##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2006
 Commission File Number 000-13789
 NASTECH PHARMACEUTICAL COMPANY INC.
  Delaware
    
    11-2658569(State or other jurisdiction ofincorporation or organization)
    
    (I.R.S. Employer Identification No.)3450 Monte Villa Parkway, Bothell, WA
    
    98021(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ
  Date
    
    Class
    
    Shares OutstandingJuly 25, 2006
    
    Common stock  $0.006 par value
    
    21,930,195




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##### 



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONITEM 1 - FINANCIAL STATEMENTS (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2005 and June 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2005
and June 30, 2006
    
    
    4Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the six months
ended June 30, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and June 30, 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    17ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 4 - CONTROLS AND PROCEDURES
    
    
    29PART II  OTHER INFORMATIONITEM 1A  RISK FACTORS
    
    
    29ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    29ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    30ITEM 6  EXHIBITS
    
    
    30SIGNATURES
    
    
    30EXHIBIT INDEX
    
    
    31EXHIBIT 10.7EXHIBIT 10.66EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Items 1, 3 and 5 of PART II have not been included as they are not applicable
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share Data)
 December 31,
    
    
    June 30,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,769
    
    
    $
    26,874Restricted cash and short term investments
    
    
    998
    
    
    
    1,498Short term investments
    
    
    32,142
    
    
    
    34,969Accounts receivable
    
    
    189
    
    
    
    1,289Inventories
    
    
    2,733
    
    
    
    2,744Prepaid expenses and other current assets
    
    
    1,545
    
    
    
    1,445Total current assets
    
    
    64,376
    
    
    
    68,819Property and equipment, net
    
    
    8,173
    
    
    
    11,971Security deposits and other assets
    
    
    404
    
    
    
    425Total assets
    
    $
    72,953
    
    
    $
    81,215LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,944
    
    
    $
    3,488Accrued payroll and employee benefits
    
    
    1,740
    
    
    
    1,738Accrued expenses
    
    
    474
    
    
    
    499Capital lease obligations  current portion
    
    
    2,431
    
    
    
    2,678Deferred revenue  current portion
    
    
    1,589
    
    
    
    4,116Total current liabilities
    
    
    9,178
    
    
    
    12,519Capital lease obligations, net of current portion
    
    
    3,170
    
    
    
    3,833Deferred revenue, net of current portion
    
    
    4,250
    
    
    
    5,961Other liabilities
    
    
    788
    
    
    
    1,043Total liabilities
    
    
    17,386
    
    
    
    23,356Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 100,000 authorized: no shares issued and outstanding:
    
    
    
    
    
    
    Common stock, $0.006 par value; 50,000,000 authorized: 20,750,477 and 21,822,735
shares outstanding at December 31, 2005 and June 30, 2006, respectively
    
    
    124
    
    
    
    131Additional paid-in capital
    
    
    176,068
    
    
    
    181,824Deferred compensation
    
    
    (4,902
    )
    
    
    Accumulated deficit
    
    
    (115,616
    )
    
    
    (124,023
    )Accumulated other comprehensive loss
    
    
    (107
    )
    
    
    (73
    )Total stockholders equity
    
    
    55,567
    
    
    
    57,859Total liabilities and stockholders equity
    
    $
    72,953
    
    
    $
    81,215
  3




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##### Table of Contents



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share Data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006RevenuesProduct revenue, net
    
    
    
    
    
    $
    173
    
    
    
    
    
    
    $
    592License and research fees
    
    $
    1,602
    
    
    
    11,238
    
    
    $
    4,932
    
    
    
    17,537Total revenue
    
    
    1,602
    
    
    $
    11,411
    
    
    $
    4,932
    
    
    $
    18,129Operating expenses:Cost of product revenue
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    301Research and development
    
    
    7,229
    
    
    
    8,766
    
    
    
    14,460
    
    
    
    20,567Sales and marketing
    
    
    294
    
    
    
    435
    
    
    
    618
    
    
    
    830General and administrative
    
    
    2,769
    
    
    
    3,301
    
    
    
    4,930
    
    
    
    6,252Total operating expenses
    
    
    10,292
    
    
    
    12,564
    
    
    
    20,008
    
    
    
    27,950Loss from operations
    
    
    (8,690
    )
    
    
    (1,153
    )
    
    
    (15,076
    )
    
    
    (9,821
    )Other income (expense):Interest income
    
    
    416
    
    
    
    718
    
    
    
    825
    
    
    
    1,356Interest expense
    
    
    (70
    )
    
    
    (125
    )
    
    
    (190
    )
    
    
    (243
    )Other income and expense, net
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Loss before change in accounting principle
    
    
    (8,344
    )
    
    
    (560
    )
    
    
    (14,431
    )
    
    
    (8,698
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291Net Loss
    
    $
    (8,344
    )
    
    $
    (560
    )
    
    $
    (14,431
    )
    
    $
    (8,407
    )Basic and diluted net loss per share:Prior to cumulative effect of change in accounting
principle
    
    $
    (0.47
    )
    
    $
    (0.03
    )
    
    $
    (0.81
    )
    
    $
    (0.41
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net loss per common share  basic and diluted
    
    $
    (0.47
    )
    
    $
    (0.03
    )
    
    $
    (0.81
    )
    
    $
    (0.40
    )Shares used in computing net loss per share 
basic and diluted
    
    
    17,852
    
    
    
    21,238
    
    
    
    17,801
    
    
    
    20,965
  4




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
For the Six Months Ended June 30, 2006
(Unaudited)
(In Thousands, Except Share Data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Deferred
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Compensation
    
    
    Loss
    
    
    EquityBalance December 31,
2005
    
    
    20,750,477
    
    
    $
    124
    
    
    $
    176,068
    
    
    $
    (115,616
    )
    
    $
    (4,902
    )
    
    $
    (107
    )
    
    $
    55,567Proceeds from the
exercise of options
    
    
    244,304
    
    
    
    2
    
    
    
    2,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,874Proceeds from the
exercise of warrants
    
    
    694,856
    
    
    
    4
    
    
    
    5,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,510Compensation related to
restricted stock
    
    
    133,098
    
    
    
    1
    
    
    
    1,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,206Compensation related to
stock options
    
    
    
    
    
    
    
    
    
    
    1,366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,366Cumulative effect of
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (5,193
    )
    
    
    
    
    
    
    4,902
    
    
    
    
    
    
    
    (291
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,407
    )
    
    
    
    
    
    
    
    
    
    
    (8,407
    )Change in unrealized loss
on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,407
    )
    
    
    
    
    
    
    34
    
    
    
    (8,373
    )Balance June 30, 2006
    
    
    21,822,735
    
    
    $
    131
    
    
    $
    181,824
    
    
    $
    (124,023
    )
    
    
    
    
    
    $
    (73
    )
    
    $
    57,859
  5




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 Six Months EndedJune 30,2005
    
    
    2006Operating activities:Net loss
    
    $
    (14,431
    )
    
    $
    (8,407
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash compensation related to stock options
    
    
    243
    
    
    
    1,366Non-cash compensation related to restricted stock
    
    
    514
    
    
    
    1,206Depreciation and amortization of property and equipment
    
    
    829
    
    
    
    1,210Gain on sale of property and equipment
    
    
    116
    
    
    
    3Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (291
    )Changes in assets and liabilities:Accounts receivable
    
    
    (888
    )
    
    
    (1,100
    )Inventories
    
    
    (256
    )
    
    
    (11
    )Prepaid expenses and other assets
    
    
    (888
    )
    
    
    79Accounts payable
    
    
    1,597
    
    
    
    544Deferred revenue
    
    
    (986
    )
    
    
    4,238Accrued expenses and other liabilities
    
    
    504
    
    
    
    278Net cash used in operating activities
    
    
    (13,646
    )
    
    
    (885
    )Investing activities:Property and equipment acquisitions
    
    
    (2,536
    )
    
    
    (5,011
    )Purchases of investments
    
    
    (72,814
    )
    
    
    (37,443
    )Sales and maturities of investments
    
    
    72,569
    
    
    
    34,650Net cash used in investing activities
    
    
    (2,781
    )
    
    
    (7,804
    )Financing activities:Change in restricted cash and short-term investments
    
    
    8,002
    
    
    
    (500
    )Payments on notes payable
    
    
    (8,352
    )
    
    
    Borrowings under capital lease obligations
    
    
    1,699
    
    
    
    2,355Payments on capital lease obligations
    
    
    (844
    )
    
    
    (1,445
    )Proceeds from exercise of stock options
    
    
    1,203
    
    
    
    2,874Proceeds from exercise of warrants
    
    
    
    
    
    
    5,510Net cash provided by financing activities
    
    
    1,708
    
    
    
    8,794Net decrease in cash and cash equivalents
    
    
    (14,719
    )
    
    
    105Cash and cash equivalents  beginning of period
    
    
    25,797
    
    
    
    26,769Cash and cash equivalents  end of period
    
    $
    11,078
    
    
    $
    26,874Supplemental disclosures of investing and financing activities:Cash paid for interest
    
    $
    191
    
    
    $
    244Non-cash investing activity:Change in unrealized loss on available-for-sale securities
    
    $
    (19
    )
    
    $
    34
  6




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2006 and June 30, 2005 (Unaudited)
 Note 1  Business and Summary of Significant Accounting Policies
 Business
       Basis of Preparation
  7




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Reclassifications
  Principles of Consolidation
  Use of Estimates
  Revenue Recognition
 Revenue Recognition, Revenue Arrangements with Multiple Deliverables.
       8




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Income Taxes
  Research and Development Costs
   Stock-based Compensation
     9




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##### Table of Contents



Net Loss per Common Share
  Inventory
  Recent Accounting Pronouncements
 Share-Based Payment.
      10




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##### Table of Contents



Note 2  Stock-based compensation plans
  Determining Fair Value Under SFAS 123R
 Valuation and Amortization Method.
 Expected Life
 Expected Volatility
 Risk-Free Interest Rate.
 Expected Dividend Yield.
 Expected Forfeitures.
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    3.9
    %
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    4.8
    %Expected stock volatility
    
    
    0.81
    
    
    
    0.68
    
    
    
    0.80
    
    
    
    0.70Expected option life
    
    6 years
    
    5.5 years
    
    6 years
    
    5.7 yearsWeighted average fair value granted during period
    
    $
    8.22
    
    
    $
    8.42
    
    
    $
    7.79
    
    
    $
    9.05
 Stock-based Compensation Under SFAS 123R
  Three months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2006Stock-based compensation:Research and development
    
    $
    499
    
    
    $
    978Sales and marketing
    
    
    75
    
    
    
    120General and administrative
    
    
    798
    
    
    
    1,474Total stock-based compensation
    
    $
    1,372
    
    
    $
    2,572
 11




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##### Table of Contents



Three months ended
    
    Six months endedJune 30, 2006
    
    June 30, 2006As Reported
    
    If Reported
    
    As Reported
    
    If ReportedFollowing
    
    Following
    
    Following
    
    FollowingSFAS 123R
    
    APB 25
    
    SFAS 123R
    
    APB 25Condensed consolidated statement of operations:Net loss
    
    $
    (560
    )
    
    $
    17
    
    
    $
    (8,407
    )
    
    $
    (7,599
    )Net loss per shareBasic and Diluted
    
    $
    (0.03
    )
    
    $
    0.00
    
    
    $
    (0.40
    )
    
    $
    (0.36
    )Condensed consolidated statement of cash flows:Net cash used in operating activities
    
    $
    2,737
    
    
    $
    2,737
    
    
    $
    (885
    )
    
    $
    (885
    )Net cash provided by financing activities
    
    $
    1,284
    
    
    $
    1,284
    
    
    $
    8,794
    
    
    $
    8,794
 Stock Option Activity
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding December 31, 2005
    
    
    2,688
    
    
    $
    12.92Options granted
    
    
    124
    
    
    
    13.98Options exercised
    
    
    (244
    )
    
    
    12.16Options canceled
    
    
    (7
    )
    
    
    11.05Options expired
    
    
    (2
    )
    
    
    12.65Outstanding at June 30, 2006
    
    
    2,559
    
    
    $
    13.05
    
    
    6.1 years
    
    $
    7,970Exercisable at June 30, 2006
    
    
    1,694
    
    
    $
    12.58
    
    
    4.9 years
    
    $
    6,373
  12




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Options OutstandingWeighted-
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual Life
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    (Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$5.62   - $9.99
    
    
    375,729
    
    
    
    2.7
    
    
    $
    8.23
    
    
    
    293,532
    
    
    $
    7.97$10.00 - $12.43
    
    
    334,833
    
    
    
    4.8
    
    
    
    10.94
    
    
    
    308,335
    
    
    
    10.95$12.94 - $12.94
    
    
    800,000
    
    
    
    5.8
    
    
    
    12.94
    
    
    
    800,000
    
    
    
    12.94$13.35 - $16.00
    
    
    948,433
    
    
    
    8.1
    
    
    
    14.53
    
    
    
    192,201
    
    
    
    14.30$25.00 - $25.00
    
    
    100,000
    
    
    
    5.8
    
    
    
    25.00
    
    
    
    100,000
    
    
    
    25.00Totals
    
    
    2,558,995
    
    
    
    6.1
    
    
    $
    13.05
    
    
    
    1,694,068
    
    
    $
    12.58
 Pro Forma Information
  Three months ended
    
    
    Six months endedJune 30, 2005
    
    
    June 30, 2005Net loss as reported
    
    $
    (8,344
    )
    
    $
    (14,431
    )Add: Stock-based employee compensation included in the reported net loss
    
    
    367
    
    
    
    757Deduct: Stock-based employee compensation, determined under fair value
based methods
    
    
    (1,252
    )
    
    
    (2,366
    )Pro forma net loss
    
    $
    (9,229
    )
    
    $
    (16,040
    )Net Loss per shareBasic and diluted  as reported
    
    $
    (0.47
    )
    
    $
    (0.81
    )Basic and diluted  pro forma
    
    $
    (0.52
    )
    
    $
    (0.90
    )
 Note 3  Contractual Agreements
 Procter & Gamble (P&G) :
   13




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Galenea :
 Accounting for Research and Development Costs.
 Amylin Pharmaceuticals, Inc.
   Par Pharmaceutical
    14




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##### Table of Contents



®
 Questcor Pharmaceuticals, Inc. ® ® ® ® ®
 ® ® ® ® ®
 ®
 Questcor assignment to QOL Medical, LLC 
 Alnylam Pharmaceuticals, Inc .
 Merck
  Note 4  Stockholders Equity
 Common Stock Offerings
 15




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##### Table of Contents



Warrants
 Exercise Price of Warrants
    
    
    Total$6.34
    
    
    $11.09
    
    

$14.26
    
    
    WarrantsWarrants outstanding at December 31, 2005
    
    
    458,395
    
    
    
    433,288
    
    
    
    516,384
    
    
    
    1,408,067Exercised during the six months ended
June 30, 2006
    
    
    (458,395
    )
    
    
    (240,715
    )
    
    
    
    
    
    
    (699,110
    )Warrants outstanding at June 30, 2006
    
    
    
    
    
    
    192,573
    
    
    
    516,384
    
    
    
    708,957Warrants expiring in September 2008
    
    
    
    
    
    
    192,573
    
    
    
    
    
    
    
    192,573Warrants expiring in June 2009
    
    
    
    
    
    
    
    
    
    
    516,384
    
    
    
    516,384
 Restricted Stock Awards
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Unvested restricted shares outstanding, beginning of period
    
    
    180,141
    
    
    
    496,209
    
    
    
    145,620
    
    
    
    444,322Restricted shares issued
    
    
    39,562
    
    
    
    79,635
    
    
    
    80,883
    
    
    
    150,946Restricted shares forfeited
    
    
    (2,760
    )
    
    
    (5,312
    )
    
    
    (9,560
    )
    
    
    (12,307
    )Restricted shares vested
    
    
    (68,120
    )
    
    
    (77,304
    )
    
    
    (68,120
    )
    
    
    (89,733
    )Unvested restricted shares outstanding, end of period
    
    
    148,823
    
    
    
    493,228
    
    
    
    148,823
    
    
    
    493,228Non-cash restricted stock compensation expense, net of forfeitures
    
    $
    250,000
    
    
    $
    659,000
    
    
    $
    514,000
    
    
    $
    1,206,000Average award price during period
    
    $
    11.13
    
    
    $
    13.89
    
    
    $
    11.01
    
    
    $
    15.28
 Shelf Registration Statement
 16




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##### Table of Contents



Stockholders Rights Plan
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Statements contained herein that are not historical fact may be 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, that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual results to differ
materially from those projected or suggested in any forward-looking statement made by us. These
factors include, but are not limited to: (i) our ability to obtain additional funding; (ii) our
ability to attract and/or maintain manufacturing, research, development and commercialization
partners; (iii) our and/or a partners ability to successfully complete product research and
development, including pre-clinical and clinical studies and commercialization; (iv) our and/or a
partners ability to obtain required governmental approvals, including product and patent
approvals; and (v) our and/or a partners ability to develop and commercialize products that can
compete favorably with those of competitors. In addition, significant fluctuations in quarterly
results may occur as a result of the timing of milestone payments, the recognition of revenue from milestone payments and other sources not
related to product sales to third parties, and the timing of costs and expenses related to our
research and development programs. Additional factors that would cause actual results to differ
materially from those projected or suggested in any forward-looking statements are contained in our
filings with the Securities and Exchange Commission, including those factors discussed under the
captions Forward-Looking Information and Risk Factors in our most recent Annual Report on Form
10-K, as may be supplemented or amended by our Quarterly Reports on Form 10-Q , which we urge
investors to consider. We undertake no obligation to publicly release revisions in such
forward-looking statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise
required by securities and other applicable laws.
     
    
    Applying Our Tight Junction Technology and Other Drug
Delivery Methods to Product Candidates.We will focus our
research and development efforts on product candidates,
including small molecules, peptides, large molecules and
therapeutic siRNA, where our proprietary technologies
utilizing tight junctions may offer clinical advantages
such as improved safety and clinical efficacy or increased
patient compliance due to elimination of injection site
pain and avoidance of injection site irritation. We will
also continue to search for applications of our tight
junction technology to improve other forms of drug
delivery, including oral, pulmonary and intravenous
delivery.
 17




---



##### Table of Contents




    
    Pursuing Collaborations with Pharmaceutical and
Biotechnology Companies.We will continue to try to
establish strategic collaborations with pharmaceutical and
biotechnology companies. Typically, we collaborate with
partners to commercialize our product candidates by
utilizing their research and development, regulatory
compliance, marketing and distribution capabilities. We may
also assist our collaboration partners in developing more
effective drug delivery methods for their product
candidates that have already completed early stage clinical
trials, or are even currently marketed. We intend to
structure our collaborative arrangements to receive
research and development funding and milestone payments
during the development phase, revenue from manufacturing
upon commercialization and patent-based royalties on future
sales of products.
    
    Strategically Developing and Commercializing Product
Candidates on Our Own.In select cases where we deem it to
be strategically advantageous to us, we plan to internally
develop, manufacture and distribute our products.
    
    Utilizing Our Manufacturing Expertise and Capabilities.We
have invested substantial time, money and intellectual
capital in developing our manufacturing facilities and
know-how which we believe would be difficult for our
competitors to replicate easily. These capabilities give us
competitive advantages including the ability to prepare the
chemistry, manufacturing and controls section of the new
drug application (the NDA) filing with the U.S. Food and
Drug Administration (the FDA) and maintain a high-level
of quality control in manufacturing product candidates for
clinical trials and FDA-approved products for
commercialization. We believe our manufacturing
capabilities will meet our projected capacity needs for the
foreseeable future.
   Procter & Gamble Partnership
    18




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##### Table of Contents



®
 ®
 Amylin Pharmaceuticals, Inc.
   Par Pharmaceutical Partnership
    19




---



##### Table of Contents



®
 Merck Partnership
  RNAi Technology and Intellectual Property Acquisitions
  Alnylam.
 Galenea Corp./ MIT.
  20




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##### Table of Contents



Cash Position and Recent Financings
    Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition, Revenue Arrangements with
Multiple Deliverables.
   21




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##### Table of Contents



Stock-Based Compensation
     Income Taxes
  Research and Development Costs
  22




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##### Table of Contents



Results of Operations
 Revenue and cost of revenue
 ®
 ® ® ®
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(dollars in thousands)Product revenue, net
    
    $
    
    
    
    $
    173
    
    
    $
    
    
    
    $
    592License and research feesQuestcor FDA approval milestone payment
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    Revenue recognized under the terminated
Merck agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,741Revenue recognized under the P&G agreement
    
    
    
    
    
    
    10,804
    
    
    
    
    
    
    
    12,908Other license and research fees
    
    
    1,602
    
    
    
    434
    
    
    
    2,932
    
    
    
    888License and research fees, total
    
    
    1,602
    
    
    
    11,238
    
    
    
    4,932
    
    
    
    17,537Total revenue
    
    $
    1,602
    
    
    $
    11,411
    
    
    $
    4,932
    
    
    $
    18,129Dollar increase
    
    
    
    
    

    $
    9,809


    
    


    
    
    
    
    $
    13,197Percentage increase
    
    
    
    
    


    

    610
    %

    
    
    
    
    
    
    270
    %
 Research and development
  23




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(dollars in thousands)PTH(1-34)
    
    
    15
    %
    
    
    27
    %
    
    
    14
    %
    
    
    28
    %Tight Junctions and RNAi
    
    
    22
    %
    
    
    21
    %
    
    
    21
    %
    
    
    26
    %Insulin
    
    
    
    %
    
    
    15
    %
    
    
    
    %
    
    
    11
    %Influenza
    
    
    
    %
    
    
    12
    %
    
    
    
    %
    
    
    8
    %Calcitonin
    
    
    33
    %
    
    
    4
    %
    
    
    36
    %
    
    
    7
    %Peptide YY
    
    
    11
    %
    
    
    3
    %
    
    
    9
    %
    
    
    4
    %Other R&D projects (1)
    
    
    19
    %
    
    
    18
    %
    
    
    20
    %
    
    
    16
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Total R&D expense
    
    $
    7,229
    
    
    $
    8,766
    
    
    $
    14,460
    
    
    $
    16,473
    (2)Dollar increase
    
    
    
    
    
    

    1,537
    
    
    
    

    
    
    
    2,013Percentage increase
    
    
    
    
    
    

    21
    %

    
    
    
    
    
    
    14
    %
 
 (1)
    
    Other research and development projects include our
feasibility projects, oral abuse-resistant opioid,
morphine gluconate and other projects.(2)
    
    Excludes purchased in-process R&D from Galenea of
approximately $4.1 million in the six months ended June
30, 2006. We believe that presenting R&D expense without
the Galenea transaction allows for better comparability
between periods given the significance of the amount
relative to total R&D expense.  §
    
    Personnel-related expenses increased by approximately
48% to $4.6 million compared to $3.1 million in the
prior year period due to an increase in headcount in
support of our research and development programs and
due to an increase of $0.4 million in non-cash stock
compensation. R&D headcount increased from 83 at June
30, 2005 to 129 at June 30, 2006.§
    
    Costs of clinical trials, consulting, outside services
and laboratory supplies decreased by approximately 24%
to $2.2 million compared to $2.9 million in the prior
year period as the 2005 period included significant
clinical trial expenses for calcitonin.§
    
    Facilities and equipment costs increased approximately
70% to $1.7 million from $1.0 million in the prior year
period due to rent and related expenses on additional
space leased and an increase in depreciation of
equipment resulting from capital expenditures to
acquire needed technical capabilities and to support
increased capacity.§
    
    Research and development administrative expenses
increased by approximately 60% to $0.3 million from
$0.2 million in the prior year period due to the
increase in R&D headcount.
  §
    
    Personnel-related expenses increased by approximately
50% to $9.0 million compared to $6.0 million in the
prior year period due to an increase in headcount in
support of our research and development programs and
due to an increase of $0.9 million in non-cash stock
compensation.§
    
    Costs of clinical trials, consulting, outside services
and laboratory supplies decreased by approximately 33%
to $3.9 million compared to $5.9 million in the prior
year period as the 2005 period included significant
clinical trial expenses for calcitonin.§
    
    Facilities and equipment costs increased approximately
41% to $3.1 million from $2.2 million in the prior year
period due to rent and related expenses on additional
space leased and an increase in depreciation of
equipment resulting from capital expenditures to
acquire needed technical capabilities and to support
increased capacity.§
    
    Research and development administrative expenses
increased by approximately 25% to $0.5 million from
$0.4 million in the prior year period due to the
increase in R&D headcount.
  24




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##### Table of Contents




    
    the number of sites included in the clinical trials;
    
    the length of time required to enroll suitable patient subjects;
    
    the number of patients that participate in the trials;
    
    the duration of patient follow-up that seems appropriate in view of results; and
    
    the number and complexity of safety and efficacy parameters monitored during the study.
 ®
  Sales and marketing
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Total sales and marketing expense
    
    $
    294
    
    
    $
    435
    
    
    $
    618
    
    
    $
    830Dollar increase
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    212Percentage increase
    
    
    
    
    
    
    48
    %
    
    
    
    
    
    
    34
    %
  General and administrative
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Total general and administrative expense
    
    $
    2,769
    
    
    $
    3,301
    
    
    $
    4,930
    
    
    $
    6,252Dollar increase
    
    
    
    
    
    
    532
    
    
    
    
    
    
    
    1,322Percentage increase
    
    
    
    
    
    
    19
    %
    
    
    
    
    
    
    27
    %
 25




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##### Table of Contents



Interest Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Interest income
    
    $
    416
    
    
    $
    718
    
    
    $
    825
    
    
    $
    1,356Average funds available for investment
    
    $
    54,800
    
    
    $
    60,800
    
    
    $
    60,900
    
    
    $
    60,400Average interest rate, annualized
    
    
    3.0
    %
    
    
    4.7
    %
    
    
    2.7
    %
    
    
    4.5
    %
  Interest Expense
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2006
    
    2005
    
    2006(dollars in thousands)Interest expense
    
    $
    70
    
    
    $
    125
    
    
    $
    190
    
    
    $
    243Average borrowings under capital leases and notes payable
    
    $
    3,800
    
    
    $
    5,800
    
    
    $
    5,900
    
    
    $
    5,600Average interest rate, annualized
    
    
    7.4
    %
    
    
    8.6
    %
    
    
    6.4
    %
    
    
    8.7
    %
  Liquidity and Capital Resources
 Cash Requirements
  Sources and Uses of Cash
   26




---



##### Table of Contents




    
    Under our collaborative arrangement with P&G, we received
an initial cash payment of $10 million in February 2006.
The $10 million initial payment has been recorded as
deferred revenue and is being amortized into revenue over
the estimated development period. In the three months ended
June 30, 2006 we received and recognized a $7.0 million
milestone payment from P&G. The arrangement includes the
potential for additional milestone payments of up to $15
million during the remainder of 2006. In total, milestone
payments could reach $577 million over the life of the
project depending upon the successful completion of
specified development, regulatory and commercialization
goals, although there can be no assurance that any such
milestones will be achieved. Under our agreement with P&G,
we are eligible to receive double-digit patent-based
royalties, with the rate escalating upon the achievement of
certain sales levels.
    
    Under our collaborative arrangement with Merck, we received
an initial cash payment of $5 million in October 2004. The
$5 million initial payment was being amortized over the
estimated development period until the collaboration with
Merck for PYY was terminated on March 1, 2006, at which
time the balance of the unamortized license payment was
recognized as revenue. Under the agreement, Nastech
reacquired its rights in the PYY program. At this time, we
intend to continue the clinical development of PYY either
on our own or with a new collaboration partner. Although
the results of any research conducted by Merck remain
confidential and we are not permitted to disclose the
results of any clinical trials at this time, we continue to
believe that PYY may be a viable product candidate for a
commercial therapeutic for the treatment of obesity.
    
    Under our collaborative arrangement with Par
Pharmaceutical, we received an initial cash payment in
October 2004 which was amortized over the estimated
development period.
    
    Under our supply agreement with Questcor, in February 2005
we received and recognized a payment of $2 million from
Questcor upon FDA approval of a New Drug Application for
the Nascobal® nasal spray product. On
October 17, 2005, with our consent, Questcor assigned all
of its rights and obligations under the Questcor Asset
Purchase and Supply Agreements dated June 2003 to QOL. We
received $2.0 million from Questcor on October 19, 2005 in
consideration for our consent to the assignment and in
connection with us entering into an agreement with QOL
which modified certain terms of the Asset Purchase and
Supply Agreements. The $2.0 million is being recognized
ratably over the five-year life of the QOL agreement. QOL
has assumed Questcors obligation to pay us an additional
$2.0 million contingent upon issuance of a U.S. patent for
the Nascobal® nasal spray product.
  Six Months EndedJune 30,2005
    
    
    2006(Dollars in thousands)Cash used in operating activities
    
    $
    (13,646
    )
    
    $
    (885
    )Cash used in investing activities
    
    
    (2,781
    )
    
    
    (7,804
    )Cash provided by financing activities
    
    
    1,708
    
    
    
    8,794Net increase (decrease) in cash and cash equivalents
    
    $
    (14,719
    )
    
    $
    105
 27




---



##### Table of Contents



Liquidity
   Contractual Obligations
  
    
    At June 30, 2006 our operating lease obligations increased
to approximately $24.0 million (through February 2016) from
approximately $19.3 million at December 31, 2005. This is
due to one new facility lease adding approximately $5.5
million in rental payments through February 2016, partially
offset by approximately $0.9 million in rents paid during
the six months ended June 30, 2006. In addition, effective
as of July 17, 2006, we have leased the remaining
approximately 17,100 additional square feet of laboratory
space and remaining approximately 18,800 additional square
feet of office space in the facility adjacent to our
Bothell, Washington headquarters. The lease for this space
expires in February 2016 and has a five-year renewal
option. This lease for the remainder of this building adds
approximately $7.0 million to the operating lease
obligations of $24.0 million reported as of June 30, 2006
above.
    
    Our capital lease obligations increased by approximately
$0.9 million to approximately $6.5 million (including
future interest payments) at June 30, 2006 due to
approximately $2.4 million in new leases funded offset by
approximately $1.5 million in payments made during the six
months ended June 30, 2006.
    
    Our purchase obligations increased by approximately $2.2 million from
approximately $0.6 million to approximately $2.8 million at June 30,
2006 due to purchase order activity (primarily for PTH(1-34)) during
the six months ended June 30, 2006.
 Off-Balance Sheet Arrangements
  28




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##### Table of Contents



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 ITEM 1A  RISK FACTORS
   
 ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES
 Warrants.
 29




---



##### Table of Contents



ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    The election of the following eleven (11) directors, each to hold office for a term of one
(1) year or until their respective successors have been duly elected or appointed:
 Nominee
    
    Votes FOR
    
    Votes WITHHELDDr. Steven C. Quay
    
    
    15,917,298
    
    
    
    2,944,937Susan B. Bayh
    
    
    15,902,956
    
    
    
    2,959,279J. Carter Beese, Jr.
    
    
    15,818,483
    
    
    
    3,043,752Dr. Alexander D. Cross
    
    
    15,922,032
    
    
    
    2,940,203Dr. Ian R. Ferrier
    
    
    15,760,712
    
    
    
    3,101,523Myron Z. Holubiak
    
    
    15,857,379
    
    
    
    3,004,856Leslie D. Michelson
    
    
    15,924,904
    
    
    
    2,937,331John V. Pollock
    
    
    15,853,850
    
    
    
    3,008,385Gerald T. Stanewick
    
    
    15,917,785
    
    
    
    2,944,450Bruce R. Thaw
    
    
    15,922,104
    
    
    
    2,940,131Devin N. Wenig
    
    
    15,850,457
    
    
    
    3,011,778
 2)
    
    The appointment of KPMG LLP as our independent registered public accountants for the year
ending December 31, 2006:
 Votes FOR
    
    Votes AGAINST
    
    Votes ABSTAINED
    
    Broker NON-VOTES18,767,016
    
    
    47,827
    
    
    
    47,392
    
    
    
    0
 3)
    
    The approval of an amendment to our 2004 Stock Incentive Plan
to increase the number of shares authorized thereunder by 1,000,000 shares, from 1,350,000 shares to 2,350,000 shares:
 Votes FOR
    
    Votes AGAINST
    
    Votes ABSTAINED
    
    Broker NON-VOTES9,507,692
    
    
    1,385,501
    
    
    
    324,845
    
    
    
    7,644,197
 
 ITEM 6  EXHIBITS
  
 SIGNATURES
  NASTECH PHARMACEUTICAL COMPANY INC.By:
    
    /s/ Steven C. QuaySteven C. Quay, M.D., Ph.D.Chairman of the Board, President
and Chief Executive OfficerBy:
    
    /s/ Philip C. RankerPhilip C. RankerChief Financial Officer
 30




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Reorganization, dated August 8, 2000,
among the Company, Atossa Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company, and
Atossa HealthCare, Inc. (filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K dated August 8, 2000, and
incorporated herein by reference).2.2
    
    Asset Purchase Agreement, dated September 30, 2002, with
Schwarz Pharma, Inc.(filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K dated September 30, 2002 and
incorporated herein by reference).3.1
    
    Restated Certificate of Incorporation of the Company dated
July 20, 2005 (filed as Exhibit 3.1 to our Current Report on
Form 8-K dated July 20, 2005, and incorporated herein by
reference).3.2
    
    Amended and Restated Bylaws of the Company dated August 11,
2004 (filed as Exhibit 3.10 to our Registration Statement on
Form S-3, File No. 333-119429, and incorporated herein by
reference).4.1
    
    Investment Agreement, dated as of February 1, 2002, by and
between the Company and Pharmacia & Upjohn Company (filed as
Exhibit 4.1 to the Company Current Report on Form 8-K dated
February 1, 2002 and incorporated herein by reference).4.2
    
    Rights Agreement, dated February 22, 2000, between the Company
and American Stock Transfer & Trust Company as Rights Agent
(filed as Exhibit 1 to our Current Report on Form 8-K dated
February 22, 2000 and incorporated herein by reference).4.3
    
    Securities Purchase Agreement dated as of June 25, 2004 (filed
as Exhibit 99.2 to our Current Report on Form 8-K dated June
25, 2004 and incorporated herein by reference).4.4
    
    Form of Warrant (filed as Exhibit 99.3 to the Companys
Current Report on Form 8-K dated June 25, 2004 and
incorporated herein by reference).10.1
    
    Lease Agreement for facilities at 45 Davids Drive, Hauppauge,
NY, effective as of July 1, 2005 (filed as Exhibit 10.30 to
the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 and incorporated herein by reference).10.2
    
    Lease Agreement, dated April 23, 2002, with Phase 3 Science
Center LLC, Ahwatukee Hills Investors LLC and J. Alexanders
LLC (filed as Exhibit 10.26 to the Companys Quarterly Report
on Form 10-Q for the Quarter Ended March 31, 2002 and
incorporated herein by reference).10.3
    
    First Amendment, dated June 17, 2003, to Lease Agreement dated
April 23, 2002, with Phase 3 Science Center LLC, Ahwatukee
Hills Investors LLC and J. Alexanders LLC (filed as Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the
Quarter ended June 30, 2003 and incorporated herein by
reference).10.4
    
    Second Amendment, dated February 4, 2004, to Lease Agreement
dated April 23, 2002, with Phase 3 Science Center LLC,
Ahwatukee Hills Investors LLC and J. Alexanders LLC (filed as
Exhibit 10.24 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by
reference).10.5
    
    Lease Agreement for facilities at 80 Davids Drive, Hauppauge,
NY, effective as of July 1, 2005 (filed as Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 2005 and incorporated herein by reference).10.6
    
    Lease Agreement for facilities at 3830 Monte Villa Parkway,
Bothell, WA, with Ditty Properties Limited Partnership,
effective as of March 1, 2006 (filed as Exhibit 10.1 to
Amendment No. 1 to the Companys Current Report on Form 8-K/A
dated March 1, 2006 and filed on July 26, 2006 and
incorporated herein by reference).(1)10.7
    
    First Amendment, dated July 17, 2006, to Lease Agreement dated
March 1, 2006 with Ditty Properties Limited Partnership for
facilities at 3830 Monte Villa Parkway, Bothell, WA.(2)10.8
    
    Amended and Restated Employment Agreement, dated May 2, 2002,
with Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.27 to
the Companys Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 2002 and incorporated herein by reference).
 31




---



##### Table of Contents



ExhibitNo.
    
    Description10.9
    
    Employment Agreement dated June 3, 2005 by and between Nastech
Pharmaceutical Company Inc. and Steven C. Quay, M.D., Ph.D.
(filed as Exhibit 10.1 to the Companys Current Report on Form
8-K dated June 3, 2005 and incorporated herein by reference).10.10
    
    Amended and Restated Employment Agreement dated December 16,
2005 by and between Nastech Pharmaceutical Company Inc. and
Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated December 16, 2005
and incorporated herein by reference).10.11
    
    Employment Agreement effective as of January 1, 2006 by and
between Nastech Pharmaceutical Company Inc. and Philip C.
Ranker (filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K dated January 1, 2006 and incorporated herein by
reference).10.12
    
    Termination and Mutual Release Agreement, dated September 30,
2002, with Schwarz Pharma, Inc. (Filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K dated September 30, 2002
and incorporated herein by reference).10.13
    
    Divestiture Agreement, dated January 24, 2003, with Pharmacia
& Upjohn Company (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated January 24, 2003 and
incorporated herein by reference).10.14
    
    Nastech Pharmaceutical Company Inc. 1990 Stock Option Plan
(filed as Exhibit 4.2 to the Companys Registration Statement
on Form S-8, File No. 333-28785, and incorporated herein by
reference).10.15
    
    Amended and Restated Nastech Pharmaceutical Company Inc. 2000
Nonqualified Stock Option Plan (filed as Exhibit 4.4 to the
Companys Registration Statement on Form S-8, File No.
333-49514, and incorporated herein by reference).10.16
    
    Amendment No. 1 to the Amended and Restated Nastech
Pharmaceutical Company Inc. 2000 Nonqualified Stock Option
Plan. (filed as Exhibit 10.18 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference).10.17
    
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan
(filed as Exhibit 10.28 to the Companys Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 2002 and incorporated
herein by reference).10.18
    
    Amendment No. 1 to the Nastech Pharmaceutical Company Inc.
2002 Stock Option Plan. (filed as Exhibit 10.20 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference).10.19
    
    Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan
(filed as Exhibit 99 to the Companys Registration Statement
on Form S-8, File No. 333-118206, and incorporated herein by
reference).10.20
    
    Amendment No. 1 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan (filed as Exhibit 10.4 to the Companys
Current Report on Form 8-K dated July 20, 2005 and
incorporated herein by reference).10.21
    
    Amendment No. 2 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan (filed as Exhibit 10.18 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended September
30, 2005 and incorporated herein by reference).10.22
    
    Amendment No. 3 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan. (filed as Exhibit 10.24 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2005 and incorporated herein by reference).10.23
    
    Amendment No. 4 to Nastech Pharmaceutical Company Inc. 2004
Stock Incentive Plan. (filed as Exhibit 10.5 to the Companys
Registration Statement on Form S-8, File No. 333-135724, and
incorporated herein by reference).10.24
    
    Restricted Stock Grant Agreement effective July 20, 2005 by
and between Nastech Pharmaceutical Company Inc. and Dr. Steven
C. Quay, M.D., Ph.D. (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated July 20, 2005 and
incorporated herein by reference).10.25
    
    Incentive Stock Option Grant Agreement effective July 20, 2005
by and between Nastech Pharmaceutical Company Inc. and Dr.
Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K dated July 20, 2005 and
incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.26
    
    Non-Qualified Stock Option Grant Agreement effective July 20,
2005 by and between Nastech Pharmaceutical Company Inc. and
Dr. Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K dated July 20, 2005 and
incorporated herein by reference).10.27
    
    Amendments to Certain Grant Agreements effective as of July
20, 2005 by and between Nastech Pharmaceutical Company Inc.
and Steven C. Quay, M.D., Ph.D. (filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K dated December 16, 2005
and incorporated herein by reference).10.28
    
    Stock Option Agreement dated as of August 25, 2004 between
Nastech Pharmaceutical Company Inc. and Mr. Philip C. Ranker
(filed as Exhibit 10.34 to the Companys Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.29
    
    Restricted Stock Grant Agreement effective August 25, 2004 by
and between Nastech Pharmaceutical Company Inc. and Mr. Philip
C. Ranker (filed as Exhibit 10.35 to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 2005
and incorporated herein by reference).10.30
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. Philip C.
Ranker (filed as Exhibit 10.36 to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 2005
and incorporated herein by reference).10.31
    
    Restricted Stock Grant Agreement effective September 7, 2005
by and between Nastech Pharmaceutical Company Inc. and Mr.
Philip C. Ranker. (filed as Exhibit 10.38 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended September
30, 2005 and incorporated herein by reference).10.32
    
    Restricted Stock Grant Agreement effective as of January 1,
2006 by and between Nastech Pharmaceutical Company Inc. and
Philip C. Ranker (filed as Exhibit 10.2 to the Companys
Current Report on Form 8-K dated January 1, 2006 and
incorporated herein by reference).10.33
    
    Incentive Stock Option Grant Agreement dated as of January 1,
2006 by and between Nastech Pharmaceutical Company Inc. and
Philip C. Ranker (filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K dated January 1, 2006 and
incorporated herein by reference).10.34
    
    Non-Qualified Stock Option Grant Agreement dated as of January
1, 2006 by and between Nastech Pharmaceutical Company Inc. and
Philip C. Ranker (filed as Exhibit 10.4 to the Companys
Current Report on Form 8-K dated January 1, 2006 and
incorporated herein by reference).10.35
    
    Restricted Stock Grant Agreement effective January 21, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr. Gordon
Brandt, M.D. (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K dated January 21, 2005 and incorporated
herein by reference).10.36
    
    Stock Option Agreement dated as of January 21, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. Gordon Brandt,
M.D.(filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K dated January 21, 2005 and incorporated herein by
reference).10.37
    
    Restricted Stock Grant Agreement effective December 16, 2005
by and between Nastech Pharmaceutical Company Inc. and Dr.
Gordon C. Brandt (filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K dated December 16, 2005 and
incorporated herein by reference).10.38
    
    Stock Option Agreement dated as of December 16, 2005 between
Nastech Pharmaceutical Company Inc. and Dr. Gordon C. Brandt
(filed as Exhibit 10.4 to the Companys Current Report on Form
8-K dated December 16, 2005 and incorporated herein by
reference).10.39
    
    Restricted Stock Grant Agreement effective January 21, 2005 by
and between Nastech Pharmaceutical Company Inc. and Mr. Paul
H. Johnson, Ph.D. (filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K dated January 21, 2005 and
incorporated herein by reference).10.40
    
    Restricted Stock Grant Agreement effective October 5, 2005 by
and between Nastech Pharmaceutical Company Inc. and Dr. Paul
H. Johnson, Ph.D (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated October 5, 2005 and
incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.41
    
    Stock Option Agreement dated as of January 21, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. Paul H. Johnson,
Ph.D. (filed as Exhibit 10.4 to the Companys Current Report
on Form 8-K dated January 21, 2005 and incorporated herein by
reference).10.42
    
    Stock Option Agreement dated as of October 5, 2005 between
Nastech Pharmaceutical Company Inc. and Dr. Paul H. Johnson,
Ph.D. (filed as Exhibit 10.2 to the Companys Current Report
on Form 8-K dated October 5, 2005 and incorporated herein by
reference).10.43
    
    Restricted Stock Grant Agreement effective May 25, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. David E.
Wormuth (filed as Exhibit 10.3 to the Companys Current Report
on Form 8-K dated May 25, 2005 and incorporated herein by
reference).10.44
    
    Stock Option Agreement dated as of May 25, 2005 between
Nastech Pharmaceutical Company Inc. and Mr. David E. Wormuth
(filed as Exhibit 10.4 to the Companys Current Report on Form
8-K dated May 25, 2005 and incorporated herein by reference).10.45
    
    Restricted Stock Grant Agreement effective as of January 30,
2006 by and between Nastech Pharmaceutical Company Inc. and
Timothy M. Duffy (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated January 30, 2006 and
incorporated herein by reference).10.46
    
    Incentive Stock Option Grant Agreement dated as of January 30,
2006 by and between Nastech Pharmaceutical Company Inc. and
Timothy M. Duffy (filed as Exhibit 10.2 to the Companys
Current Report on Form 8-K dated January 30, 2006 and
incorporated herein by reference).10.47
    
    Non-Qualified Stock Option Grant Agreement dated as of January
30, 2006 by and between Nastech Pharmaceutical Company Inc.
and Timothy M. Duffy (filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K dated January 30, 2006 and
incorporated herein by reference).10.48
    
    Restricted Stock Grant Agreement effective August 11, 2004 by
and between Nastech Pharmaceutical Company Inc. and Mr. Bruce
R. York. (filed as Exhibit 10.33 to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 2005
and incorporated herein by reference).10.49
    
    Restricted Stock Grant Agreement effective July 1, 2005 by and
between Nastech Pharmaceutical Company Inc. and Mr. Bruce R.
York (filed as Exhibit 10.37 to the Companys Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 2005 and
incorporated herein by reference).10.50
    
    Restricted Stock Grant Agreement effective September 7, 2005
by and between Nastech Pharmaceutical Company Inc. and Mr.
Bruce R. York (filed as Exhibit 10.39 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended September
30, 2005 and incorporated herein by reference).10.51
    
    Restricted Stock Grant Agreement effective July 14, 2006 by
and between Nastech Pharmaceutical Company Inc. and Mr. Bruce
R. York (filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K dated July 14, 2006 and incorporated herein by
reference).10.52
    
    Asset Purchase Agreement dated June 16, 2003, by and between
the Company and Questcor Pharmaceuticals, Inc. (filed as
Exhibit 2.1 to the Companys Current Report on Form 8-K dated
June 17, 2003 and incorporated herein by reference).10.53
    
    Form of Purchase Agreement (filed as Exhibit 99.2 to the
Companys Current Report on Form 8-K dated September 4, 2003
and incorporated herein by reference).10.54
    
    Form of Warrant (filed as Exhibit 99.3 to the Companys
Current Report on Form 8-K dated September 4, 2003, and
incorporated herein by reference).10.55
    
    Revolving Line of Credit Agreement with Wells Fargo Bank,
dated December 19, 2003 (filed as Exhibit 10.20 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).10.56
    
    Addendum to Promissory Note with Wells Fargo Bank, dated
January 20, 2004 (filed as Exhibit 10.21 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
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##### Table of Contents



ExhibitNo.
    
    Description10.57
    
    Security Agreement Securities Account with Wells Fargo Bank,
dated December 19, 2003 (filed as Exhibit 10.22 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).10.58
    
    Addendum to Security Agreement: Securities Account with Wells
Fargo Bank, dated December 19, 2003 (filed as Exhibit 10.23 to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).10.59
    
    Revolving Line of Credit Agreement with Wells Fargo Bank,
dated October 20, 2004 (filed as Exhibit 10.29 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by reference).10.60
    
    Exclusive Development, Commercialization and License Agreement
by and between Merck & Co., Inc. and the Company effective as
of September 24, 2004 (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated September 24, 2004 and
incorporated herein by reference).(1)10.61
    
    Supply Agreement by and between the Company and Merck & Co.,
Inc. effective as of September 24, 2004 (filed as Exhibit 10.2
to the Companys Current Report on Form 8-K dated September
24, 2004 and incorporated herein by reference).(1)10.62
    
    License and Supply Agreement by and between Par
Pharmaceutical, Inc. and Nastech Pharmaceutical Company Inc.
effective as of October 22, 2004 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K dated October 22, 2004
and incorporated herein by reference).(1)10.63
    
    Agreement dated as of September 23, 2005 by and between
Nastech Pharmaceutical Company Inc. and QOL Medical, LLC.
(filed as Exhibit 10.1 to Amendment No. 1 to the Companys
Current Report on Form 8-K/A dated October 17, 2005 and filed
on July 26, 2006 and incorporated herein by reference).(1)10.64
    
    Product Development and License Agreement by and between
Nastech Pharmaceutical Company Inc. and Procter & Gamble
Pharmaceuticals, Inc. dated January 27, 2006 (filed as Exhibit
10.1 to the Companys Current Report on Form 8-K dated January
27, 2006 and incorporated herein by reference).(1)10.65
    
    Supply Agreement by and between Nastech Pharmaceutical Company
Inc. and Procter & Gamble Pharmaceuticals, Inc. dated June 2,
2006 (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K dated June 2, 2006 and incorporated herein by
reference).(1)10.66
    
    Development and License Agreement by and between Nastech
Pharmaceutical Company Inc. and Amylin Pharmaceuticals, Inc.
dated June 23, 2006.(1)(2)31.1
    
    Certification of the Companys Chairman of the Board,
President and Chief Executive Officer pursuant to Rules 13a14
and 15d-14 under the Securities Exchange Act of 1934, as
amended.(2)31.2
    
    Certification of the Companys Chief Financial Officer
pursuant to Rules 13a14 and 15d-14 under the Securities
Exchange Act of 1934, as amended.(2)32.1
    
    Certification of the Companys Chairman of the Board,
President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(2)32.2
    
    Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(2)
 
 (1)
    
    Portions of this exhibit have been omitted pursuant to a
request for confidential treatment under Rule 24b-2 of
the Securities Exchange Act of 1934, amended, and the
omitted material has been separately filed with the
Securities and Exchange Commission.(2)
    
    Filed Herewith. 35