##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
  Form 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
 For the fiscal year ended December 31, 2006
  Commission File Number 0-13789
  NASTECH PHARMACEUTICAL COMPANY
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware

11-2658569(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)3830 Monte Villa Parkway
    Bothell, Washington(Address of principal
    executive offices)

98021(Zip
    Code)   Registrants telephone number, including area code:
 (425) 908-3600
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.006 par value

The Nasdaq Stock Market LLCPreferred Stock Purchase Rights,
    $0.01 par value

The Nasdaq Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
  Title of Each ClassNone   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 



NASTECH
    PHARMACEUTICAL COMPANY INC.
  Table of
    Contents
  
  PagePART IItem 1.

Business


4Item 1A.

Risk
    Factors


23Item 1B.

Unresolved Staff
    Comments


35Item 2.

Properties


35Item 3.

Legal
    Proceedings


35Item 4.

Submission of
    Matters to a Vote of Security Holders


35PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


36Item 6.

Selected Financial
    Data


38Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


39Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


53Item 8.

Financial
    Statements and Supplementary Data


54Item 9.

Changes In and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


82Item 9A.

Controls and
    Procedures


82Item 9B.

Other
    Information


82PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


83Item 11.

Executive
    Compensation


83Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


83Item 13.

Certain
    Relationships and Related Transactions


83Item 14.

Principal
    Accounting Fees and Services


83PART IVItem 15.

Exhibits, Financial
    Statement Schedules


83Signatures


84Exhibit Index


86EXHIBIT 10.46EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  Form 10-K
    
    our ability to obtain additional funding;
    our efforts to establish and maintain collaboration partnerships
    for the development of PTH(1-34) nasal spray, PYY(3-36) nasal
    spray, generic calcitonin-salmon nasal spray, exenatide nasal
    spray, insulin nasal spray, RNA interference or other programs;
    the success or failure of our research and development programs
    or the programs of our partners;
    the advantages and disadvantages of pharmaceuticals delivered
    nasally;
    the need for improved and alternative drug delivery methods;
    our efforts to collaborate with other pharmaceutical and
    biotechnology companies that have products under development;
    our ability to successfully complete product research and
    development, including pre-clinical and clinical trials and
    commercialization;
    our ability to obtain governmental approvals, including product
    and patent approvals;
    our ability to successfully manufacture the products of our
    research and development programs and our marketed products to
    meet current good manufacturing practices and to manufacture
    these products at a financially acceptable cost;
    our ability to attract and retain our key officers and employees
    and manufacturing, sales, distribution and marketing partners;
    costs associated with any product liability claims, patent
    prosecution, patent infringement lawsuits and other lawsuits;
    our ability to develop and commercialize our products before our
    competitors; and
    the size of the drug delivery market.  Form 10-K
 3




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PART I  ITEM 1.
    Business.  OVERVIEW
  cell-to-cell
      Business
    Strategy
    
    Applying Our Tight Junction Technology and Other Drug
    Delivery Methods to Product Candidates.  We focus
    our research and development efforts on product candidates,
    including peptides, large and small molecules and therapeutic
    siRNA, for which our proprietary technologies may offer clinical
    advantages, such as improved safety and clinical efficacy, or
    increased patient compliance. We also will continue to search
    for applications of our tight junction technology to improve
    other forms of drug delivery, including oral, pulmonary and
    intravenous delivery.
    Collaborations with Pharmaceutical and Biotechnology
    Companies.  We will continue to establish
    strategic collaborations with pharmaceutical and biotechnology
    companies. Typically, we collaborate with partners to
    commercialize our internal product candidates by utilizing their
    late stage clinical development, regulatory, marketing and sales
    capabilities. We 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 generally
    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.
    Developing and Commercializing Our Own Product
    Candidates.  In select cases in which we deem it
    to be strategically advantageous to us, we plan to internally
    develop, manufacture and commercialize our products.
    Leveraging 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 in the near term. These
    capabilities give us competitive advantages, 4




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including the ability to prepare the chemistry, manufacturing
    and controls (CMC) section of new drug application
    (NDA) filings with the U.S. Food and Drug
    Administration (FDA) and to 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.  COLLABORATIONS
    AND PROGRAMS
  Procter &
    Gamble Partnership
  ® ®
        Par
    Pharmaceutical Partnership
   5




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®
  Merck
    Partnership
     6




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Amylin
    Pharmaceuticals, Inc.
        RNAi
    Technology and Intellectual Property Acquisitions
    Alnylam. tm
  Galenea.
   7




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first-in-class
  City of Hope.
  Independent
    Product Development
    Other
    Collaborations
  Questcor Pharmaceuticals, Inc./QOL Medical
    LLC. ® ® ®
  ® ® ®
  ® ®
  Novo Nordisk A/S feasibility agreement.
  Cytyc Corporation.
 8




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THERAPEUTIC
    AREAS
      DeliveryInitial









Technology/Indication

Product

Clinical Status

Next Steps

Marketing Rights

Intellectual PropertyOsteoporosis

Parathyroid
    Hormone
    PTH(1 -34) (Peptide)

Phase 2 study
    ongoing

Additional Phase 2 and pivotal
    Phase 3 clinical trials

P&G (worldwide) Nastech
    (certain U.S. co- promotion rights)

Tight junction/patents and
    applicationsOsteoporosis

Calcitonin-salmon (Peptide)

ANDA submitted and accepted for
    review by the FDA

FDA review of ANDA ongoing

Par Pharmaceutical (U.S.) Nastech
    (rest of world)

Formulation patent applicationsObesity

PeptideYY(3-36)

Two Phase 1 studies completed in
    2006; Phase 1 Rhinitis study ongoing

Phase 2 weight loss study

Nastech

Tight junction/ patents and
    applications; PYY patents and applicationsDiabetes

Insulin

Phase 1 studies ongoing

Phase 2 efficacy study

Nastech

Tight junction patents and
    applications; insulin applicationsDiabetes

Exenatide

Phase 1 studies ongoing

To be determined by Amylin

Amylin

Tight junction patents and
    applicationsAutism

Carbetocin

Phase 1 study ongoing

Phase 2 efficacy study

Nastech

Tight junction patents and
    applications; carbetocin patent and applications     DeliveryInitial









Technology/Indication

Product

Clinical Status

Next Steps

Marketing Rights

Intellectual PropertyAntivirals

RNAi directed against influenza
    virus

Preclinical

Preclinical safety and efficacy
    studies

Nastech

MIT and Galenea antiviral patent
    applicationsInflammation

RNAi directed against TNF-alpha

Preclinical

Preclinical safety and efficacy
    studies

Nastech

Alnylam patents and applications;
    delivery and technology patent applicationsVarious

Undisclosed compounds

Preclinical

Preclinical safety and PK studies

Novo Nordisk

Tight junction patents and
    applicationsAnemia

Undisclosed compounds

Preclinical

Preclinical safety and PK studies

Undisclosed partners

IP applications and patents issued  9




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CLINICAL-STAGE
    PRODUCT CANDIDATES
  Osteoporosis
  2004 Bone
    Health and Osteoporosis: A Report of the Surgeon General ® ®
  ® ®
  Parathyroid Hormone
    PTH(1-34). ®
      PTH(1-34). PTH(1-34)
 10




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Clinical Trial Data. ®
  Current Initiatives. ®
    Calcitonin-salmon.
  Clinical Trial Data. ® ®
  Current Initiatives. ®
 11




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Obesity
  ® ® ® ®
  Peptide YY(3-36). The
    New England Journal of Medicine Pages 941-948), 24-hour
    
    an exclusive license to the Cedars-Sinai patent estate secured
    in May 2004 containing the only issued patents directed to the
    use of PYY or functional analogs to induce satiety;
    our acquisition of exclusive worldwide rights to the PYY patent
    applications within the field of nasal administration, licensed
    from Imperial College Innovations and Oregon Health Sciences
    University through Thiakis, Ltd.; and 12




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
    our acquisition of exclusive licenses to six issued
    U.S. patents and two pending U.S. applications, and
    one pending PCT application from the University of Cincinnati
    related to second generation PYY analogs that have produced
    weight loss in animal experiments.  Clinical Trial Data.
        Diabetes
    Insulin.
  Development Status. ® ®
 13




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Exenatide. ® twice-per-day
  Development Status.
  Autism
      Carbetocin.
  Development Status.
  PRE-CLINICAL
    PRODUCT CANDIDATES
  Antiviral
   14




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Pre-clinical Development Status. Direct-to-lung
  Inflammation
    Pre-clinical Development Status. TNF-alpha
  DRUG
    DELIVERY TECHNOLOGIES
    Tight Junction Technology. cell-to-cell Johnson PH and
    Quay SC (Nastech Pharmaceutical Co.). Advances in nasal delivery
    through tight junction biology. Expert Opinion Drug Delivery.
 15




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(2005) 2(2):281-298).
            Intracellular Delivery of RNAi-Based
    Therapeutics.
  Pre-clinical Development Status.
 16




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Feasibility Studies.
  Other Drug Delivery Technologies.
  
    experience in stabilizing liquid formulations;
    knowledge of physical properties of nasal sprays;
    experience with pro-drug selection to improve biological
    properties;
    experience with counter ion selection to increase drug
    solubility;
    correlations between in vitro and in vivo nasal delivery
    models; and
    manufacturing know-how;  MANUFACTURING
        SALES AND
    MARKETING
   17




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COLLABORATION
    PARTNERS
    RESEARCH
    AND DEVELOPMENT
    PROPRIETARY
    RIGHTS AND INTELLECTUAL PROPERTY
      PendingNastechU.S.


90Foreign


141PCT


17Exclusive In-licensed(1)U.S.


7Foreign


40PCT


1Total pending


296IssuedNastechU.S.


14Foreign


11Exclusive In-Licensed(1)U.S.


7Foreign


4Total issued


36Total cases


332  18




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##### Table of Contents



(1)
    
    Does not include undisclosed proprietary technologies that are
    the subject of our license agreements with Alnylam, City of Hope
    or the Carnegie Institution.  and/or
  
    obtain patent and other proprietary protection for our
    intellectual property;
    enforce and defend patents once obtained;
    operate without infringing the patents and proprietary rights of
    third parties; and
    preserve our trade secrets.  GOVERNMENT
    REGULATION
    and/or
  ® ®
     19




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and/or 180-day first-to-file
   20




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COMPETITION
     21




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Osteoporosis. P&G/sanofi-aventis ® ® ® ® ® ®
  Obesity. ® tm ® ® ® over-the-counter
  Type 2 Diabetes. ® ® tm GLP-1
  RNAi.
 22




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PRODUCT
    LIABILITY
    EMPLOYEES
    AVAILABLE
    INFORMATION
  1-800-SEC-0330 e-mail http://www.sec.gov. Form 10-K, Form 10-Q, Form 8-K,
  ITEM 1A.
    Risk
    Factors.    Risks
    Related to our Financial Position and Need for Additional
    Capital
  We do
    not generate operating income and will require additional
    financing in the future. If additional capital is not available,
    we may have to curtail or cease operations.
    
    research and development;
    develop and commercialize our product candidates;
    enhance existing services;
    respond to competitive pressures; and
    acquire complementary businesses or technologies. 23




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
    the scope, duration and expenditures associated with our
    research and development programs;
    continued scientific progress in these programs;
    the outcome of potential licensing transactions, if any;
    competing technological developments;
    our proprietary patent position, if any, in our
    products; and
    the regulatory approval process for our products.    We
    have not been profitable on an annual basis for ten years, and
    we may never become profitable.
      Risks
    Related to the Development and Regulatory Approval of our Drug
    Candidates
  Clinical
    trials of our product candidates are expensive and
    time-consuming, and the results of these trials are
    uncertain.
   24




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We are
    subject to extensive government regulation, including the
    requirement of approval before our products may be manufactured
    or marketed.
    ® ®
    Our
    ability to commercialize our products after FDA approval is
    subject to exclusivity periods provided
    by law.
  first-to-file
  We use
    hazardous chemicals and radioactive and biological materials in
    our business. Any disputes relating to improper use, handling,
    storage or disposal of these materials could be time-consuming
    and costly.
   25




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Failure
    to comply with foreign regulatory requirements governing human
    clinical trials and marketing approval for drugs could prevent
    us from selling our drug candidates in foreign markets, which
    may adversely affect our operating results and financial
    condition.
    Risks
    Related to our Dependence on Third Parties
  We are
    dependent on our collaborative arrangements with third parties
    for a substantial portion of our revenue, and our development
    and commercialization activities may be delayed or reduced if we
    fail to negotiate or maintain successful collaborative
    arrangements.
       26




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Our
    success depends to a significant degree upon the commercial
    success of products manufactured by us pursuant to supply
    agreements or marketed by our collaboration
    partners.
    An
    interruption in the supply of our raw and bulk materials needed
    to make our products could cause our product development and
    commercialization to be slowed or stopped.
    We
    rely on third parties to conduct our clinical trials, and those
    third parties may not perform satisfactorily, including failing
    to meet established deadlines for the completion of such
    clinical trials.
      We
    have limited experience in marketing or selling our products,
    and we may need to rely on marketing partners or contract sales
    companies.
   27




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Risks
    Related to our Intellectual Property and Other Legal
    Matters
  If we
    are unable to adequately protect our proprietary technology from
    legal challenges, infringement or alternative technologies, our
    competitive position may be hurt and our operating results may
    be negatively impacted.
            Because
    intellectual property rights are of limited duration, expiration
    of intellectual property rights and licenses will negatively
    impact our operating results.
    Our
    patent applications may be inadequate in terms of priority,
    scope or commercial value.
   28




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We may
    be required to defend lawsuits or pay damages for product
    liability claims.
      Risks
    Related to the Commercialization of our Drug
    Candidates
  Our
    product development efforts may not result in commercial
    products.
    
    a product candidate may not perform as expected in later or
    broader trials in humans and limit marketability of such product
    candidate;
    necessary regulatory approvals may not be obtained in a timely
    manner, if at all;
    a product candidate may not be able to be successfully and
    profitably produced and marketed;
    third parties may have proprietary rights to a product
    candidate, and do not allow sale on reasonable terms;
    a product candidate may not be financially successful because of
    existing therapeutics that offer equivalent or better
    treatments; or
    suppliers of product pumps or actuators required to atomize our
    formulations may increase their price or cease to manufacture
    them without prior notice.  ® ®
 29




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Even
    if we are successful in commercializing a product candidate, it
    is possible that the commercial opportunity for
    nasally-administered products will be limited.
  ® ®
  
    establishment and demonstration of the effectiveness and safety
    of the drugs;
    timing of market entry as compared to competitive products;
    the benefits of our drugs relative to their prices and the
    comparative price of competing products;
    actual and perceived benefits and detriments of nasal drug
    delivery, which may be affected by press and academic literature;
    marketing and distribution support of our products; and
    any restrictions on labeled indications.  Our
    revenues and profits from any particular generic pharmaceutical
    products decline as our competitors introduce their own generic
    equivalents.
    If we
    have a problem with our manufacturing facilities, we may not be
    able to market our products or conduct clinical
    trials.
     30




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Risks
    Related to our Industry
  Reforms
    in the healthcare industry and the uncertainty associated with
    pharmaceutical pricing, reimbursement and related matters could
    adversely affect the marketing, pricing and demand for our
    products.
    Coverage
    and reimbursement status of newly-approved drugs is uncertain
    and the failure to obtain adequate reimbursement coverage could
    limit our ability to generate revenue.
    We may
    be unable to compete successfully against our current and future
    competitors.
     31




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Risks
    Related to Employee Matters and Managing Growth
  If we
    lose our key personnel, or if we are unable to attract and
    retain additional personnel, then we may be unable to
    successfully develop our business.
    We may
    encounter difficulties managing our growth, which could
    adversely affect our business.
    If we
    make strategic acquisitions, we will incur a variety of costs
    and might never realize the anticipated benefits.
   32




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Failure
    of our internal control over financial reporting could harm our
    business and financial results.
    Risks
    Related to our Common Stock
  We
    cannot assure you that our stock price will not
    decline.
    
    negative results from our clinical or pre-clinical trials or
    adverse FDA decisions related to our product candidates or third
    party products that are in the same drug class as our products;
    changes in revenue estimates or publication of research reports
    related to our company by analysts;
    failure to meet analysts revenue estimates;
    speculation in the press or investment community;
    strategic actions by our company or our competitors, such as
    acquisitions or restructurings;
    actions by institutional stockholders and other significant
    stockholders;
    low average daily trading volumes due to relatively small number
    of shares outstanding;
    general market conditions; and
    domestic and international economic factors unrelated to our
    performance.      We
    have never paid cash or stock dividends on our common stock and
    we do not anticipate paying dividends in the foreseeable
    future.
   33




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The
    anti-takeover provisions of our stockholder rights plan may
    entrench management, may delay or prevent beneficial takeover
    bids by third parties and may prevent or frustrate any
    stockholder attempt to replace or remove the current management
    even if the stockholders consider it beneficial to do
    so.
      Our
    operating results are subject to significant fluctuations and
    uncertainties, and our failure to meet expectations of public
    market analysts or investors regarding operating results may
    cause our stock price to decline.
    
    timing and achievement of licensing transactions, including
    milestones and other performance factors associated with these
    contracts;
    time and costs involved in patent prosecution and development of
    our proprietary position;
    continued scientific progress and level of expenditures in our
    research and development programs;
    cost of manufacturing
    scale-up and
    production batches, including vendor provided activities and
    costs;
    time and costs involved in obtaining regulatory approvals;
    changes in general economic conditions and drug delivery
    technologies;
    expiration of existing patents and related revenues; and
    new products and product enhancements that we or our competitors
    introduce.     34




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A
    significant number of shares of our common stock are subject to
    options and warrants, and we expect to sell additional shares of
    our common stock in the future. Sales of these shares will
    dilute the interests of other security holders and may depress
    the price of our common stock.
    ITEM 1B.
    Unresolved
    Staff Comments.    ITEM 2.
    Properties.    3830 Monte Villa Parkway, Bothell,
    Washington.
  3450 Monte Villa Parkway, Bothell,
    Washington.
  45 Davids Drive, and 80 Davids Drive, Hauppauge, New
    York.
    ITEM 3.
    Legal
    Proceedings.    ITEM 4.
    Submission
    of Matters to a Vote of Security Holders.   35




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PART II  ITEM 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information
    Quarter

High


Low2005:First Quarter

$
12.25


$
9.11Second Quarter


14.88



9.67Third Quarter


15.18



12.40Fourth Quarter


16.65



12.792006:First Quarter

$
23.14


$
13.70Second Quarter


18.16



12.05Third Quarter


16.00



11.15Fourth Quarter


19.98



15.012007:First Quarter through
    February 28, 2007

$
15.39


$
11.11     Holders
    Dividends
   36




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Performance
    Graph
    Comparison
    of Cumulative Total Return
  
  12/31/01


12/31/02


12/31/03


12/31/04


12/31/05


12/31/06Nastech Pharmaceutical Company
    Inc.


$
100.00



$
55.16



$
62.00



$
78.06



$
94.97



$
96.97Nasdaq Stock Market Index (U.S.)


$
100.00



$
69.13



$
103.36



$
112.49



$
114.88



$
126.22Nasdaq Pharmaceutical Stocks Index


$
100.00



$
72.40



$
110.91



$
107.35



$
125.31



$
120.38   Unregistered
    Sales of Equity Securities
  Warrants.
 37




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ITEM 6.
    Selected
    Financial Data.  Form 10-K.
  Years Ended December 31,Consolidated Statements of Operations Data:

2002


2003


2004


2005


2006REVENUELicense and research fees

$
7,515


$
17,635


$
1,556


$
7,416


$
27,265Government grants


















488Product revenue


1,408



1,805



291



33



737Total revenue


8,923



19,440



1,847



7,449



28,490OPERATING EXPENSES:Cost of product revenue


289



498



258



21



355Research and development(1)


11,613



17,097



21,083



30,334



43,244Royalties


9















Sales and marketing


1,863



2,377



1,046



1,326



1,927General and administrative


8,138



5,679



7,951



9,569



12,281Restructuring charge


595















Total operating expenses


22,507



25,651



30,338



41,250



57,807LOSS FROM OPERATIONS


(13,584
)


(6,211
)


(28,491
)


(33,801
)


(29,317
)Interest income


278



227



344



1,990



2,789Interest and other expense


(162
)


(393
)


(462
)


(352
)


(640
)Gain on sale of product






4,236











Loss before cumulative effect of
    change in accounting principle


(13,468
)


(2,141
)


(28,609
)


(32,163
)


(27,168
)Cumulative effect of change in
    accounting principle


















291NET LOSS

$
(13,468
)

$
(2,141
)

$
(28,609
)

$
(32,163
)

$
(26,877
)LOSS PER SHARE  BASIC
    AND DILUTED Loss before cumulative effect of change in
    accounting principle

$
(1.34
)

$
(0.20
)

$
(2.21
)

$
(1.72
)

$
(1.28
)Cumulative effect of change in
    accounting principle


















.01Net loss per common
    share  basic and diluted

$
(1.34
)

$
(0.20
)

$
(2.21
)

$
(1.72
)

$
(1.27
)Shares used in computing net loss
    per share  basic and diluted


10,028



10,751



12,955



18,719



21,218   38




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##### Table of Contents



Consolidated Balance Sheet Data:

2002


2003


2004(3)


2005(4)


2006Cash, cash equivalents, restricted
    cash and short term investments(2)

$
9,021


$
25,081


$
74,474


$
59,909


$
50,993Working capital


3,342



14,766



58,362



55,198



42,833Total assets


23,050



31,138



80,775



72,953



73,832Notes payable and capital lease
    obligations


7,637



8,737



11,603



5,601



11,683Total stockholders equity


8,645



17,906



58,148



55,567



43,336     (1)
    
    The 2006 amount includes $4.1 million related to purchased
    in-process research and development.(2)
    
    Amount includes restricted cash of approximately
    $6.3 million at December 31, 2003, $9.0 million
    at December 31, 2004, $1.0 million at
    December 31, 2005 and $2.2 million at
    December 31, 2006.(3)
    
    During 2004, we received net proceeds of $12.3 million from
    a public offering of 1,136,364 shares of common stock and
    warrants to purchase 516,384 shares of common stock, and
    net proceeds of $52.9 million from a public offering of
    4,250,000 shares of common stock.(4)
    
    During 2005, we received net proceeds of $21.6 million from
    a public offering of 1,725,000 shares of common stock.  ITEM 7.
    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, and Section 21E of
    the Securities Exchange Act, 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 annual or 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 SEC, including those factors discussed under the
    caption Risk Factors in this Report, 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.
    
    The section entitled Background describes our
    principal operational activities and summarizes significant
    trends and developments in our business and in our industry.
    Critical Accounting Policies and Estimates discusses
    our most critical accounting policies.
    Recently Issued Accounting Standards discusses new
    accounting standards. 39




---



##### Table of Contents




    Consolidated Results of Operations discusses the
    primary factors that are likely to contribute to significant
    variability of our results of operations for the year ended
    December 31, 2005 as compared to the year ended
    December 31, 2006, and the year ended December 31,
    2004 as compared to the year ended December 31, 2005.
    Liquidity and Capital Resources discusses our cash
    requirements, sources and uses of cash and liquidity.
    Contractual Obligations discusses our contractual
    obligations as of December 31, 2006.
    Off-Balance Sheet Arrangements indicates that we did
    not have any off-balance sheet arrangements as of
    December 31, 2006.    Background
  cell-to-cell
         40




---



##### Table of Contents



PTH(1-34)
    PTH(1-34). PTH(1-34)
     41




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
  00-21, 01-14, Out-of-Pocket
  00-21, 00-21,
   42




---



##### Table of Contents



01-14, out-of-pocket
        Research
    and Development Costs
       43




---



##### Table of Contents



Stock-Based
    Compensation
            Income
    Taxes
   44




---



##### Table of Contents



Recently
    Issued Accounting Standards
    No. 115-1 SFAS 124-1, Other-Than-Temporary other-than-temporary other-than-temporary other-than-temporary.
  No. 123R-3,
       45




---



##### Table of Contents



No. 123R-5, FAS 123R-1
  Consolidated
    Results of Operations
  Comparison
    of Annual Results of Operations
    Years Ended





Years EndedDecember 31,


Change


December 31,


Change2005


2006


$


%


2004


2005


$


%RevenueLicense and research fees

$
7,416


$
27,265


$
19,849



268
%

$
1,556


$
7,416


$
5,860



377
%Government grants






488



488















Product revenue


33



737



704







291



33



(258
)


(89
)%Total revenue


7,449



28,490



21,041



282
%


1,847



7,449



5,602



303
%Operating
    expensesCost of product revenue


21



355



334







258



21



(237
)


(92
)%Research and development


30,334



43,244



12,910



43
%


21,083



30,334



9,251



44
%Sales and marketing


1,326



1,927



601



45
%


1,046



1,326



280



27
%General and administrative


9,569



12,281



2,712



28
%


7,951



9,569



1,618



20
%Total operating expenses


41,250



57,807



16,557



40
%


30,338



41,250



10,912



36
%Interest income


1,990



2,789



799



40
%


344



1,990



1,646



478
%Interest and other expense


(352
)


(640
)


(288
)


82
%


(462
)


(352
)


110



(24
)%Loss before cumulative effect of
    change in accounting principle


(32,163
)


(27,168
)


4,995



(16
)%


(28,609
)


(32,163
)


(3,554
)


12
%Cumulative effect of change in
    accounting principle






291



291















Net loss

$
(32,163
)

$
(26,877
)

$
5,286



(16
)%

$
(28,609
)

$
(32,163
)

$
(3,554
)


12
%   Comparison
    of Year Ended December 31, 2005 to the Year Ended
    December 31, 2006
  Revenue.
 46




---



##### Table of Contents



License and research fees revenue.
  ® 5-year
  Government grants revenue.
  Product Revenue. ® ®
  Cost of product revenue. ® ®
  Research and Development.
  
    In February 2006, we acquired RNAi IP and other RNAi
    technologies from Galenea, including patent applications
    licensed from MIT that have early priority dates in the
    antiviral RNAi field focused on viral respiratory infections,
    including influenza, rhinovirus and other respiratory diseases.
    We also acquired Galeneas research and IP relating to
    pulmonary drug delivery technologies for RNAi. We also assumed
    Galeneas awarded and pending grant applications from NIAID
    and the Department of Defense to support the development of
    RNAi-based antiviral drugs. In connection with this transaction,
    we recorded a charge of approximately $4.1 million for
    acquired research associated with products in development for
    which, at the acquisition date, technological feasibility had
    not been established and there was no alternative future use.
    Purchased IPR&D expenses, which were zero in the prior year,
    were included in R&D expense in 2006.
    In November 2006, we acquired a license from the Beckman
    Research Institute/City of Hope for exclusive and non-exclusive
    licenses to the Dicer-substrate RNAi IP developed there. We
    obtained exclusive rights to five undisclosed targets selected
    by us, as well as broad non-exclusive rights to Dicer-substrates
    directed against all mammalian targets subject to certain City
    of Hope limitations that will have no impact on our programs. We
    intend to further develop this IP and technology, which should
    cause a related increase in R&D expenses.
    Personnel-related expenses increased by 36% to
    $17.0 million in 2006 compared to $12.6 million in
    2005 due to an increase in headcount in support of our R&D
    programs. 47




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##### Table of Contents




    Non-cash stock-based compensation included in R&D expense
    increased to $2.1 million in 2006 from approximately
    $0.5 million in 2005.
    Facilities and equipment costs increased by 54% to
    $7.4 million in 2006 compared to $4.8 million in 2005
    due to rent and related expenses on additional space leased at
    the Bothell facility and an increase in depreciation of
    equipment resulting from capital expenditures to acquire needed
    technical capabilities and to support increased capacity.
    Depreciation expense included in R&D in 2006 was
    $2.3 million, compared with $1.5 million in 2005.
    Costs of clinical trials, consulting, outside services and
    laboratory supplies increased by 2% to approximately
    $11.2 million in 2006 compared to approximately
    $11.0 million in 2005 due primarily to our increased
    efforts related to pre-clinical and clinical programs for
    PTH(1-34), PYY, calcitonin and RNAi.    Years Ended December 31,2005


2006(2)PTH(1-34)


16%



31%Tight Junctions and RNAi


27%



22%Insulin






11%Influenza






8%PYY


15%



6%Calcitonin


27%



5%Other research and development
    projects(1)


15%



17%Total


100%



100%     (1)
    
    Other research and development projects include our excipient
    projects, feasibility projects and other projects.(2)
    
    Excludes purchased IPR&D in the field of RNAi related to
    influenza from Galenea of approximately $4.1 million in
    2006. We believe that presenting R&D expense by project as a
    percentage of total R&D project expense without the Galenea
    transaction allows for better comparability between periods
    given the significance of the amount relative to total R&D
    project expense.    
    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.  ® ®
 48




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##### Table of Contents



Sales and marketing. ®
  General and administrative.
  
    Costs of legal and accounting fees, corporate insurance and
    other administrative costs increased by 21% to approximately
    $5.4 million in 2006 compared to approximately
    $4.5 million in 2005.
    Non-cash stock-based compensation expense included in general
    and administrative expense increased to approximately
    $2.6 million in 2006 compared to $1.3 million in 2005,
    primarily due to the expensing of restricted stock, which we
    first began issuing in June 2004.
    Personnel-related expenses increased by 10% to $3.6 million
    in 2006 compared to $3.3 million in 2005 due primarily to
    increased headcount related to administrative activities.    Interest Income.
  Years Ended December 31,2005


2006(Dollars in thousands)Interest income

$
1,990


$
2,789Average funds available for
    investment


61,300



57,600Average interest rate


3.3
%


4.8
%    49




---



##### Table of Contents



Interest and Other Expense.
  Years Ended December 31,2005


2006(Dollars in thousands)Interest and other expense

$
352


$
640Average borrowings under capital
    leases and note payable


5,300



6,800Average interest rate


6.9
%


9.8
%     Comparison
    of Year Ended December 31, 2004 to Year Ended
    December 31, 2005
  Revenue.
  License and research fees. ®
  Product revenue and cost of product
    revenue. ®
  Research and Development.
  
    Personnel-related expenses increased by 42% to
    $12.6 million in 2005 compared to $8.9 million in 2004
    due to an increase in headcount in support of our R&D
    programs.
    Costs of clinical trials, consulting, outside services and
    laboratory supplies increased by 49% to approximately
    $11.0 million in 2005 compared to approximately
    $7.4 million in 2004 due primarily to our pre-clinical and
    clinical programs for PTH(1-34), PYY, calcitonin and RNAi.
    R&D administrative expenses increased by 15% to
    $1.5 million in 2005 compared to $1.3 million in 2004
    due primarily to higher administrative costs to support our
    increase in headcount.
    Facilities and equipment costs increased by 41% to
    $4.8 million in 2005 compared to $3.4 million in 2004
    due to rent and related expenses on additional space leased at
    the Bothell facility and an increase in depreciation of
    equipment resulting from capital expenditures to acquire needed
    technical capabilities and to support increased capacity.  Sales and Marketing.
 50




---



##### Table of Contents



General and Administrative.
  
    Costs of legal fees, accounting fees, corporate insurance and
    other administrative costs increased by 22% to approximately
    $4.5 million in 2005 compared to approximately
    $3.7 million in 2004.
    Non-cash stock-based compensation increased by 44% to
    approximately $1.3 million in 2005 compared to
    $0.9 million in 2004, primarily due to the expensing of
    restricted stock which we first began issuing in June 2004.
    Personnel-related expenses increased by 10% to $3.3 million
    in 2005 compared to $3.0 million in 2004 due primarily to
    increased headcount related to administrative activities.  Interest Income.
  Interest and Other Expense.
  Liquidity
    and Capital Resources
  Cash
    Requirements
    Sources
    and Uses of Cash
       51




---



##### Table of Contents




    Under our collaborative arrangement with P&G, we received an
    initial cash payment of $10.0 million in February 2006,
    which has been recorded as deferred revenue and is being
    amortized into revenue over the estimated development period and
    a $7.0 million milestone payment that we received and
    recognized in full as revenue in 2006.
    Under our collaborative arrangement with Merck for PYY(3-36), we
    received an initial cash payment of $5.0 million in October
    2004. The $5.0 million initial payment was being amortized
    over the estimated development period until the collaboration
    was terminated in March 2006, at which time the unamortized
    balance of the license payment of approximately
    $3.7 million was recognized as revenue and we reacquired
    our rights in the PYY program.
    Under our supply agreement with Questcor, in February 2005 we
    received and recognized a payment of $2.0 million from
    Questcor upon FDA approval of an NDA for our
    Nascobal®
    nasal spray product. In October 2005, with our consent, Questcor
    assigned all of its rights and obligations under the Questcor
    Agreements dated June 2003 to QOL. We received $2.0 million
    from Questcor in October 2005 in consideration for our consent
    to the assignment and in connection with our entering into an
    agreement with QOL that modified certain terms of the Questcor
    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.
    Under our collaborative arrangement with Par Pharmaceutical, we
    received an initial cash payment of $1.0 million in October
    2004 that was amortized over the estimated development period.        Liquidity
   52




---



##### Table of Contents



Contractual
    Obligations
    Total


2007


2008


2009


2010


2011


Thereafter(Dollars in thousands)Facility leases

$
29,682


$
2,892


$
2,999


$
3,108


$
3,164


$
3,197


$
14,322Capital lease obligations


11,683



4,226



3,962



2,919



576







Purchase obligations


3,647



3,647



















Total

$
45,012


$
10,765


$
6,961


$
6,027


$
3,740


$
3,197


$
14,322     Total


2007


2008


2009


2010


2011


Thereafter(Dollars in thousands)Capital lease obligations

$
1,760


$
958


$
574


$
202


$
26


$



$
Total

$
1,760


$
958


$
574


$
202


$
26


$



$
   Off-Balance
    Sheet Arrangements
  Regulation S-K.
  ITEM 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk.      2007


2008


2009


2010


Total


Fair Value(Dollars in thousands)Capital lease
    obligations  principal

$
4,226


$
3,962


$
2,919


$
576


$
11,683


$
11,683Capital lease
    obligations  interest


958



574



202



26



1,760



1,762Total

$
5,184


$
4,536


$
3,121


$
602


$
13,443


$
13,445  53




---



##### Table of Contents



ITEM 8.
    Financial
    Statements and Supplementary Data.  REPORTS OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


55FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA


57Consolidated
    Balance Sheets at December 31, 2005 and 2006


57Consolidated
    Statements of Operations for the years ended December 31,
    2004, 2005 and 2006


58Consolidated
    Statements of Stockholders Equity and Comprehensive Loss
    for the years ended December 31, 2004, 2005 and
    2006


59Consolidated
    Statements of Cash Flows for the years ended December 31,
    2004, 2005 and 2006


60Notes to
    Consolidated Financial Statements


61  54




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##### Table of Contents



Report
    of Independent Registered Public Accounting Firm             Internal Control  Integrated Framework
  
    55




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
     Internal Control 
    Integrated Framework
        Internal
    Control  Integrated Framework Internal Control 
    Integrated Framework
    
    56




---



##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2005


2006(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
26,769


$
28,481Restricted cash


998



2,155Short-term investments


32,142



20,357Accounts receivable


189



2,798Inventories


2,733



2,203Prepaid expenses and other current
    assets


1,545



1,564Total current assets


64,376



57,558Property and equipment, net


8,173



15,444Other assets


404



830Total assets

$
72,953


$
73,832LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,944


$
4,437Accrued payroll and employee
    benefits


1,740



2,652Accrued expenses


474



882Capital lease
    obligations  current portion


2,431



4,226Deferred revenue 
    current portion


1,589



2,528Total current liabilities


9,178



14,725Capital lease obligations, net of
    current portion


3,170



7,457Deferred revenue, net of current
    portion


4,250



6,138Other liabilities


788



2,176Total liabilities


17,386



30,496Commitments and contingenciesStockholders equity:Preferred stock, $.01 par
    value; 100,000 shares authorized: no shares issued and
    outstanding






Common stock and additional
    paid-in capital, $0.006 par value; 50,000,000 shares
    authorized: 20,750,477 shares issued and outstanding as of
    December 31, 2005 and 22,117,124 shares issued and
    outstanding as of December 31, 2006


176,192



185,849Deferred compensation


(4,902
)


Accumulated deficit


(115,616
)


(142,493
)Accumulated other comprehensive
    loss


(107
)


(20
)Total stockholders equity


55,567



43,336Total liabilities and
    stockholders equity

$
72,953


$
73,832    57




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Years Ended December 31,2004


2005


2006(In thousands, except per share data)Revenue:License and research fees

$
1,556


$
7,416


$
27,265Government grants










488Product revenue


291



33



737Total revenue


1,847



7,449



28,490Operating expenses:Cost of product revenue


258



21



355Research and development


21,083



30,334



43,244Sales and marketing


1,046



1,326



1,927General and administrative


7,951



9,569



12,281Total operating expenses


30,338



41,250



57,807Loss from operations


(28,491
)


(33,801
)


(29,317
)Other income (expense):Interest income


344



1,990



2,789Interest and other expense


(462
)


(352
)


(640
)Total other income (expense)


(118
)


1,638



2,149Loss before cumulative effect of
    change in accounting principle


(28,609
)


(32,163
)


(27,168
)Cumulative effect of change in
    accounting principle










291Net loss

$
(28,609
)

$
(32,163
)

$
(26,877
)Loss per common share 
    basic and diluted:Loss before cumulative effect of
    change in accounting principle

$
(2.21
)

$
(1.72
)

$
(1.28
)Cumulative effect of change in
    accounting principle










0.01Net loss per common
    share  basic and diluted

$
(2.21
)

$
(1.72
)

$
(1.27
)Shares used in computing net loss
    per share  basic and diluted


12,955



18,719



21,218    58




---



##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY AND COMPREHENSIVE LOSS
  AccumulatedCommon Stock and








Other


TotalAdditional Paid-In Capital


Deferred


Accumulated


Comprehensive


StockholdersShares


Amount


Compensation


Deficit


Loss


Equity(In thousands, except share data)Balance December 31,
    2003


11,849,128


$
73,499


$
(749
)

$
(54,844
)

$



$
17,906Proceeds from the issuance of
    common shares and warrants, net


5,386,364



65,176















65,176Proceeds from the exercise of
    options and warrants


514,864



2,684















2,684Compensation related to restricted
    stock


145,620



1,569



(1,081
)










488Compensation related to stock
    options






32



472











504Net loss














(28,609
)






(28,609
)Unrealized loss on securities
    available for sale


















(1
)


(1
)Comprehensive loss






















(28,610
)Balance December 31,
    2004


17,895,976



142,960



(1,358
)


(83,453
)


(1
)


58,148Proceeds from the issuance of
    common shares, net


1,725,000



21,583















21,583Proceeds from the exercise of
    options and warrants


743,868



6,205















6,205Compensation related to restricted
    stock


385,633



5,436



(3,823
)










1,613Compensation related to stock
    options






8



279











287Net loss














(32,163
)






(32,163
)Unrealized loss on securities
    available for sale


















(106
)


(106
)Comprehensive loss






















(32,269
)Balance December 31,
    2005


20,750,477



176,192



(4,902
)


(115,616
)


(107
)


55,567Cumulative effect of change in
    accounting principle






(5,193
)


4,902











(291
)Proceeds from the exercise of
    options and warrants


1,105,010



9,867















9,867Compensation related to restricted
    stock


261,637



2,326















2,326Compensation related to stock
    options






2,657















2,657Net loss














(26,877
)






(26,877
)Unrealized gain on securities
    available for sale


















87



87Comprehensive loss






















(26,790
)Balance December 31,
    2006


22,117,124


$
185,849


$



$
(142,493
)

$
(20
)

$
43,336    59




---



##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2004


2005


2006(In thousands)Operating activities:Net loss

$
(28,609
)

$
(32,163
)

$
(26,877
)Adjustments to reconcile net loss
    to net cash used in operating activities:Non-cash compensation related to
    stock options


504



287



2,657Non-cash compensation related to
    restricted stock


488



1,613



2,326Depreciation and amortization


1,443



1,832



2,903Loss on disposition of property
    and equipment


35



121



25Cumulative effect of change in
    accounting principle










(291
)Changes in assets and liabilities:Accounts receivable


104



(189
)


(2,609
)Inventories


123



(2,676
)


15Prepaid expenses and other assets


215



(865
)


70Accounts payable


(738
)


1,292



1,493Deferred revenue


6,257



(418
)


2,827Accrued expenses and other
    liabilities


1,010



(113
)


2,708Net cash used in operating
    activities


(19,168
)


(31,279
)


(14,753
)Investing activities:Change in restricted cash










(1,157
)Purchases of investments


(46,589
)


(122,822
)


(67,595
)Sales and maturities of investments


15,200



130,251



79,467Purchases of property and equipment


(2,164
)


(4,966
)


(10,199
)Net cash provided by (used in)
    investing activities


(33,553
)


2,463



516Financing activities:Change in restricted cash


(2,729
)


8,002



Proceeds from sales of common
    shares and warrants, net


65,176



21,583



Payments on notes payable


(146
)


(8,352
)


Proceeds from notes payable


2,227







Borrowings under capital lease
    obligations


1,885



4,273



9,288Payments on capital lease
    obligations


(1,100
)


(1,923
)


(3,206
)Proceeds from exercise of stock
    options and warrants


2,684



6,205



9,867Net cash provided by financing
    activities


67,997



29,788



15,949Net increase in cash and cash
    equivalents


15,276



972



1,712Cash and cash
    equivalents  beginning of year


10,521



25,797



26,769Cash and cash
    equivalents  end of year

$
25,797


$
26,769


$
28,481Supplemental disclosure:Cash paid for interest

$
414


$
367


$
677    60




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 For the Three Years Ended December 31, 2006
  Note 1 
    Business and Summary of Significant Accounting
    Policies
  Business
  cell-to-cell
            Summary
    of Significant Accounting Policies
  Principles of Consolidation
 61




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Use of Estimates
  Cash Equivalents
  Restricted Cash
  Short-term Investments available-for-sale available-for-sale available-for-sale available-for-sale other-than-temporary other-than-temporary, available-for-sale
  Allowance for Doubtful Accounts
  Inventories (first-in,
  Property and Equipment
 62




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Impairment of long-lived assets
  Fair Value of Financial Instruments
  Concentration of Credit Risk and Significant
    Customers and/or
      Revenue Recognition 00-21, 01-14, Out-of-Pocket
  00-21,
 63




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  00-21,
      01-14, out-of-pocket
        Shipping and Handling Costs
  Research and Development Costs
 64




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Stock-Based Compensation
         65




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2004


2005(Dollars in thousands, except per share amounts)Net loss, as reported

$
(28,609
)

$
(32,163
)Add: stock-based employee
    compensation under APB 25 included in reported net loss


992



1,900Deduct: stock-based employee
    compensation, determined under fair value method


(5,585
)


(6,189
)Proforma net loss

$
(33,202
)

$
(36,452
)Loss per share:Basic and diluted  as
    reported

$
(2.21
)

$
(1.72
)Basic and diluted 
    proforma

$
(2.56
)

$
(1.95
)     Net Loss per Common Share
  Years Ended December 31,2004


2005


2006Stock options outstanding under
    our various stock option plans


2,760,752



2,688,199



2,412,414Unvested restricted stock


145,620



444,322



544,480Warrants


1,486,073



1,403,047



660,814Total


4,392,445



4,535,568



3,617,708   Advertising Costs
  Operating leases
 66




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Income Taxes
  Comprehensive Loss available-for-sale
  Reclassifications
  Recent Accounting Pronouncements
  No. 115-1 SFAS 124-1, Other-Than-Temporary other-than-temporary other-than-temporary other-than-temporary.
  No. 123R-3,
     67




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      No. 123R-5, FAS 123R-1,
  Note 2 
    Short-term Investments
    Unrealized


Unrealized


RecordedDecember 31, 2005

Cost Basis


Gains


Losses


BasisType of security:Commercial Paper and Corporate
    Bonds

$
15,270


$



$
(46
)

$
15,224U.S. Government and Agency
    Securities


16,976







(58
)


16,918Total

$
32,246


$



$
(104
)

$
32,142   Unrealized


Unrealized


RecordedDecember 31, 2006

Cost Basis


Gains


Losses


BasisType of security:U.S. Government and Agency
    Securities

$
20,373


$



$
(16
)

$
20,357Total

$
20,373


$



$
(16
)

$
20,357   other-than-temporary
 68




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 3 
    Property and Equipment
    2005


2006Furniture and fixtures

$
882


$
1,701Machinery and equipment


7,428



10,342Computer equipment and software


2,361



3,846Leasehold improvements


2,817



7,49213,488



23,381Less accumulated depreciation and
    amortization


5,315



7,937Net property and equipment

$
8,173


$
15,444     Note 4 
    Employee Benefit Plan
    Note 5 
    Letter of Credit
      Note 6 
    Stockholders Equity
  Preferred Stock
  Common Stock
 69




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  winding-up,
    Stockholder Rights Plan
    Shelf Registration Statement Form S-3,
  Common Stock Offerings
   70




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Stock Incentive Plans
       71




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Restricted Stock Awards
  Years Ended December 31,2004


2005


2006Unvested restricted shares
    outstanding, beginning of period






145,620



444,322Restricted shares issued


148,020



415,253



300,536Restricted shares forfeited


(2,400
)


(29,620
)


(21,988
)Restricted shares vested






(86,931
)


(178,390
)Unvested restricted shares
    outstanding, end of period


145,620



444,322



544,480Weighted average grant date fair
    value per share

$
10.89


$
13.90


$
14.43     Stock Options
  Years Ended December 31,2004


2005


2006Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOutstanding at beginning of period


3,010,550


$
10.43



2,760,752


$
11.36



2,688,199


$
12.92Granted


217,000



11.35



703,000



14.59



123,633



13.98Exercised


(430,132
)


5.09



(660,842
)


8.25



(390,887
)


11.69Expired


(667
)


12.43



(65,846
)


15.13



(1,500
)


12.65Terminated and canceled


(35,999
)


8.77



(48,865
)


9.20



(7,033
)


11.05Outstanding at end of period


2,760,752


$
11.36



2,688,199


$
12.92



2,412,412


$
13.18Exercisable at end of period


1,893,567


$
10.69



1,717,240


$
11.29



1,778,015


$
12.76  72




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options Outstanding


Options ExercisableWeighted-Average


Weighted-





Weighted-Remaining


Average





AverageNumber


Contractual Life


Exercise


Number


ExercisableRange of Exercise Prices

Outstanding


(Years)


Price


Exercisable


Price$ 5.63 - $10.50


440,112



4.4


$
8.78



419,113


$
8.73$10.51 - $12.33


162,667



4.3



11.18



150,501



11.15$12.94 - $12.94


800,000



5.3



12.94



800,000



12.94$13.35 - $16.00


909,633



8.1



14.57



308,401



14.61$25.00 - $25.00


100,000



5.3



25.00



100,000



25.00Totals


2,412,412



6.1


$
13.18



1,778,015


$
12.76Exerciseable at Dec. 31, 2006


1,778,015



5.3   Determining
    Fair Value Under SFAS 123R
  Valuation and Amortization Method.
  Expected Life.
  Expected Volatility.
  Risk-Free Interest Rate.
  Expected Dividend Yield.
  Expected Forfeitures.
 73




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2004


2005


2006Expected dividend yield


0
%


0
%


0
%Risk free interest rate


3.4
%


4.1
%


4.7
%Expected stock volatility


78
%


74
%


70
%Expected option life


5 years



6 years



5.7 yearsWeighted average fair value granted

$
7.75


$
10.29


$
9.05   Stock-based Compensation
  2004


2005


2006Stock-based compensation:Research and development

$
51


$
519


$
2,106Sales and marketing


14



68



250General and administrative


927



1,313



2,627Total stock-based compensation

$
992


$
1,900


$
4,983           Warrants
 74




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 7 
    Income Taxes
    Years Ended December 31,2005


2006Deferred tax assets:Net operating loss carryforwards

$
39,232


$
44,019Federal and State tax credits


4,427



5,944Depreciation &
    amortization


1,329



2,981Deferred revenue


2,044



3,033Other


636



2,112Total deferred tax assets


47,668



58,089Valuation allowance


(47,668
)


(58,089
)Net deferred taxes

$



$
           Note 8 
    Commitments and Contingencies
  Leases
     75




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Operating


Capital


Total2007

$
2,892


$
5,184


$
8,0762008


2,999



4,536



7,5352009


3,108



3,121



6,2292010


3,164



602



3,7662011


3,197







3,197Thereafter


14,322







14,322Less amount representing interest






(1,760
)


(1,760
)Total

$
29,682


$
11,683


$
41,365   Contingencies
  Note 9 
    Contractual Agreements
  Procter & Gamble
    (P&G)
   76




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Galenea
      Amylin Pharmaceuticals, Inc. 
      Par Pharmaceutical
 77




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        ®
  ®
  Questcor/QOL Medical, LLC ® ® ® ® ®
  ®
 78




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   ® ®
  Alnylam Pharmaceuticals, Inc.  tm
  Merck
    Government Grants
  Thiakis Limited peptide-1 (GLP-1)
  Cytyc Corporation 
 79




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    City of Hope
  Feasibility Agreements
  Note 10 
    Related Party Transactions
      Note 11 
    Subsequent Events
    Note 12 
    Quarterly Financial Data (Unaudited) (in thousands, except per
    share data)
  March 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Total revenue

$
3,330


$
1,602


$
1,223


$
1,294Operating expenses


(9,716
)


(10,292
)


(10,463
)


(10,779
)Net loss


(6,087
)


(8,344
)


(8,814
)


(8,918
)Net loss per share 
    Basic and Diluted

$
(0.34
)

$
(0.47
)

$
(0.46
)

$
(0.44
)   80




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##### Table of Contents



NASTECH
    PHARMACEUTICAL COMPANY INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  March 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Total revenue

$
6,718


$
11,411


$
5,545


$
4,816Operating expenses


(15,386
)


(12,564
)


(13,943
)


(15,914
)Loss before cumulative effect of
    change in accounting principle


(8,138
)


(560
)


(7,808
)


(10,662
)Cumulative effect of change in
    accounting principle


291











Net loss


(7,847
)


(560
)


(7,808
)


(10,662
)Loss per share  Basic
    and Diluted:Loss before cumulative effect of
    change in accounting principle

$
(0.39
)

$
(0.03
)

$
(0.36
)

$
(0.50
)Cumulative effect of change in
    accounting principle


.01











Net loss per share 
    Basic and Diluted

$
(0.38
)

$
(0.03
)

$
(0.36
)

$
(0.50
)    81




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##### Table of Contents



ITEM 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure.    ITEM 9A.
    Controls
    and Procedures.  Disclosure Controls and
    Procedures. Form 10-K, Rules 13a-15(e) 15d-15(e)
  Internal Control over Financial
    Reporting.
  Management Report on Internal
    Control. Rules 13a-15(f) 15d-15(f)
        Internal Control  Integrated Framework
    Form 10-K.
  ITEM 9B.
    Other
    Information.   82




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##### Table of Contents



PART III  ITEM 10.
    Directors
    and Executive Officers of the Registrant.    ITEM 11.
    Executive
    Compensation.    ITEM 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    ITEM 13.
    Certain
    Relationships and Related Transactions.    ITEM 14.
    Principal
    Accounting Fees and Services.   PART IV  ITEM 15.
    Exhibits,
    Financial Statement Schedules.  Financial Statements and Financial Statement
    Schedule
  Form 10-K.
  Exhibits
   83




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##### Table of Contents



SIGNATURES    NASTECH PHARMACEUTICAL COMPANY INC.
  By:
    /s/  Steven
    C. Quay, M.D., Ph.D.   
    Signature

Title/s/  Steven
    C.
    Quay, M.D., Ph.D.Steven
    C. Quay, M.D., Ph.D.

Chairman of the Board, President
    and
    Chief Executive Officer
    (Principal Executive Officer)/s/  Philip
    C. RankerPhilip
    C. Ranker

Chief Financial Officer and
    Secretary
    (Principal Financial Officer)/s/  Bruce
    R. YorkBruce
    R. York

Chief Accounting Officer and
    Assistant Secretary
    (Principal Accounting Officer)/s/  Susan
    B. BayhSusan
    B. Bayh

Director/s/  J.
    Carter
    Beese, Jr.J.
    Carter Beese, Jr.

Director/s/  Dr.
    Alexander D.
    CrossDr.
    Alexander D. Cross

Director/s/  Dr.
    Ian R.
    FerrierDr.
    Ian R. Ferrier

Director/s/  Myron
    Z. HolubiakMyron
    Z. Holubiak

Director/s/  Leslie
    D.
    MichelsonLeslie
    D. Michelson

Director 84




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##### Table of Contents



Signature

Title/s/  John
    V. PollockJohn
    V. Pollock

Director/s/  Gerald
    T.
    StanewickGerald
    T. Stanewick

Director/s/  Bruce
    R. ThawBruce
    R. Thaw

Director/s/  Devin
    N. WenigDevin
    N. Wenig

Director  85




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##### Table of Contents



EXHIBIT INDEX  ExhibitNo.

Description2
.1

Agreement and Plan of
    Reorganization, dated August 8, 2000, among Nastech, Atossa
    Acquisition Corporation, a Delaware corporation and wholly-owned
    subsidiary of Nastech, and Atossa HealthCare, Inc. (filed as
    Exhibit 2.1 to Nastech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 Nastechs Current Report on
    Form 8-K
    dated September 30, 2002 and incorporated herein by
    reference).3
.1

Restated Certificate of
    Incorporation of Nastech 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
    Nastech 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).3
.3

Certificate of Designation, Rights
    and Preferences of Series A Junior Participating Preferred
    Stock dated January 17, 2007 (filed as Exhibit 3.1 to
    Nastechs Current Report on
    Form 8-K
    dated January 19, 2007 and incorporated herein by
    reference).4
.1

Investment Agreement, dated as of
    February 1, 2002, by and between Nastech and
    Pharmacia & Upjohn Company (filed as Exhibit 4.1
    to Nastech Current Report on
    Form 8-K
    dated February 1, 2002 and incorporated herein by
    reference).4
.2

Rights Agreement, dated
    February 22, 2000, between Nastech 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

Amendment No. 1 to Rights
    Agreement dated as of January 17, 2007 by and between
    Nastech and American Stock Transfer and Trust Company (filed as
    Exhibit 4.1 to Nastechs Current Report on
    Form 8-K
    dated January 19, 2007 and incorporated herein by
    reference).4
.4

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
.5

Form of Warrant (filed as
    Exhibit 99.3 to Nastech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 Nastech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 Nastech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 Nastech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 Nastech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 Nastech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, effective as of
    March 1, 2006 (filed as Exhibit 10.1 to Nastechs
    Current Report on
    Form 8-K
    dated March 1, 2006 and incorporated herein by
    reference).(1)10
.7

First Amendment to Lease Agreement
    for facilities at 3830 Monte Villa Parkway, Bothell, WA,
    effective as of July 17, 2006, filed as Exhibit 10.7 to
    Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2006 and incorporated herein
    by reference). 86




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##### Table of Contents



ExhibitNo.

Description10
.8

Amended and Restated Employment
    Agreement, dated May 2, 2002, with Dr. Steven C.
    Quay, M.D., Ph.D. (filed as Exhibit 10.27 to
    Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2002 and incorporated
    herein by reference).10
.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 Nastech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 Nastechs Current Report on
    Form 8-K
    dated December 16, 2005 and incorporated herein by
    reference).10
.11

Employment Agreement with Gregory
    L. Weaver, dated April 30, 2002 (filed as
    Exhibit 10.29 to Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2002 and incorporated herein
    by reference).10
.12

Change-in-Control
    Severance Agreement with Gregory L. Weaver, dated July 31,
    2002 (filed as Exhibit 10.1 to Nastechs Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2002 and incorporated
    herein by reference).10
.13

Agreement, Release and Waiver
    dated September 7, 2005 by and between Nastech
    Pharmaceutical Company Inc. and Mr. Gregory L. Weaver
    (filed as Exhibit 10.1 to Nastechs Current Report on
    Form 8-K
    dated September 7, 2005 and incorporated herein by
    reference).10
.14

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
    Nastechs Current Report on
    Form 8-K
    dated January 1, 2006 and incorporated herein by reference).10
.15

Employment Agreement effective as
    of August 17, 2006 by and between Nastech Pharmaceutical
    Company Inc. and Dr. Gordon C. Brandt (filed as
    Exhibit 10.1 to Nastechs Current Report on
    Form 8-K
    dated August 21, 2006 and incorporated herein by reference).10
.16

Employment Agreement effective as
    of September 15, 2006 by and between Nastech Pharmaceutical
    Company Inc. and Timothy M. Duffy (filed as Exhibit 10.1 to
    Nastechs Current Report on
    Form 8-K
    dated September 20, 2006 and incorporated herein by
    reference).10
.17

Employment Agreement effective as
    of November 1, 2006 by and between Nastech Pharmaceutical
    Company Inc. and Dr. Paul H. Johnson (filed as
    Exhibit 10.1 to Nastechs Current Report on
    Form 8-K
    dated November 1, 2006 and incorporated herein by
    reference).10
.18

Termination and Mutual Release
    Agreement, dated September 30, 2002, with Schwarz Pharma,
    Inc. (Filed as Exhibit 10.3 to Nastechs Current
    Report on
    Form 8-K
    dated September 30, 2002 and incorporated herein by
    reference).10
.19

Divestiture Agreement, dated
    January 24, 2003, with Pharmacia & Upjohn Company
    (filed as Exhibit 10.1 to Nastechs Current Report on
    Form 8-K
    dated January 24, 2003 and incorporated herein by
    reference).10
.20

Nastech Pharmaceutical Company
    Inc. 1990 Stock Option Plan (filed as Exhibit 4.2 to
    Nastechs Registration Statement on
    Form S-8,
    File No.
    333-28785,
    and incorporated herein by reference).10
.21

Amended and Restated Nastech
    Pharmaceutical Company Inc. 2000 Nonqualified Stock Option Plan
    (filed as Exhibit 4.4 to Nastechs Registration
    Statement on
    Form S-8,
    File
    No. 333-49514,
    and incorporated herein by reference).10
.22

Amendment No. 1 to the
    Amended and Restated Nastech Pharmaceutical Company Inc. 2000
    Nonqualified Stock Option Plan (filed as Exhibit 10.18 to
    Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2006 and incorporated
    herein by reference).10
.23

Amendment No. 2 to the
    Amended Restated Nastech Pharmaceutical Company Inc. 2000
    Nonqualified Stock Option Plan (filed as Exhibit 10.19 to
    Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2006 and incorporated
    herein by reference).10
.24

Nastech Pharmaceutical Company
    Inc. 2002 Stock Option Plan (filed as Exhibit 10.28 to
    Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2002 and incorporated herein
    by reference).10
.25

Amendment No. 1 to the
    Nastech Pharmaceutical Company Inc. 2002 Stock Option Plan
    (filed as Exhibit 10.20 to Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2006 and incorporated
    herein by reference). 87




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##### Table of Contents



ExhibitNo.

Description10
.26

Nastech Pharmaceutical Company
    Inc. 2004 Stock Incentive Plan (filed as Exhibit 99 to
    Nastechs Registration Statement on
    Form S-8,
    File No.
    333-118206,
    and incorporated herein by reference).10
.27

Amendment No. 1 to Nastech
    Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as
    Exhibit 10.4 to Nastechs Current Report on
    Form 8-K
    dated July 20, 2005 and incorporated herein by reference).10
.28

Amendment No. 2 to Nastech
    Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as
    Exhibit 10.18 to Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2005 and incorporated
    herein by reference).10
.29

Amendment No. 3 to Nastech
    Pharmaceutical Company Inc. 2004 Stock Incentive Plan (filed as
    Exhibit 10.24 to Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2006 and incorporated
    herein by reference).10
.30

Amendment No. 4 to the
    Nastech Pharmaceutical Company Inc. 2004 Stock Incentive Plan
    (filed as Exhibit 10.5 to Nastechs Registration
    Statement on
    Form S-8,
    File No
    333-135724,
    and incorporated herein by reference).10
.31

Amendment No. 5 to the
    Nastech Pharmaceutical Company Inc 2004 Stock Incentive Plan
    (filed as Exhibit 10.27 to Nastechs Quarterly Report
    on
    Form 10-K
    for the quarter ended September 30, 2006 and incorporated
    herein by reference).10
.32

Asset Purchase Agreement dated
    June 16, 2003, by and between Nastech and Questcor
    Pharmaceuticals, Inc. (filed as Exhibit 2.1 to
    Nastechs Current Report on
    Form 8-K
    dated June 17, 2003 and incorporated herein by reference).10
.33

Form of Purchase Agreement (filed
    as Exhibit 99.2 to Nastechs Current Report on
    Form 8-K
    dated September 4, 2003 and incorporated herein by
    reference).10
.34

Form of Warrant (filed as
    Exhibit 99.3 to Nastechs Current Report on
    Form 8-K
    dated September 4, 2003, and incorporated herein by
    reference).10
.35

Revolving Line of Credit Agreement
    with Wells Fargo Bank, dated December 19, 2003 (filed as
    Exhibit 10.20 to Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2003 and incorporated
    herein by reference).10
.36

Addendum to Promissory Note with
    Wells Fargo Bank, dated January 20, 2004 (filed as
    Exhibit 10.21 to Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2003 and incorporated
    herein by reference).10
.37

Security Agreement Securities
    Account with Wells Fargo Bank, dated December 19, 2003
    (filed as Exhibit 10.22 to Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2003 and incorporated
    herein by reference).10
.38

Addendum to Security Agreement:
    Securities Account with Wells Fargo Bank, dated
    December 19, 2003 (filed as Exhibit 10.23 to
    Nastechs Annual Report on
    Form 10-K
    for the year ended December 31, 2003 and incorporated
    herein by reference).10
.39

Revolving Line of Credit Agreement
    with Wells Fargo Bank, dated October 20, 2004 (filed as
    Exhibit 10.29 to Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2004 and incorporated
    herein by reference).10
.40

Exclusive Development,
    Commercialization and License Agreement by and between
    Merck & Co., Inc. and Nastech effective as of
    September 24, 2004 (filed as Exhibit 10.1 to
    Nastechs Current Report on
    Form 8-K
    dated September 24, 2004 and incorporated herein by
    reference).(1)10
.41

Supply Agreement by and between
    Nastech and Merck & Co., Inc. effective as of
    September 24, 2004 (filed as Exhibit 10.2 to
    Nastechs Current Report on
    Form 8-K
    dated September 24, 2004 and incorporated herein by
    reference).(1)10
.42

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 Nastechs Current Report on
    Form 8-K
    dated October 22, 2004 and incorporated herein by
    reference).(1)10
.43

Agreement dated as of
    September 23, 2005 by and between Nastech Pharmaceutical
    Company Inc. and QOL Medical, LLC. (filed as Exhibit 10.1 to
    Nastechs Current Report on
    Form 8-K
    dated October 17, 2005 and incorporated herein by
    reference).(1) 88




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##### Table of Contents



ExhibitNo.

Description10
.44

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
    Nastechs Current Report on
    Form 8-K
    dated January 27, 2006 and incorporated herein by
    reference).(1)10
.45

Supply Agreement by and between
    Nastech and Procter & Gamble Pharmaceutical, Inc.
    (filed as Exhibit 10.1 to Nastechs Current Report on
    Form 8-K
    dated June 8, 2006 and incorporated herein by reference).(1)10
.46

First Amendment dated as of
    December 4, 2006 to Product Development and License
    Agreement by and between Nastech and Procter & Gamble
    Pharmaceuticals, Inc.(1)(2)10
.47

Development and License Agreement
    by and between Nastech and Amylin Pharmaceuticals, Inc. dated
    June 23, 2006 (filed as Exhibit 10.66 to
    Nastechs Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2006 and incorporated herein
    by reference).(1)10
.48

Form of Restricted Stock Grant
    Agreement (filed as Exhibit 10.1 to Nastech Pharmaceutical
    Company Inc.s Current Report on
    Form 8-K,
    dated February 6, 2007 and incorporated herein by
    reference).10
.49

Form of Stock Option Agreement
    (filed as Exhibit 10.2 to Nastech Pharmaceutical Company
    Inc.s Current Report on
    Form 8-K,
    dated February 6, 2007 and incorporated herein by
    reference).23
.1

Consent of KPMG LLP, independent
    registered public accounting firm.(2)31
.1

Certification of Nastech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 Nastech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 Nastech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 Nastech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. 89