marketing costs of extended release oxymorphone. The Company intends to
utilize available cash and short-term investments, cash from operations, and
funds available under the Revolver.

      The Company had negative cash flow from operations in the nine months
ended September 30, 2001 of $6.5 million, primarily due to the net loss in the
period, partially offset by net reductions of accounts receivable as noted
above. The Company had negative cash flow from operations in the nine months
ended September 30, 2000 of $3.2 million, primarily due to net losses for the
period. Funds expended in 2001 for the acquisition of fixed assets were
primarily related to additions at the Company's manufacturing facilities in Iowa
and Finland, 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 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
enable the Company to maintain currently planned operations at least through
2002. The Company may need to


                                       11
<PAGE>
raise additional funds to maintain its operations beyond such date. The Company
may seek to obtain additional funds through transactions relating to its
business lines and/or debt or equity financings. The additional financing may
not be available to the Company on acceptable terms, if at all.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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


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, foreign currency exchange rates and changes
in market values of its investments. The Company's interest rate risk includes
cash flow risk associated with borrowing under its variable rate revolver. The
Company's investments are made in accordance with the Company's investment
policy and primarily consist of money market funds, corporate bonds and
commercial paper, 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 its sales and purchases in European currencies other than its
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.


                                       12
<PAGE>
                          PART II. -- OTHER INFORMATION



ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS


      On July 11, 2001, the Company sold 2,447,187 shares of its common stock to
both new and existing shareholders for an aggregate price of approximately $30.0
million and net proceeds of $29.7 million. The shares were offered and sold to
"accredited investors" without registration under the Securities Act of 1933, as
amended, or the securities laws of certain states, in reliance on the exemptions
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder and in reliance on similar exemptions under applicable state laws.

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 July 10, 2001, the Company filed a report on Form 8-K reporting it
           had entered into definitive agreements for the sale of approximately
           2.4 million shares of common stock in a private placement to selected
           institutional and other accredited investors for a total of $30
           million.

           On July 25, 2001, the Company provided an updated description of the
           risks and uncertainties which could materially affect Penwest's
           business, financial condition, and results of operations and reissued
           its financial statements for the year ended December 31, 2000,
           including an updated report of independent auditors and subsequent
           event footnote.

           On July 31, 2001, the Company filed a report on Form 8-K announcing
           its results for the second quarter ended June 30, 2001.

           On August 8, 2001, the Company filed a report on Form 8-K announcing
           that Dr. Michael J. Fox had stepped down as President and Chief
           Operating Officer and that Dr. Fox would continue as a consultant to
           the Company.


                                       13
<PAGE>
                                    SIGNATURE



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

                                       PENWEST PHARMACEUTICALS CO.


Date: November 12, 2001                   /s/  Jennifer L. Good
      -----------------                   ---------------------
                                          Jennifer L. Good
                                          Senior Vice President, Finance, and
                                          Chief Financial Officer
                                          (Principal Financial Officer)




                                       14
<PAGE>
                                  EXHIBIT INDEX

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



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