Dear Fellow Shareholders:

Penwest has a clear, well defined growth strategy: to leverage our strength in drug delivery and drug formulation to develop a portfolio of products targeting disorders of the nervous system. Our current development pipeline includes products for the treatment of pain, epilepsy, Parkinson's disease, spasticity and edema. We are continually evaluating new growth opportunities, both internally and externally.

During 2006, we made important progress in pursuit of that strategy. Our key accomplishments included the approval and launch of Opana ERŪ by Endo Pharmaceuticals, development of our internal pipeline and enhancement of our organizational capabilities and processes.

Launch of Opana ER
Penwest reached an important milestone in June with the FDA's approval of Opana ER and the launch by Endo of this valuable new product for the treatment of moderate to severe chronic pain. Since this product was launched in the second half of 2006, prescriptions have been steadily increasing. Initial feedback on Opana ER has been favorable, and Endo has invested significant resources in the sales and marketing of the product.

We expect that our involvement with Endo and Opana ER will continue in the future as we seek to fully leverage the value of this product as a global franchise through commercialization with an international partner. We have a successful relationship with Endo, and we will continue to pursue opportunities to create value together.

Progress on Our Pipeline
As we build our internal portfolio, we are both advancing the product candidates currently in our pipeline and generating new product concepts. We plan to continue to focus primarily on products that can be developed using a 505(b)(2) regulatory strategy because we believe it enables us to move more quickly by focusing on improved formulations of products that have previously been approved by the FDA.

We placed strong emphasis on building our pipeline in 2006 and setting the stage for a busy clinical year in 2007. We plan to advance nalbuphine ER, a compound we are developing for moderate chronic pain into a Phase II study, and continue formulation studies on torsemide ER, a once daily treatment for edema resulting from congestive heart failure, in 2007. Our upcoming trials on nalbuphine ER are designed to explore whether it is an effective treatment for chronic pain, while the studies of torsemide will focus on optimizing the formulation.

In 2006, we also completed extensive formulation work and Phase I studies on several earlier-stage compounds in our portfolio. We are hopeful that we can advance one or two of these compounds into Phase II trials by the end of 2007.

In addition to developing our internal pipeline, we continually evaluate opportunities to in-license new technologies and product candidates to augment our portfolio. In 2006, we initiated work on compounds utilizing novel drug delivery technologies accessed through collaborations. We believe this is a good way to expand our product opportunities, diversify our technology risk and, importantly, develop products that fulfill unmet medical needs. In addition, we are exploring possible collaborations with companies that own new chemical entities in early stage development that relate to the treatment of specific neurological diseases, and need our expertise in drug formulation and clinical development to advance the product candidates.

Enhanced Organizational Capabilities
In 2006, we continued to strengthen our organization to establish the end-to-end capabilities necessary for effectively executing our growth strategy. This initiative involved, among other things, bringing on board a number of talented people with pharmaceutical development and clinical expertise, developing a disciplined process for evaluating new product concepts and utilizing project management tools to efficiently execute the development of our pipeline.

In addition, we expanded our Board of Directors to enhance its ability to support the growth and transition of Penwest. We were pleased to begin 2007 by welcoming to the Board Dr. David Meeker, President of the Lysosomal Storage Diseases Therapeutics unit of Genzyme Corporation. We believe Dr. Meeker's knowledge and experience in clinical development and regulatory strategy will be invaluable as we move forward.

Priorities for 2007
Penwest spent 2006 creating momentum, a theme you will see reflected in this annual report. We expect that these efforts will accelerate the pace of our growth. Our primary focus in 2007 is on the disciplined execution of our clinical development programs. Given the risks inherent in drug development, we recognize that we will not be successful with every product candidate. However, we are confident that we have the organizational strengths and processes in place to grow our company with the creativity and discipline it takes to be successful.

I look forward to keeping all of you apprised of our progress going forward. Thank you for your continued support.

Sincerely,

Jennifer L. Good
President and Chief Executive Officer