##### 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, 2005


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.)
|                                                                                        
|3450 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 Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the
Act:


Title of each class


Common Stock, $0.006 par value


Preferred Stock Purchase Rights, $0.01 par value


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K.










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##### 










NASTECH PHARMACEUTICAL COMPANY INC.


Table of Contents


|              |  |                                                                                                                      |    |      |    |  |  | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|              |  |                                                                                                                      |    | Page |   
|              |  |                                                                                                                      |    |      |   
|PART I       
|Item 1.       |  | Business                                                                                                             |    |      | 5  | 
|Item 1A.      |  | Risk Factors                                                                                                         |    |      | 25 | 
|Item 1B.      |  | Unresolved Staff Comments                                                                                            |    |      | 37 | 
|Item 2.       |  | Properties                                                                                                           |    |      | 37 | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 37 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 37 | 
|             
|PART II      
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 38 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 39 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 40 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 53 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 55 | 
|Item 9.       |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |    |      | 81 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 81 | 
|Item 9B.      |  | Other Information                                                                                                    |    |      | 82 | 
|             
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 82 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |      | 82 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 82 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 82 | 
|Item 14.      |  | Principal Accounting Fees and Services                                                                               |    |      | 82 | 
|             
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules                                                                              |    |      | 82 | 
|Signatures    |  |                                                                                                                      | 83 |     
|Exhibit Index |  |                                                                                                                      | 84 |     
|EXHIBIT 10.18
|EXHIBIT 10.20
|EXHIBIT 10.24
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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FORWARD-LOOKING STATEMENTS


10-K








| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to obtain additional funding;                                                                                                                                                                                                                                                  
|
| |  | our efforts to establish and maintain collaboration partnerships
    for the development of
    PTH(1-34)
    intranasal spray, PYY intranasal spray, generic
    calcitonin-salmon intranasal spray, morphine gluconate
    intranasal spray, insulin, 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
    intranasally;                                                                                                                                                                                                            
|
| |  | 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;                                                                                                                                                        

3



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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | 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 projected size of the drug delivery market.                                                                             



10-K


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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

OVERVIEW


cell-to








| |                  
| | -----------------
| | Business Strategy





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                   
|
| |  | 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |                               
| | ------------------------------
| | Summary of Recent Developments



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capital Raising  We completed public offerings
    of 4,250,000 shares of our common stock for gross proceeds
    of $57.4 million in December 2004, and
    1,725,000 shares of our common stock for gross proceeds of
    approximately $23.3 million in August 2005, pursuant to our
    $80.0 million shelf registration statement and a
    $0.7 million post effective amendment filed on
    August 25, 2005 pursuant to Rule 462(b) of the
    Securities Act.                                                                                                                                                        
|
| |  | PTH(1-34) 
    On January 27, 2006, we entered into a Product Development
    and License Agreement with Procter & Gamble
    Pharmaceuticals, Inc. (P&G) to develop and
    commercialize our
    PTH(1-34)
    nasal spray for the treatment of osteoporosis. We received an
    initial $10.0 million payment, and in total, milestone
    payments could reach $577.0 million over the life of the
    project depending upon the successful completion of specified
    development, regulatory and commercialization milestones,
    although there can be no assurance that any such milestones will
    be achieved.
|
| |  | PYY  The strategic collaboration that we
    entered into with Merck in September 2004 for PYY was terminated
    on March 1, 2006. Under the agreement, Nastech will
    reacquire 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.                                                                                                                                                                                                                                                                         
|
| |  | RNAi                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Galenea  On February 17, 2006 we acquired
    the RNAi intellectual property (IP) estate and other
    RNAi technologies of Galenea Corp. (Galenea) which
    includes certain IP licensed from the Massachusetts Institute of
    Technology (MIT) for the development of RNAi
    therapeutics against viral respiratory infections, including
    influenza, rhinovirus, and other respiratory diseases.
|
| |  | Alnylam  In July 2005 we entered into a
    license agreement with Alnylam Pharmaceuticals, Inc.
    (Alnylam). Under the license, we acquired the
    exclusive rights to discover, develop and commercialize RNAi
    therapeutics directed against TNF-alpha, a protein associated
    with inflammatory diseases including rheumatoid arthritis and
    certain chronic respiratory diseases.              



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nascobal Nasal Spray  In February 2005,
    Questcor paid us a milestone fee of $2.0 million upon
    notice of FDA approval of the NDA for Nascobal nasal spray.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Questcor Pharmaceuticals, Inc. assignment to QOL Medical,
    LLC  On October 17, 2005, with our consent,
    Questcor Pharmaceuticals, Inc. (Questcor) assigned
    all of its rights and obligations to the
    Nascobal®
    nasal spray under the Questcor Asset Purchase and Supply
    Agreements dated June 16, 2003 to QOL Medical, LLC
    (QOL). We received $2.0 million from Questcor
    on October 19, 2005 in consideration for our consent to the
    assignment and in connection with our entering into an agreement
    with QOL which modified certain terms of the Asset Purchase and
    Supply Agreements. QOL has also assumed Questcors
    obligation to pay us $2.0 million on the issuance by the US
    Patent and Trademark Office of a patent covering any formulation
    which treats any indication identified in our NDA for Nascobal
    Nasal Spray. Pursuant to the terms of our

6



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| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | agreement with Questcor, we will continue to prosecute the
    pending U.S. patents for the Nascobal nasal spray product
    on behalf of QOL as well as manufacture Nascobal Nasal Spray and
    Nascobal Nasal Gel exclusively for QOL.   
|
| |  | Novo Nordisk A/S feasibility agreement  On
    March 15, 2006, we announced that we entered into a
    multi-compound
    feasibility study agreement with Novo Nordisk A/S with respect
    to certain Novo Nordisk therapeutic compounds.

COLLABORATIONS AND PROGRAMS




| |                             
| | ----------------------------
| | Procter & Gamble Partnership

(1-34) (1-34) (1-34)




(1-34) (1-34) (1-34)


(1-34) ® (1-34)


(1-34) (1-34) ®




| |                               
| | ------------------------------
| | Par Pharmaceutical Partnership



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| |                  
| | -----------------
| | Merck Partnership





| |                                                           
| | ----------------------------------------------------------
| | RNAi Technology and Intellectual Property
    Acquisitions



Alnylam. tm


Galenea Corp./ MIT.


8



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first-in




| |                                
| | -------------------------------
| | Independent Product Development





| |                     
| | --------------------
| | Other Collaborations

Questcor Pharmaceuticals, Inc.




Questcor assignment to QOL.


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Novo Nordisk A/S feasibility agreement. multi-compound


Cytyc Corporation.


THERAPEUTIC AREAS:






|                         |  |                                              |  |                                                                                      |  |                                             |  |                                                     |  |                                                                           
|------------------------ |  | -------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------- |  | --------------------------------------------------- |  | --------------------------------------------------------------------------
|                         |  |                                              |  |                                                                                      |  |                                             |  |                                                     |  | Delivery                                                                  
|Initial                  |  |                                              |  |                                                                                      |  |                                             |  |                                                     |  | Technology/                                                               
|Indication               |  | Product                                      |  | Clinical Status                                                                      |  | Next Steps                                  |  | Marketing Rights                                    |  | Intellectual Property                                                     
|                         |  |                                              |  |                                                                                      |  |                                             |  |                                                     |  |                                                                           
|Osteoporosis             |  | Parathyroid Hormone PTH
    (1 -34)(Peptide) |  | Four Phase I trials completed                                                        |  | Pharmacokinetic and pivotal clinical trials |  | P&G (worldwide) Nastech (U.S. co- promotion rights) |  | Tight junction/patents and applications                                   
|Osteoporosis             |  | Calcitonin-salmon (Peptide)                  |  | ANDA submitted and accepted for review by the FDA                                    |  | FDA review of ANDA                          |  | Par Pharmaceutical (U.S.) Nastech (rest of world)   |  | Formulation patent applications                                           
|Obesity                  |  | PeptideYY
    (3-36)                         |  | Four Phase I and one placebo- controlled, double-blind
    efficacy trials completed |  | Additional dose ranging studies             |  | Nastech                                             |  | Tight junction/ patents and applications; PYY patents and
    applications
|Breakthrough Cancer Pain |  | Morphine Gluconate (Small molecule)          |  | One Phase II trial completed                                                         |  | Currently seeking a partner                 |  | Nastech                                             |  | Formulation patents and applications                                      

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|                   |  |                                       |  |                 |  |                                         |  |                  |  |                                                                                  
|------------------ |  | ------------------------------------- |  | --------------- |  | --------------------------------------- |  | ---------------- |  | ---------------------------------------------------------------------------------
|                   |  |                                       |  |                 |  |                                         |  |                  |  | Delivery                                                                         
|Initial            |  |                                       |  |                 |  |                                         |  |                  |  | Technology/                                                                      
|Indication         |  | Product                               |  | Clinical Status |  | Next Steps                              |  | Marketing Rights |  | Intellectual Property                                                            
|                   |  |                                       |  |                 |  |                                         |  |                  |  |                                                                                  
|Antivirals         |  | RNAi directed against influenza virus |  | Preclinical     |  | Preclinical safety and efficacy studies |  | Nastech          |  | MIT and Galenea antiviral patent applications                                    
|Inflammation       |  | RNAi directed against TNF-alpha       |  | Preclinical     |  | Preclinical safety and efficacy studies |  | Nastech          |  | Alnylam patents and applications; delivery and technology patent
    applications
|Metabolic diseases |  | Insulin                               |  | Formulation     |  | Preclinical safety and efficacy studies |  | Nastech          |  | Tight junction patents and applications; insulin applications                    

CLINICAL-STAGE PRODUCT CANDIDATES




| |             
| | ------------
| | Osteoporosis

Bone
Health and Osteoporosis: A Report of the Surgeon General (1-34) ® (1-34) ®


® ®


Parathyroid Hormone
PTH(1-34) (1-34) (1-34) ®


11



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(1-34) (1-34) (1-34)




(1-34) (1-34) (1-34)


Clinical Trial Data. (1-34) (1-34) (1-34) ® (1-34)


Current Initiatives. (1-34) ®


(1-34) (1-34) (1-34)


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(1-34)


Calcitonin-salmon. ®


Clinical Trial Data.


Current Initiatives.




| |        
| | -------
| | Obesity

® ®


Peptide
YY(3-36)


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The New England Journal of Medicine 24-hour






| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our own patent estate containing nine pending U.S. patent
    applications, 41 pending and one issued foreign patent
    applications and three pending PCT applications;                                                                                                   
|
| |  | an exclusive license to the Cedars-Sinai patent estate secured
    in May 2004 containing the only issued patent 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 intranasal administration,
    licensed from Imperial College Innovations and Oregon Health
    Sciences University through Thiakis, Ltd.; and                         
|
| |  | our acquisition of exclusive licenses to six issued US patents
    and two pending US 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.






| |                         
| | ------------------------
| | Breakthrough Cancer Pain



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Morphine Gluconate.


Clinical Trial Data. Pain


Current Initiatives.


PRE-CLINICAL PRODUCT CANDIDATES




| |          
| | ---------
| | Antiviral



Pre-clinical Development Status. Direct-to


15



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| |             
| | ------------
| | Inflammation



Pre-clinical Development Status.




| |                   
| | ------------------
| | Metabolic Diseases





Development Status.




| |                    
| | -------------------
| | Feasibility Studies



16



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DRUG DELIVERY TECHNOLOGIES




Tight Junction Technology. cell-to Johnson PH and Quay SC (Nastech Pharmaceutical
Co.). Advances in nasal delivery through tight junction biology.
Expert Opinion Drug Delivery.
(2005) 2(2):281-298).








17



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(1-34)




Intracellular Delivery of RNAi-Based Therapeutics.


Pre-clinical Development Status.


Other Drug Delivery Technologies.




| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | manufacturing know-how;                                                   
|
| |  | experience in stabilizing liquid formulations;                            
|
| |  | knowledge of physical properties of intranasal sprays;                    
|
| |  | experience with prodrug selection to improve biological
    properties;   
|
| |  | experience with counter ion selection to increase drug
    solubility; and
|
| |  | correlations between in vitro and in vivo intranasal
    delivery models. 

OTHER




| |              
| | -------------
| | Manufacturing





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| |                    
| | -------------------
| | Sales and Marketing





| |                                         
| | ----------------------------------------
| | Licenses, Patents and Proprietary Rights



19



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|            |                          |         |               |  |    |     | 
|----------- | ------------------------ | ------- | ------------- |  | -- | --- | 
|Pending     |                          |         |               | 
|            | Nastech                  |         |               |  |   
|            |                          | US      |               |  | 76 |    
|            |                          | Foreign |               |  | 99 |    
|            |                          | PCT     |               |  | 14 |    
|            | Exclusive In-licensed(1) |         |               |  |   
|            |                          | US      |               |  | 6  |    
|            |                          | Foreign |               |  | 28 |    
|            |                          | PCT     |               |  | 1  |    
|            |                          |         |               | 
|            |                          |         | Total pending |  |    | 224 | 
|            |                          |         |               | 
|Issued      |                          |         |               | 
|            | Nastech                  |         |               |  |   
|            |                          | US      |               |  | 14 |    
|            |                          | Foreign |               |  | 4  |    
|            | Exclusive In-Licensed(1) |         |               |  |   
|            |                          | US      |               |  | 7  |    
|            |                          | Foreign |               |  | 0  |    
|            |                          |         |               | 
|            |                          |         | Total issued  |  |    | 25  | 
|            |                          |         |               | 
|Total cases |                          |         | 249           | 
|            |                          |         |               | 






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include an undisclosed amount of proprietary
    technologies that are the subject of our license agreement with
    Alnylam.





| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | obtain patent and other proprietary protection for our
    inventions;                 
|
| |  | enforce and defend patents once obtained;                                              
|
| |  | operate without infringing the patents and proprietary rights of
    third parties; and
|
| |  | preserve our trade secrets.                                                            





| |                      
| | ---------------------
| | Government Regulation





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180-day






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| |            
| | -----------
| | Competition





23



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Osteoporosis. Pharmaceutical treatments for osteoporosis
    include bisphosphonates such as Procter & Gamble/
    Aventis
    Actonel®
    (risedronate) and Mercks
    Fosamax®
    (alendronate) and selective estrogen receptor modulators
    such as Lillys
    Evista®
    (raloxifene). If commercialized, our intranasal
    PTH(1-34)
    will also compete directly with Lillys
    Forteo®
    (teriparatide), an FDA approved injectable parathyroid hormone.
    Additional competition could come from development candidates
    such as injectable full length parathyroid hormone by NPS
    Pharmaceuticals, Inc. An inhaled form of
    PTH(1-34),
    is currently being developed by Alkermes/ Lilly. Our generic
    calcitonin-salmon intranasal spray to be manufactured by us and
    distributed by Par Pharmaceutical will compete with
    Novartis
    Miacalcin®
    (intranasal calcitonin-salmon) and Unigenes
    Fortical®,
    as well as development candidates such as oral
    PTH(1-34)
    and oral calcitonin under development by Emisphere. Novartis may
    introduce an authorized generic version through Sandoz US, its
    wholly-owned subsidiary and Apotex has filed a generic
    application of intranasal salmon-calcitonin. See Item 1:
    Business  Collaborations and Programs  Par
    Pharmaceutical Partnership.
|
| | Obesity. Products approved by the FDA for the treatment
    of obesity include:
    Xenical®
    (orlistat) by F. Hoffman-LaRoche Ltd.,
    Meridia®
    (sibutramine) by Abbott Laboratories and the generic
    phentermine. In addition, there are other products currently in
    development for the treatment of obesity, including
    Acompliatm
    (rimonabant) by Sanofi-SA, PEGylated PYY by Pfizer,
    injectable PYY by Amylin Pharmaceuticals, Inc. and oral PYY by
    Emisphere.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | RNAi. Currently, there are two key competitors in the
    RNAi space. Alnylam is a competitor and a collaborator as well.
    We currently directly compete with Alnylam in the area of
    respiratory viral RNAi. They have programs in both Respiratory
    Syncytial Virus (RSV) infection and influenza. While we
    compete with Alnylam on these respiratory viral programs, we
    have also collaborated to exclusively license key IP from
    Alnylam in support of our TNF-alpha RNAi program. While we
    currently have no directly competitive programs with Sirna
    Therapeutics, Inc. (Sirna) we will continue to
    compete with Sirna for access to key IP in the field of
    therapeutic RNAi. As with our current TNF-alpha collaboration
    with Alnylam, there will be future opportunities for strategic
    collaborations with a number of other competing companies in
    various areas of the RNAi field including additional
    opportunities with Alnylam, Sirna, Dharmacon and other smaller
    companies and educational institutions. Such collaborations and
    competitive situations will be driven by licensing of key
    technology in the RNAi field as it is developed and becomes
    available for license.                                                                                                                   
|
| | Breakthrough Cancer Pain. Currently, the only approved
    pharmaceutical treatment for breakthrough cancer pain is Actiq
    (oral transmucosal fentanyl citrate) by Cephalon. In addition,
    OraVescent (a quick dissolve formulation of fentanyl) by
    Cephalon has been filed for regulatory approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                  
| | -----------------
| | Product Liability



24



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| |                
| | ---------------
| | Human Resources





| |                        
| | -----------------------
| | Corporation Information

http://www.nastech.com




| |                      
| | ---------------------
| | Available Information

1-800-SEC-0330 e-mailing http://www.sec.gov


http://www.nastech.com 10-K, 10-Q, 8-K,







|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS





| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | 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;                                                          

25



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| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | 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 nine
    years, and we may never become profitable.







| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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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.





| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if we are successful in commercializing a product
    candidate, it is possible that the commercial opportunity for
    intranasally-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 intranasal 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.





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Clinical trials of our product candidates are expensive
    and time-consuming, and the results of these trials are
    uncertain.



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(1-34)




| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to extensive government regulation
    including the requirement of approval before our products may be
    manufactured or marketed.









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| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Our patent applications may be inadequate in terms of
    priority, scope or commercial value.







| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Our ability to commercialize our products after FDA
    approval is subject to exclusivity periods provided by
    law.

first-to


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| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                              







| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to adequately protect our proprietary
    technology from legal challenges, infringement or alternative
    technologies, this inability will hurt our competitive position
    and negatively impact our operating results.





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| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because intellectual property rights are of limited
    duration, expiration of intellectual property rights and
    licenses will negatively impact our operating results.





| |                                                                           
| | --------------------------------------------------------------------------
| | 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.



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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | We have limited experience in marketing or selling our
    products, and we may need to rely on marketing partners or
    contract sales companies.





| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 required to defend lawsuits or pay damages for
    product liability claims.







| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | We may be unable to compete successfully against our
    current and future competitors.



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| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | If we have a problem with our manufacturing facilities, we
    may not be able to market our products or conduct clinical
    trials.







| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                                
| | ---------------------------------------------------------------
| | 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
    by analysts or the decision of analysts to drop coverage of us;                                                                  
|
| |  | failure to meet analysts revenue estimates;                                                                                                                                                         
|
| |  | speculation in the press or investment community;                                                                                                                                                    
|
| |  | strategic actions by us 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.                                                                                                                        







| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | We have never paid cash or stock dividends on our common
    stock and we do not anticipate paying dividends in the
    foreseeable future.



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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.







| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Failure of the Companys internal control over
    financial reporting could harm its business and financial
    results.



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|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES
















|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS








|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



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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 |   | Low  
|        |                |      |   |      
|2004:   |                |      |   |       |  |  |   |      
|        | First Quarter  |      | $ | 14.65 |  |  | $ | 9.01  | 
|        | Second Quarter |      |   | 14.95 |  |  |   | 9.40  | 
|        | Third Quarter  |      |   | 15.05 |  |  |   | 7.25  | 
|        | Fourth Quarter |      |   | 16.56 |  |  |   | 11.95 | 
|2005:   |                |      |   |       |  |  |   |      
|        | First Quarter  |      | $ | 12.25 |  |  | $ | 9.11  | 
|        | Second Quarter |      |   | 14.88 |  |  |   | 9.67  | 
|        | Third Quarter  |      |   | 15.18 |  |  |   | 12.40 | 
|        | Fourth Quarter |      |   | 16.65 |  |  |   | 12.79 | 







| |                
| | ---------------
| | Dividend Policy





| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized For Issuance Under Equity
    Compensation Plans





| |                                        
| | ---------------------------------------
| | Unregistered Sales of Equity Securities

Warrants.


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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

10-K.


|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |         |        |   |   |         |        |  
|-------------------------------------------- | -------------------------- | ---- | ------ | ----- | ---- | - | ------- | ------ | - | - | ------ | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|Statement of Operations Data:                |                            | 2001 |        |       | 2002 |   |         | 2003   |   |   | 2004   |        |   | 2005 |        
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Revenue:                                     |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |         |        |   |   |         |       
|                                             | Product revenue, net       |      | $      | 996   |      |   | $       | 1,408  |   |   | $      | 1,805  |   |      | $       | 291    |   |   | $       | 33     |  
|                                             | License and research fees  |      |        | 1,607 |      |   |         | 7,515  |   |   |        | 17,635 |   |      |         | 1,556  |   |   |         | 7,416  |  
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Total revenue                                |                            |      | 2,603  |       |      |   | 8,923   |        |   |   | 19,440 |        |   |      | 1,847   |        |   |   | 7,449   |       
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Operating expenses:                          |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |         |        |   |   |         |       
|                                             | Cost of product revenue    |      |        | 503   |      |   |         | 289    |   |   |        | 498    |   |      |         | 258    |   |   |         | 21     |  
|                                             | Research and development   |      |        | 6,595 |      |   |         | 11,613 |   |   |        | 17,097 |   |      |         | 21,083 |   |   |         | 30,334 |  
|                                             | Royalties                  |      |        | 487   |      |   |         | 9      |   |   |        |       |   |      |         |       |   |   |         |       |  
|                                             | Sales and marketing        |      |        | 595   |      |   |         | 1,863  |   |   |        | 2,377  |   |      |         | 1,046  |   |   |         | 1,326  |  
|                                             | General and administrative |      |        | 3,977 |      |   |         | 8,138  |   |   |        | 5,679  |   |      |         | 7,951  |   |   |         | 9,569  |  
|                                             | Restructuring charge       |      |        |      |      |   |         | 595    |   |   |        |       |   |      |         |       |   |   |         |       |  
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Total operating expenses                     |                            |      | 12,157 |       |      |   | 22,507  |        |   |   | 25,651 |        |   |      | 30,338  |        |   |   | 41,250  |       
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Loss from operations                         |                            |      | (9,554 | )     |      |   | (13,584 | )      |   |   | (6,211 | )      |   |      | (28,491 | )      |   |   | (33,801 | )     
|Gain on sale of product                      |                            |      |       |       |      |   |        |        |   |   | 4,236  |        |   |      |        |        |   |   |        |       
|Interest income                              |                            |      | 322    |       |      |   | 278     |        |   |   | 227    |        |   |      | 344     |        |   |   | 1,990   |       
|Interest expense                             |                            |      |       |       |      |   | (162    | )      |   |   | (393   | )      |   |      | (462    | )      |   |   | (352    | )     
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Net loss                                     |                            | $    | (9,232 | )     |      | $ | (13,468 | )      |   | $ | (2,141 | )      |   | $    | (28,609 | )      |   | $ | (32,163 | )     
|                                             |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |        
|Net loss per common share:                   |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |         |        |   |   |         |       
|                                             | Basic and diluted          |      | $      | (1.16 | )    |   | $       | (1.34  | ) |   | $      | (0.20  | ) |      | $       | (2.21  | ) |   | $       | (1.72  | )
|Shares used in computing net loss per share: |                            |      |        |       |      |   |         |        |   |   |        |        |   |      |         |        |   |   |         |       
|                                             | Basic and diluted          |      |        | 7,956 |      |   |         | 10,028 |   |   |        | 10,751 |   |      |         | 12,955 |   |   |         | 18,719 |  

|                                   |  |      |         |      |  |      |         |         |  |         |         |   |  |   |         |   |  |   |          |  
|---------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | - |  | - | -------- | -
|Balance Sheet Data:                |  | 2001 |         | 2002 |  | 2003 |         | 2004(2) |  | 2005(3)
|                                   |  |      |         |      |  |      |         |         |  |        
|Cash and short term investments(1) |  | $    | 11,760  |      |  | $    | 9,021   |         |  | $       | 25,081  |   |  | $ | 74,474  |   |  | $ | 59,909   |  
|Working capital                    |  |      | 10,404  |      |  |      | 3,342   |         |  |         | 14,766  |   |  |   | 58,362  |   |  |   | 55,198   |  
|Total assets                       |  |      | 15,440  |      |  |      | 23,050  |         |  |         | 31,138  |   |  |   | 80,775  |   |  |   | 72,593   |  
|Notes payable                      |  |      |        |      |  |      | 7,250   |         |  |         | 6,271   |   |  |   | 8,352   |   |  |   |         |  
|Accumulated deficit                |  |      | (39,235 | )    |  |      | (52,703 | )       |  |         | (54,844 | ) |  |   | (83,453 | ) |  |   | (115,616 | )
|Total stockholders equity         |  | $    | 13,494  |      |  | $    | 8,645   |         |  | $       | 17,906  |   |  | $ | 58,148  |   |  | $ | 55,567   |  






|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amount includes restricted cash and short term investments of
    approximately $6.3 million at December 31, 2003,
    $9.0 million at December 31, 2004 and
    $1.0 million at December 31, 2005.                                     
|   
|(2) | During 2004, we received net proceeds of $12.3 million from
    a public offering of 1,136,364 shares of common stock and
    warrants and net proceeds of $52.9 million from a public
    offering of 4,250,000 shares of common stock.
|   
|(3) | During 2005, we received net proceeds of $21.6 million from
    a public offering of 1,725,000 shares of common stock.                                                                                                                  

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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.


cell-to








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Critical Accounting Policies and Estimates




Revenue Recognition. Revenue
Recognition, 00-21 00-21), Revenue Arrangements with Multiple
Deliverables. 00-21,








42



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Stock-Based Compensation. Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation




Share-Based Payment.


Income Taxes.


Clinical Trial Expenses.


43



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Results of Operations




| |              
| | -------------
| | Total Revenue

Total Revenue.


|                          |  |                          |        |  |            |  |     |         |  |   |            |  |  |         |     |   |            |   |       |  |  |  |     |  
|------------------------- |  | ------------------------ | ------ |  | ---------- |  | --- | ------- |  | - | ---------- |  |  | ------- | --- | - | ---------- | - | ----- |  |  |  | --- | -
|                          |  | Years Ended December 31, |       
|                          |  |                          |       
|                          |  | 2003                     |        |  | 2004       |  |     | 2005    | 
|                          |  |                          |        |  |            |  |     |         | 
|                          |  | Revenue                  |        |  | % of Total |  |     | Revenue |  |   | % of Total |  |  | Revenue |     |   | % of Total |  
|                          |  |                          |        |  |            |  |     |         |  |   |            |  |  |         |     |   |            |  
|                          |  | (Dollars in thousands)   |       
|Product revenue, net      |  | $                        | 1,805  |  |            |  | 9   | %       |  | $ | 291        |  |  |         | 16  | % |            | $ | 33    |  |  |  | 1   | %
|License and research fees |  |                          | 17,635 |  |            |  | 91  | %       |  |   | 1,556      |  |  |         | 84  | % |            |   | 7,416 |  |  |  | 99  | %
|                          |  |                          |        |  |            |  |     |         |  |   |            |  |  |         |     |   |            |  
|Total revenue             |  | $                        | 19,440 |  |            |  | 100 | %       |  | $ | 1,847      |  |  |         | 100 | % |            | $ | 7,449 |  |  |  | 100 | %
|                          |  |                          |        |  |            |  |     |         |  |   |            |  |  |         |     |   |            |  





| |                          
| | -------------------------
| | License and Research Fees

License and Research Fees.


|                                                                                                                                    |  |                          |        |  |      |   |       |      |  |   |       | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                                                                                                    |  | Years Ended December 31, |       
|                                                                                                                                    |  |                          |       
|                                                                                                                                    |  | 2003                     |        |  | 2004 |   |       | 2005 | 
|                                                                                                                                    |  |                          |        |  |      |   |       |      | 
|                                                                                                                                    |  | (Dollars in thousands)   |       
|License fees and research and development services fees
    recognized under the collaboration and license agreement with
    Merck |  |                          |       |  |      | $ | 1,257 |      |  | $ | 3,564 | 
|Revenue recognized under the Pharmacia agreements                                                                                   |  | $                        | 16,262 |  |      |   |      |      |  |   |      | 
|Questcor FDA approval milestone payment                                                                                             |  |                          |       |  |      |   |      |      |  |   | 2,000 | 
|Other license and research fees                                                                                                     |  |                          | 1,373  |  |      |   | 299   |      |  |   | 1,852 | 
|                                                                                                                                    |  |                          |        |  |      |   |       |      | 
|Total license and research fees                                                                                                     |  | $                        | 17,635 |  |      | $ | 1,556 |      |  | $ | 7,416 | 
|                                                                                                                                    |  |                          |        |  |      |   |       |      | 



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| |                                            
| | -------------------------------------------
| | Product Revenue and Cost of Product Revenue



|                                                           |  |                          |       |      |  |      |     |   |  |   |    |  
|---------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | --- | - |  | - | -- | -
|                                                           |  | Years Ended December 31,
|                                                           |  |                         
|                                                           |  | 2003                     |       | 2004 |  | 2005
|                                                           |  |                          |       |      |  |     
|                                                           |  | (Dollars in thousands)  
|Product revenue                                            |  | $                        | 1,805 |      |  | $    | 291 |   |  | $ | 33 |  
|Cost of product revenue                                    |  |                          | 498   |      |  |      | 258 |   |  |   | 21 |  
|Cost of product revenue as a percentage of product revenue |  |                          | 28    | %    |  |      | 89  | % |  |   | 64 | %

5-year




45



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| |                         
| | ------------------------
| | Research and Development



|                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | Years Ended December 31, |       
|                                           |  |                          |       
|                                           |  | 2003                     |        |   | 2004 |   |        | 2005 | 
|                                           |  |                          |        |   |      |   |        |      | 
|                                           |  | (Dollars in thousands)   |       
|PYY                                        |  |                          | 14     | % |      |   | 42     | %    |  |   | 14     | %
|Calcitonin                                 |  |                          | 32     | % |      |   | 18     | %    |  |   | 27     | %
|Tight Junctions and RNAi                   |  |                          | 8      | % |      |   | 22     | %    |  |   | 27     | %
|PTH
    (1-34)                             |  |                          |       |   |      |   | 7      | %    |  |   | 16     | %
|Apomorphine                                |  |                          | 25     | % |      |   | 3      | %    |  |   |       |  
|Other research and development projects(1) |  |                          | 21     | % |      |   | 8      | %    |  |   | 16     | %
|                                           |  |                          |        |   |      |   |        |      | 
|                                           |  |                          | 100    | % |      |   | 100    | %    |  |   | 100    | %
|                                           |  |                          |        |   |      |   |        |      | 
|Total research and development expense     |  | $                        | 17,097 |   |      | $ | 21,083 |      |  | $ | 30,334 |  
|Dollar increase                            |  |                          |        |   |      |   | 3,986  |      |  |   | 9,251  |  
|Percentage increase                        |  |                          |        |   |      |   | 23     | %    |  |   | 44     | %






|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other research and development projects include our excipient
    projects, feasibility projects, insulin, oral abuse-resistant
    opioid, Morphine Gluconate and other projects.





| |   |                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 research and
    development 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.                                                              
|
| |  | Research and development 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.





| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Personnel-related expenses increased by 33% to $8.9 million
    compared to $6.7 million in 2003 due to an increase in
    personnel supporting our research and development programs.                                                                                                                                                  
|
| |  | Costs of clinical trials, consulting, outside services and
    laboratory supplies increased by 4% to $7.4 million in 2004
    compared to $7.1 million in 2003 due primarily to the
    timing of clinical trials performed for our PYY, calcitonin,
    RNAi,
    PTH(1-34)
    and intranasal apomorphine products under development.

46



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| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Research and development administrative expenses increased by
    116% to $1.3 million in 2004 compared to $0.6 million
    in 2003 due primarily to an increase in licensing of third-party
    patent technologies including patent licenses from Thiakis,
    Cedars-Sinai and the University of Cincinnati.
|
| |  | Facilities and equipment costs increased by 26% to
    $3.4 million in 2004 compared to $2.7 million in 2003
    due to rent and related expenses on additional space leased at
    the Bothell facility and an increase in depreciation of
    equipment resulting from additional capital expenditures.      





| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | 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



|                                  |  |                          |       |      |  |      |        |    |  |   |       |  
|--------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ------ | -- |  | - | ----- | -
|                                  |  | Years Ended December 31,
|                                  |  |                         
|                                  |  | 2003                     |       | 2004 |  | 2005
|                                  |  |                          |       |      |  |     
|                                  |  | (Dollars in thousands)  
|Total sales and marketing expense |  | $                        | 2,377 |      |  | $    | 1,046  |    |  | $ | 1,326 |  
|Dollar increase (decrease)        |  |                          |       |      |  |      | (1,331 | )  |  |   | 280   |  
|Percentage increase (decrease)    |  |                          |       |      |  |      | (56    | )% |  |   | 27    | %

47



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##### Table of Contents











| |                           
| | --------------------------
| | General and Administrative



|                                         |  |                          |       |      |  |      |       |   |  |   |       |  
|---------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2003                     |       | 2004 |  | 2005
|                                         |  |                          |       |      |  |     
|                                         |  | (Dollars in thousands)  
|Total general and administrative expense |  | $                        | 5,679 |      |  | $    | 7,951 |   |  | $ | 9,569 |  
|Dollar increase                          |  |                          |       |      |  |      | 2,272 |   |  |   | 1,618 |  
|Percentage increase                      |  |                          |       |      |  |      | 40    | % |  |   | 20    | %





| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                            
|
| |  | Amortization of non-cash deferred stock 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.                                                                





| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Costs of legal fees, accounting fees, corporate insurance and
    other administrative costs increased by 48% to $3.7 million
    in 2004 compared to $2.5 million in 2003. In addition, 2003
    included a $0.5 million expense reduction related to the
    reimbursement of legal expenses received as part of the
    divestiture agreement with Pharmacia.
|
| |  | Amortization of non-cash deferred stock compensation increased
    by 80% to approximately $0.9 million in 2004 compared to
    $0.4 million in 2003, primarily due to the expensing of
    restricted stock which we first began issuing in June 2004.                                                                                                         
|
| |  | Personnel-related expenses increased by 25% to $3.0 million
    in 2004 compared to $2.4 million in 2003 due primarily to
    increased headcount related to administrative activities.                                                                                                                                                                         

48



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##### Table of Contents







| |                        
| | -----------------------
| | Gain on Sale of Product





| |                
| | ---------------
| | Interest Income



|                                       |  |                          |        |      |  |      |        |   |  |   |        |  
|-------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2003                     |        | 2004 |  | 2005
|                                       |  |                          |        |      |  |     
|                                       |  | (Dollars in thousands)  
|Interest income                        |  | $                        | 227    |      |  | $    | 344    |   |  | $ | 1,990  |  
|Average funds available for investment |  |                          | 18,200 |      |  |      | 24,100 |   |  |   | 61,300 |  
|Average interest rate                  |  |                          | 1.2    | %    |  |      | 1.4    | % |  |   | 3.3    | %





| |                 
| | ----------------
| | Interest Expense



|                                                          |  |                          |       |      |  |      |        |   |  |   |       |  
|--------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2003                     |       | 2004 |  | 2005
|                                                          |  |                          |       |      |  |     
|                                                          |  | (Dollars in thousands)  
|Interest expense                                          |  | $                        | 393   |      |  | $    | 414    |   |  | $ | 367   |  
|Average borrowings under capital leases and notes payable |  |                          | 8,000 |      |  |      | 10,600 |   |  |   | 5,300 |  
|Average interest rate                                     |  |                          | 4.9   | %    |  |      | 3.9    | % |  |   | 6.9   | %





49



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Liquidity and Capital Resources




| |                  
| | -----------------
| | Cash Requirements







| |                         
| | ------------------------
| | Sources and Uses of Cash













| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 total, milestone payments could reach
    $577 million over the life of the project depending upon
    the successful completion of

50



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 will reacquire 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. We expect in
    the future to receive additional revenue from Par Pharmaceutical
    in the form of milestone payments, product transfer payments for
    manufactured product and a profit sharing upon commercialization
    of generic calcitonin-salmon intranasal spray. However, we
    cannot estimate when or if these additional revenue streams will
    commence, and there can be no assurance that such revenues will
    ever be generated. See Item 1: Business 
    Collaborations and Programs  Par Pharmaceutical
    Partnership, and Item 1A: Risk Factors  Our ability
    to commercialize our products after FDA approval is subject to
    exclusivity periods provided mandated by law.                                                    
|
| |  | 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.



|                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|----------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                |  | Years Ended December 31, |       
|                                                |  |                          |       
|                                                |  | 2003                     |        |   | 2004 |   |         | 2005 | 
|                                                |  |                          |        |   |      |   |         |      | 
|                                                |  | (Dollars in thousands)   |       
|Cash used in operating activities               |  | $                        | (7,686 | ) |      | $ | (19,168 | )    |  | $ | (31,279 | )
|Cash provided by (used in) investing activities |  |                          | 3,482  |   |      |   | (33,553 | )    |  |   | 2,463   |  
|Cash provided by financing activities           |  |                          | 5,704  |   |      |   | 67,997  |      |  |   | 29,788  |  
|                                                |  |                          |        |   |      |   |         |      | 
|Net increase in cash and cash equivalents       |  | $                        | 1,500  |   |      | $ | 15,276  |      |  | $ | 972     |  
|                                                |  |                          |        |   |      |   |         |      | 



51



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| |          
| | ---------
| | Liquidity







| |                        
| | -----------------------
| | Contractual Obligations



|                          |  |                        |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            |  |   |       |  |  |   |        | 
|------------------------- |  | ---------------------- | ------ |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- | ---------- |  | - | ----- |  |  | - | ------ | 
|                          |  | Total                  |        |  | 2006 |   |       | 2007 |  |   | 2008  |  |  | 2009 |       |  | 2010 |   |       | Thereafter | 
|                          |  |                        |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 
|                          |  | (Dollars in thousands) |       
|Facility leases           |  | $                      | 19,347 |  |      | $ | 1,785 |      |  | $ | 1,832 |  |  | $    | 1,881 |  |      | $ | 1,931 |            |  | $ | 1,903 |  |  | $ | 10,015 | 
|Capital lease obligations |  |                        | 5,601  |  |      |   | 2,431 |      |  |   | 1,686 |  |  |      | 1,104 |  |      |   | 380   |            |  |   |      |  |  |   |       | 
|Purchase obligations      |  |                        | 556    |  |      |   | 556   |      |  |   |      |  |  |      |      |  |      |   |      |            |  |   |      |  |  |   |       | 
|                          |  |                        |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 
|Total                     |  | $                      | 25,504 |  |      | $ | 4,772 |      |  | $ | 3,518 |  |  | $    | 2,985 |  |      | $ | 2,311 |            |  | $ | 1,903 |  |  | $ | 10,015 | 
|                          |  |                        |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |            | 



|                          |  |                        |     |  |      |   |     |      |  |   |      |  |  |      |    |  |      |   |    |            |  |  |   |  |  |  |   | 
|------------------------- |  | ---------------------- | --- |  | ---- | - | --- | ---- |  | - | ---- |  |  | ---- | -- |  | ---- | - | -- | ---------- |  |  | - |  |  |  | - | 
|                          |  | Total                  |     |  | 2006 |   |     | 2007 |  |   | 2008 |  |  | 2009 |    |  | 2010 |   |    | Thereafter | 
|                          |  |                        |     |  |      |   |     |      |  |   |      |  |  |      |    |  |      |   |    |            | 
|                          |  | (Dollars in thousands) |    
|Capital lease obligations |  | $                      | 729 |  |      | $ | 402 |      |  | $ | 223  |  |  | $    | 88 |  |      | $ | 16 |            |  |  |  |  |  |  |  | 
|                          |  |                        |     |  |      |   |     |      |  |   |      |  |  |      |    |  |      |   |    |            | 
|Total                     |  | $                      | 729 |  |      | $ | 402 |      |  | $ | 223  |  |  | $    | 88 |  |      | $ | 16 |            |  |  |  |  |  |  |  | 
|                          |  |                        |     |  |      |   |     |      |  |   |      |  |  |      |    |  |      |   |    |            | 

52



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##### Table of Contents







| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements

S-K.




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Inventory Costs, an
amendment of ARB No. 43, Chapter 4.


Exchanges of Nonmonetary
Assets, an amendment of APB , Accounting for
Nonmonetary Transactions.


Share-Based Payment.









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK



53



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##### Table of Contents







|                                      |  |                        |       |  |      |   |       |      |  |   |       |  |  |       |     |  |            |   |       |  |  |   |       | 
|------------------------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ----- | --- |  | ---------- | - | ----- |  |  | - | ----- | 
|                                      |  | 2006                   |       |  | 2007 |   |       | 2008 |  |   | 2009  |  |  | Total |     |  | Fair Value |  
|                                      |  |                        |       |  |      |   |       |      |  |   |       |  |  |       |     |  |            |  
|                                      |  | (Dollars in thousands) |      
|Capital lease obligations  principal |  | $                      | 2,431 |  |      | $ | 1,686 |      |  | $ | 1,104 |  |  | $     | 380 |  |            | $ | 5,601 |  |  | $ | 5,574 | 
|Capital lease obligations  interest  |  |                        | 402   |  |      |   | 223   |      |  |   | 88    |  |  |       | 16  |  |            |   | 729   |  |  |   | 765   | 
|                                      |  |                        |       |  |      |   |       |      |  |   |       |  |  |       |     |  |            |  
|Total                                 |  | $                      | 2,833 |  |      | $ | 1,909 |      |  | $ | 1,192 |  |  | $     | 396 |  |            | $ | 6,330 |  |  | $ | 6,339 | 
|                                      |  |                        |       |  |      |   |       |      |  |   |       |  |  |       |     |  |            |  

54



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##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                                                                                                    |  |  |       | 
|----------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|REPORTS OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM                                                                        |  |  | 56-57 | 
|FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                                         |  |  |       | 
|Consolidated Balance Sheets at
    December 31, 2004 and 2005                                                                       |  |  | 58    | 
|Consolidated Statements of Operations for
    the years ended December 31, 2003, 2004 and 2005                                      |  |  | 59    | 
|Consolidated Statements of
    Stockholders Equity and Comprehensive Loss for the years
    ended December 31, 2003, 2004 and 2005 |  |  | 60    | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2003, 2004 and 2005                                      |  |  | 61    | 
|Notes to Consolidated Financial
    Statements                                                                                      |  |  | 62-80 | 

55



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Report of Independent Registered Public Accounting
Firm












Internal Control  Integrated Framework




| |             
| | ------------
| | /s/ KPMG LLP







56



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##### Table of Contents



Report of Independent Registered Public Accounting Firm






Internal Control 
Integrated Framework








Internal
Control  Integrated Framework Internal Control 
Integrated Framework .






| |             
| | ------------
| | /s/ KPMG LLP







57



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##### Table of Contents



NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


|                                                  |                                                                                                                                                         |                             |                                            |         |              |        |       |          |        |        | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ------- | ------------ | ------ | ----- | -------- | ------ | ------ | 
|                                                  |                                                                                                                                                         | December 31,                |                                            |         | December 31, |       
|                                                  |                                                                                                                                                         | 2004                        |                                            |         | 2005         |       
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         | (In thousands, except share |                                           
|                                                  |                                                                                                                                                         | and per share data)         |                                           
|ASSETS                                           
|Current assets:                                   |                                                                                                                                                         |                             |                                            |         |              |        |       |         
|                                                  | Cash and cash equivalents                                                                                                                               |                             | $                                          | 25,797  |              |        | $     | 26,769   |       
|                                                  | Restricted cash and short term investments                                                                                                              |                             |                                            | 9,000   |              |        |       | 998      |       
|                                                  | Short-term investments                                                                                                                                  |                             |                                            | 39,677  |              |        |       | 32,142   |       
|                                                  | Accounts receivable                                                                                                                                     |                             |                                            |        |              |        |       | 189      |       
|                                                  | Inventories                                                                                                                                             |                             |                                            | 57      |              |        |       | 2,733    |       
|                                                  | Prepaid expenses and other current assets                                                                                                               |                             |                                            | 674     |              |        |       | 1,545    |       
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         |                             | Total current assets                       |         |              | 75,205 |       |          |        | 64,376 | 
|Property and equipment, net                       |                                                                                                                                                         |                             | 5,160                                      |         |              |        | 8,173 |         
|Security deposits and other assets                |                                                                                                                                                         |                             | 410                                        |         |              |        | 404   |         
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         |                             | Total assets                               |         | $            | 80,775 |       |          | $      | 72,953 | 
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY             
|Current liabilities:                              |                                                                                                                                                         |                             |                                            |         |              |        |       |         
|                                                  | Accounts payable                                                                                                                                        |                             | $                                          | 1,652   |              |        | $     | 2,944    |       
|                                                  | Accrued payroll and employee benefits                                                                                                                   |                             |                                            | 1,469   |              |        |       | 1,740    |       
|                                                  | Accrued expenses                                                                                                                                        |                             |                                            | 1,064   |              |        |       | 474      |       
|                                                  | Notes payable                                                                                                                                           |                             |                                            | 8,352   |              |        |       |         |       
|                                                  | Capital lease obligations  current portion                                                                                                             |                             |                                            | 1,532   |              |        |       | 2,431    |       
|                                                  | Deferred revenue  current portion                                                                                                                      |                             |                                            | 2,774   |              |        |       | 1,589    |       
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         | Total current liabilities   |                                            |         | 16,843       |        |       |          | 9,178  |       
|Capital lease obligations, net of current portion |                                                                                                                                                         |                             | 1,719                                      |         |              |        | 3,170 |         
|Deferred revenue, net of current portion          |                                                                                                                                                         |                             | 3,483                                      |         |              |        | 4,250 |         
|Other liabilities                                 |                                                                                                                                                         |                             | 582                                        |         |              |        | 788   |         
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         | Total liabilities           |                                            |         | 22,627       |        |       |          | 17,386 |       
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|Commitments and contingencies                     |                                                                                                                                                         |                             |                                            |         |              |        |       |         
|Stockholders equity:                             |                                                                                                                                                         |                             |                                            |         |              |        |       |         
|                                                  | Preferred stock, $.01 par value; 100,000 authorized: no
    shares issued and outstanding                                                               |                             |                                            |        |              |        |       |         |       
|                                                  | Common stock, $0.006 par value; 50,000,000 authorized:
    17,895,976 and 20,750,477 shares outstanding at
    December 31, 2004 and 2005, respectively |                             |                                            | 107     |              |        |       | 124      |       
|                                                  | Additional paid-in capital                                                                                                                              |                             |                                            | 142,853 |              |        |       | 176,068  |       
|                                                  | Deferred compensation                                                                                                                                   |                             |                                            | (1,358  | )            |        |       | (4,902   | )     
|                                                  | Accumulated deficit                                                                                                                                     |                             |                                            | (83,453 | )            |        |       | (115,616 | )     
|                                                  | Accumulated other comprehensive loss                                                                                                                    |                             |                                            | (1      | )            |        |       | (107     | )     
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         |                             | Total stockholders equity                 |         |              | 58,148 |       |          |        | 55,567 | 
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       
|                                                  |                                                                                                                                                         |                             | Total liabilities and stockholders equity |         | $            | 80,775 |       |          | $      | 72,953 | 
|                                                  |                                                                                                                                                         |                             |                                            |         |              |       



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CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                    |                            |                                       |        |        |      |   |         |        |   |   |         |        |  
|------------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                    |                            | Years Ended December 31,              |       
|                                                                    |                            |                                       |       
|                                                                    |                            | 2003                                  |        |        | 2004 |   |         | 2005   |  
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|                                                                    |                            | (In thousands, except per share data) |       
|Revenue:                                                            |                            |                                       |        |        |      |   |         |        |   |   |         |       
|                                                                    | Product revenue, net       |                                       | $      | 1,805  |      |   | $       | 291    |   |   | $       | 33     |  
|                                                                    | License and research fees  |                                       |        | 17,635 |      |   |         | 1,556  |   |   |         | 7,416  |  
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Total revenue                                                       |                            |                                       | 19,440 |        |      |   | 1,847   |        |   |   | 7,449   |       
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Operating expenses:                                                 |                            |                                       |        |        |      |   |         |        |   |   |         |       
|                                                                    | Cost of product revenue    |                                       |        | 498    |      |   |         | 258    |   |   |         | 21     |  
|                                                                    | Research and development   |                                       |        | 17,097 |      |   |         | 21,083 |   |   |         | 30,334 |  
|                                                                    | Sales and marketing        |                                       |        | 2,377  |      |   |         | 1,046  |   |   |         | 1,326  |  
|                                                                    | General and administrative |                                       |        | 5,679  |      |   |         | 7,951  |   |   |         | 9,569  |  
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Total operating expenses                                            |                            |                                       | 25,651 |        |      |   | 30,338  |        |   |   | 41,250  |       
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Loss from operations                                                |                            |                                       | (6,211 | )      |      |   | (28,491 | )      |   |   | (33,801 | )     
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Other income (expense):                                             |                            |                                       |        |        |      |   |         |        |   |   |         |       
|                                                                    | Interest income            |                                       |        | 227    |      |   |         | 344    |   |   |         | 1,990  |  
|                                                                    | Interest and other expense |                                       |        | (393   | )    |   |         | (462   | ) |   |         | (352   | )
|                                                                    | Gain on sale of product    |                                       |        | 4,236  |      |   |         |       |   |   |         |       |  
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Total other income (expense)                                        |                            |                                       | 4,070  |        |      |   | (118    | )      |   |   | 1,638   |       
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Net loss                                                            |                            | $                                     | (2,141 | )      |      | $ | (28,609 | )      |   | $ | (32,163 | )     
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Net loss per common share  basic and diluted                       |                            | $                                     | (0.20  | )      |      | $ | (2.21   | )      |   | $ | (1.72   | )     
|                                                                    |                            |                                       |        |        |      |   |         |        |  
|Shares used in computing net loss per share  basic
    and diluted |                            |                                       | 10,751 |        |      |   | 12,955  |        |   |   | 18,719  |       
|                                                                    |                            |                                       |        |        |      |   |         |        |  



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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE LOSS


For the Years Ended December 31, 2003, 2004 and 2005


|                                                                                                       |  |                                   |            |  |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |        |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------------- | ---------- |  | ---------- | - | --- | -------- |  | ----------- | ------------ | ----- |  | ------------- | ------ | - | ------------- | - | -------- | ------ |  | - | ---- | - |  | - | ------- | -
|                                                                                                       |  |                                   |            |  |            |   |     |          |  | Accumulated |              |       | 
|                                                                                                       |  | Common Stock                      |            |  | Additional |   |     |          |  |             |              | Other |  |               | Total  |  
|                                                                                                       |  |                                   |            |  | Paid-In    |   |     | Deferred |  |             | Accumulated  |       |  | Comprehensive |        |   | Stockholders |  
|                                                                                                       |  | Shares                            |            |  | Amount     |   |     | Capital  |  |             | Compensation |       |  | Deficit       |        |   | Loss          |   |          | Equity | 
|                                                                                                       |  |                                   |            |  |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |        | 
|                                                                                                       |  | (In thousands, except share data) |           
|Balance December 31, 2002                                                                              |  |                                   | 10,193,706 |  |            | $ | 61  |          |  | $           | 62,506       |       |  | $             | (1,219 | ) |               | $ | (52,703  | )      |  | $ |     |   |  | $ | 8,645   |  
|Proceeds from the issuance of common shares and warrants in
    connection with private placement, net |  |                                   | 1,513,069  |  |            |   | 9   |          |  |             | 9,954        |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 9,963   |  
|Proceeds from the exercise of options                                                                  |  |                                   | 142,353    |  |            |   | 1   |          |  |             | 911          |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 912     |  
|Compensation related to stock options                                                                  |  |                                   |           |  |            |   |    |          |  |             | 57           |       |  |               | 470    |   |               |   |         |        |  |   |     |   |  |   | 527     |  
|Net loss                                                                                               |  |                                   |           |  |            |   |    |          |  |             |             |       |  |               |       |   |               |   | (2,141   | )      |  |   |     |   |  |   | (2,141  | )
|                                                                                                       |  |                                   |            |  |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |        | 
|Balance December 31, 2003                                                                              |  |                                   | 11,849,128 |  |            |   | 71  |          |  |             | 73,428       |       |  |               | (749   | ) |               |   | (54,844  | )      |  |   |      |   |  |   | 17,906  |  
|Proceeds from the issuance of common shares and warrants, net                                          |  |                                   | 5,386,364  |  |            |   | 32  |          |  |             | 65,144       |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 65,176  |  
|Proceeds from the exercise of options and warrants                                                     |  |                                   | 514,864    |  |            |   | 4   |          |  |             | 2,680        |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 2,684   |  
|Compensation related to restricted stock                                                               |  |                                   | 145,620    |  |            |   |    |          |  |             | 1,569        |       |  |               | (1,081 | ) |               |   |         |        |  |   |     |   |  |   | 488     |  
|Compensation related to stock options                                                                  |  |                                   |           |  |            |   |    |          |  |             | 32           |       |  |               | 472    |   |               |   |         |        |  |   |     |   |  |   | 504     |  
|Net 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 |  |            |   | 107 |          |  |             | 142,853      |       |  |               | (1,358 | ) |               |   | (83,453  | )      |  |   | (1   | ) |  |   | 58,148  |  
|Proceeds from the issuance of common shares, net                                                       |  |                                   | 1,725,000  |  |            |   | 10  |          |  |             | 21,573       |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 21,583  |  
|Proceeds from the exercise of options and warrants                                                     |  |                                   | 743,868    |  |            |   | 4   |          |  |             | 6,201        |       |  |               |       |   |               |   |         |        |  |   |     |   |  |   | 6,205   |  
|Compensation related to restricted stock                                                               |  |                                   | 385,633    |  |            |   | 3   |          |  |             | 5,433        |       |  |               | (3,823 | ) |               |   |         |        |  |   |     |   |  |   | 1,613   |  
|Compensation related to stock options                                                                  |  |                                   |           |  |            |   |    |          |  |             | 8            |       |  |               | 279    |   |               |   |         |        |  |   |     |   |  |   | 287     |  
|Net 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 |  |            | $ | 124 |          |  | $           | 176,068      |       |  | $             | (4,902 | ) |               | $ | (115,616 | )      |  | $ | (107 | ) |  | $ | 55,567  |  
|                                                                                                       |  |                                   |            |  |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |        | 



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CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |          |        |  
|-------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------ | - | ------ | ------- | ----- | - | ------ | -------- | ------ | -
|                                                   |                                                                                 | Years Ended December 31,                                |       
|                                                   |                                                                                 |                                                         |       
|                                                   |                                                                                 | 2003                                                    |        |         | 2004   |   |        | 2005    |      
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|                                                   |                                                                                 | (In thousands)                                          |       
|Operating activities:                              |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |         
|                                                   | Net loss                                                                        |                                                         | $      | (2,141  | )      |   | $      | (28,609 | )     |   | $      | (32,163  | )     
|                                                   | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                         |        |         |        |   |        |         |       |   |        |          |       
|                                                   |                                                                                 | Non-cash compensation related to stock options          |        |         | 527    |   |        |         | 504   |   |        |          | 287    |  
|                                                   |                                                                                 | Non-cash compensation related to restricted stock       |        |         |       |   |        |         | 488   |   |        |          | 1,613  |  
|                                                   |                                                                                 | Depreciation and amortization of property and equipment |        |         | 1,016  |   |        |         | 1,443 |   |        |          | 1,832  |  
|                                                   |                                                                                 | Amortization of intangible asset                        |        |         | 398    |   |        |         |      |   |        |          |       |  
|                                                   |                                                                                 | Loss on retirement of property and equipment            |        |         |       |   |        |         | 35    |   |        |          | 121    |  
|                                                   |                                                                                 | Gain on sale of product                                 |        |         | (4,236 | ) |        |         |      |   |        |          |       |  
|                                                   | Changes in assets and liabilities (net of assets sold in 2003):                 |                                                         |        |         |        |   |        |         |       |   |        |          |       
|                                                   |                                                                                 | Accounts receivable                                     |        |         | 752    |   |        |         | 104   |   |        |          | (189   | )
|                                                   |                                                                                 | Inventories                                             |        |         | 102    |   |        |         | 123   |   |        |          | (2,676 | )
|                                                   |                                                                                 | Prepaid expenses and other assets                       |        |         | (216   | ) |        |         | 215   |   |        |          | (865   | )
|                                                   |                                                                                 | Accounts payable                                        |        |         | 1,121  |   |        |         | (738  | ) |        |          | 1,292  |  
|                                                   |                                                                                 | Deferred revenue                                        |        |         | (3,250 | ) |        |         | 6,257 |   |        |          | (418   | )
|                                                   |                                                                                 | Accrued expenses and other liabilities                  |        |         | (1,759 | ) |        |         | 1,010 |   |        |          | (113   | )
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|                                                   | Net cash used in operating activities                                           |                                                         |        | (7,686  | )      |   |        | (19,168 | )     |   |        | (31,279  | )     
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Investing activities:                              |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |         
|                                                   | Proceeds from sale of product                                                   |                                                         |        | 14,000  |        |   |        |        |       |   |        |         |       
|                                                   | Purchases of investments                                                        |                                                         |        | (13,689 | )      |   |        | (46,589 | )     |   |        | (122,822 | )     
|                                                   | Sales and maturities of investments                                             |                                                         |        | 5,400   |        |   |        | 15,200  |       |   |        | 130,251  |       
|                                                   | Property and equipment acquisitions                                             |                                                         |        | (2,229  | )      |   |        | (2,164  | )     |   |        | (4,966   | )     
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|                                                   | Net cash provided by (used in) investing activities                             |                                                         |        | 3,482   |        |   |        | (33,553 | )     |   |        | 2,463    |       
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Financing activities:                              |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |         
|                                                   | Sales of common shares and warrants, net                                        |                                                         |        | 9,963   |        |   |        | 65,176  |       |   |        | 21,583   |       
|                                                   | Change in restricted cash                                                       |                                                         |        | (6,271  | )      |   |        | (2,729  | )     |   |        | 8,002    |       
|                                                   | Payments on notes payable                                                       |                                                         |        | (7,979  | )      |   |        | (146    | )     |   |        | (8,352   | )     
|                                                   | Proceeds from notes payable                                                     |                                                         |        | 7,000   |        |   |        | 2,227   |       |   |        |         |       
|                                                   | Borrowings under capital lease obligations                                      |                                                         |        | 2,443   |        |   |        | 1,885   |       |   |        | 4,273    |       
|                                                   | Payments on capital lease obligations                                           |                                                         |        | (364    | )      |   |        | (1,100  | )     |   |        | (1,923   | )     
|                                                   | Exercise of stock options and warrants                                          |                                                         |        | 912     |        |   |        | 2,684   |       |   |        | 6,205    |       
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Net cash provided by financing activities          |                                                                                 |                                                         | 5,704  |         |        |   | 67,997 |         |       |   | 29,788 |         
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Net increase in cash and cash equivalents          |                                                                                 |                                                         | 1,500  |         |        |   | 15,276 |         |       |   | 972    |         
|Cash and cash equivalents  beginning of year      |                                                                                 |                                                         | 9,021  |         |        |   | 10,521 |         |       |   | 25,797 |         
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Cash and cash equivalents  end of year            |                                                                                 | $                                                       | 10,521 |         |        | $ | 25,797 |         |       | $ | 26,769 |         
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Supplemental disclosure:                           |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |         
|                                                   | Cash paid for interest                                                          |                                                         | $      | 518     |        |   | $      | 414     |       |   | $      | 367      |       
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      
|Non-cash investing and financing activities:       |                                                                                 |                                                         |        |         |        |   |        |         |       |   |        |         
|Net assets sold in connection with sale of product |                                                                                 | $                                                       | 6,534  |         |        |   |       |         |       |   |       |         
|                                                   |                                                                                 |                                                         |        |         |        |   |        |         |      



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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the Three Years Ended December 31, 2005




|         |                                   
|-------- | ----------------------------------
|Note 1  | Business and Basis of Presentation

cell-to












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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                                                   
|-------- | ------------------------------------------------------------------
|Note 2  | Summary of Significant Accounting Policies and Related
    Matters

Principles of Consolidation


Use of Estimates


Cash Equivalents


Restricted Cash


Short-term Investments


Inventories (first-in,


Intangible Assets


Goodwill Goodwill
and Other Intangible Assets


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Property and Equipment


Impairment of long-lived assets


Revenue Recognition Revenue Recognition, 00-21 00-21), Revenue Arrangements with Multiple
Deliverables. 00-21,








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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










Net Loss per Common Share


Income Taxes


Stock-Based Compensation Accounting for Stock Issued
to Employees Accounting for Stock-Based
Compensation




|                          |  |                          |         |      |  |      |         |   |  |  |         |  
|------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                          |  | Years Ended December 31,
|                          |  |                         
|                          |  | 2003                     |         | 2004 |  | 2005
|                          |  |                          |         |      |  |     
|Expected dividend yield   |  |                          | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Risk free interest rate   |  |                          | 3.0     | %    |  |      | 3.4     | % |  |  | 4.1     | %
|Expected stock volatility |  |                          | 89      | %    |  |      | 78      | % |  |  | 74      | %
|Expected option life      |  |                          | 5 years |      |  |      | 5 years |   |  |  | 6 years |  

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                        |  |                                         |        |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                        |  | Years Ended December 31,                |       
|                                                                                        |  |                                         |       
|                                                                                        |  | 2003                                    |        |   | 2004 |   |         | 2005 | 
|                                                                                        |  |                                         |        |   |      |   |         |      | 
|                                                                                        |  | (Dollars in thousands, except per share |       
|                                                                                        |  | amounts)                                |       
|Net loss, as reported                                                                   |  | $                                       | (2,141 | ) |      | $ | (28,609 | )    |  | $ | (32,163 | )
|Add: stock-based employee compensation included in the reported
    net loss            |  |                                         | 527    |   |      |   | 992     |      |  |   | 1,900   |  
|Deduct: stock-based employee compensation, determined under fair
    value based method |  |                                         | (5,537 | ) |      |   | (5,585  | )    |  |   | (6,189  | )
|                                                                                        |  |                                         |        |   |      |   |         |      | 
|Proforma net loss                                                                       |  | $                                       | (7,151 | ) |      | $ | (33,202 | )    |  | $ | (36,452 | )
|                                                                                        |  |                                         |        |   |      |   |         |      | 
|Loss per share:                                                                         |  |                                         |        |   |      |   |         |      |  |   |         |  
|Basic and diluted  as reported                                                         |  | $                                       | (0.20  | ) |      | $ | (2.21   | )    |  | $ | (1.72   | )
|Basic and diluted  proforma                                                            |  | $                                       | (0.67  | ) |      | $ | (2.56   | )    |  | $ | (1.95   | )

Research and Development Costs


Shipping and Handling Costs


Advertising Costs


Other Comprehensive Income or Loss


Fair Value of Financial Instruments


Reclassifications


Recent Accounting Pronouncements Inventory Costs, an amendment of ARB No. 43,
Chapter 4.


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Exchanges of Nonmonetary
Assets, an amendment of APB , Accounting for
Nonmonetary Transactions.


Share-Based Payment.






|         |                       
|-------- | ----------------------
|Note 3  | Short-term Investments



|                  |                                      |            |        |            |       |  |            |        |  |          |       |    |   |   |        |        | 
|----------------- | ------------------------------------ | ---------- | ------ | ---------- | ----- |  | ---------- | ------ |  | -------- | ----- | -- | - | - | ------ | ------ | 
|                  |                                      |            |        | Unrealized |       |  | Unrealized |        |  | Recorded |      
|December 31, 2004 |                                      | Cost Basis |        |            | Gains |  |            | Losses |  |          | Basis |   
|                  |                                      |            |        |            |       |  |            |        |  |          |       |   
|Type of security: |                                      |            |        |            |       |  |            |        |  |          |       |    |   |   |        |       
|                  | Commercial Paper and Corporate Bonds |            | $      | 997        |       |  |            |       |  |          |       |   |   |   | $      | 997    | 
|                  | US Government and Agency Securities  |            |        | 4,633      |       |  |            |       |  |          | $     | (1 | ) |   |        | 4,632  | 
|                  | Auction Rate Notes                   |            |        | 34,048     |       |  |            |       |  |          |       |   |   |   |        | 34,048 | 
|                  |                                      |            |        |            |       |  |            |        |  |          |       |   
|Total             |                                      | $          | 39,678 |            |       |  |           |        |  | $        | (1    | )  |   | $ | 39,677 |       
|                  |                                      |            |        |            |       |  |            |        |  |          |       |   

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                  |                                      |            |        |            |       |  |            |        |  |          |       |     |   |   |        |        | 
|----------------- | ------------------------------------ | ---------- | ------ | ---------- | ----- |  | ---------- | ------ |  | -------- | ----- | --- | - | - | ------ | ------ | 
|                  |                                      |            |        | Unrealized |       |  | Unrealized |        |  | Recorded |      
|December 31, 2005 |                                      | Cost Basis |        |            | Gains |  |            | Losses |  |          | Basis |    
|                  |                                      |            |        |            |       |  |            |        |  |          |       |    
|Type of security: |                                      |            |        |            |       |  |            |        |  |          |       |     |   |   |        |       
|                  | Commercial Paper and Corporate Bonds |            | $      | 15,270     |       |  |            |       |  |          | $     | (46 | ) |   | $      | 15,224 | 
|                  | US Government and Agency Securities  |            |        | 16,976     |       |  |            |       |  |          |       | (58 | ) |   |        | 16,918 | 
|                  |                                      |            |        |            |       |  |            |        |  |          |       |    
|Total             |                                      | $          | 32,246 |            |       |  |           |        |  | $        | (104  | )   |   | $ | 32,142 |       
|                  |                                      |            |        |            |       |  |            |        |  |          |       |    







|         |                       
|-------- | ----------------------
|Note 4  | Property and Equipment



|                                               |  |      |       |  |      |   |        | 
|---------------------------------------------- |  | ---- | ----- |  | ---- | - | ------ | 
|                                               |  | 2004 |       |  | 2005 |  
|                                               |  |      |       |  |      |  
|Furniture and fixtures                         |  | $    | 564   |  |      | $ | 882    | 
|Machinery and equipment                        |  |      | 4,822 |  |      |   | 7,428  | 
|Computer equipment and software                |  |      | 1,523 |  |      |   | 2,361  | 
|Leasehold improvements                         |  |      | 1,871 |  |      |   | 2,817  | 
|                                               |  |      |       |  |      |  
|                                               |  |      | 8,780 |  |      |   | 13,488 | 
|Less accumulated depreciation and amortization |  |      | 3,620 |  |      |   | 5,315  | 
|                                               |  |      |       |  |      |  
|Net property and equipment                     |  | $    | 5,160 |  |      | $ | 8,173  | 
|                                               |  |      |       |  |      |  





|         |                 
|-------- | ----------------
|Note 5  | Accrued Expenses



|                            |  |      |       |  |      |   |     | 
|--------------------------- |  | ---- | ----- |  | ---- | - | --- | 
|                            |  | 2004 |       |  | 2005 |  
|                            |  |      |       |  |      |  
|Allowance for sales returns |  | $    | 138   |  |      | $ | 5   | 
|Interest payable            |  |      | 24    |  |      |   |    | 
|Audit and tax services      |  |      | 89    |  |      |   | 107 | 
|Legal fees                  |  |      | 20    |  |      |   | 105 | 
|Other accrued expenses      |  |      | 793   |  |      |   | 257 | 
|                            |  |      |       |  |      |  
|                            |  | $    | 1,064 |  |      | $ | 474 | 
|                            |  |      |       |  |      |  

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                      
|-------- | ---------------------
|Note 6  | Employee Benefit Plan





|         |              
|-------- | -------------
|Note 7  | Notes Payable











|         |                     
|-------- | --------------------
|Note 8  | Stockholders Equity

Common Stock Offerings


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Increase in Authorized Shares 


70



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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Warrants


|                                          |                       |                            |         |         |   |        |        |         |   |          |         |         |   |  |         |         |  |  |           |          |  
|----------------------------------------- | --------------------- | -------------------------- | ------- | ------- | - | ------ | ------ | ------- | - | -------- | ------- | ------- | - |  | ------- | ------- |  |  | --------- | -------- | -
|                                          |                       | Exercise Price of Warrants |         |        
|                                          |                       |                            |         | Total  
|                                          |                       | $6.34                      |         | $7.50   |   | $11.09 |        | $14.40  |   | Warrants
|                                          |                       |                            |         |         |   |        |        |         |   |         
|Warrants outstanding at January 1, 2003   |                       |                            | 501,178 |         |   |        | 68,000 |         |   |          |        |         |   |  |        |         |  |  | 569,178   |         
|                                          | Issued during 2003    |                            |         |        |   |        |        |        |   |          |         | 529,574 |   |  |         |        |  |  |           | 529,574  |  
|                                          | Exercised during 2003 |                            |         |        |   |        |        |        |   |          |         |        |   |  |         |        |  |  |           |         |  
|                                          |                       |                            |         |         |   |        |        |         |   |          |         |         |   |  |         |         |  |  |           |         
|Warrants outstanding at December 31, 2003 |                       |                            | 501,178 |         |   |        | 68,000 |         |   |          | 529,574 |         |   |  |        |         |  |  | 1,098,752 |         
|                                          | Issued during 2004    |                            |         |        |   |        |        |        |   |          |         |        |   |  |         | 511,364 |  |  |           | 511,364  |  
|                                          | Exercised during 2004 |                            |         | (10,000 | ) |        |        | (65,900 | ) |          |         | (48,143 | ) |  |         |        |  |  |           | (124,043 | )
|                                          |                       |                            |         |         |   |        |        |         |   |          |         |         |   |  |         |         |  |  |           |         
|Warrants outstanding at December 31, 2004 |                       |                            | 491,178 |         |   |        | 2,100  |         |   |          | 481,431 |         |   |  | 511,364 |         |  |  | 1,486,073 |         
|                                          | Issued during 2005    |                            |         |        |   |        |        |        |   |          |         |        |   |  |         |        |  |  |           |         |  
|                                          | Exercised during 2005 |                            |         | (32,783 | ) |        |        | (2,100  | ) |          |         | (48,143 | ) |  |         |        |  |  |           | (83,026  | )
|                                          |                       |                            |         |         |   |        |        |         |   |          |         |         |   |  |         |         |  |  |           |         
|Warrants outstanding at December 31, 2005 |                       |                            | 458,395 |         |   |        |       |         |   |          | 433,288 |         |   |  | 511,364 |         |  |  | 1,403,047 |         
|                                          |                       |                            |         |         |   |        |        |         |   |          |         |         |   |  |         |         |  |  |           |         
|Warrants expiring in 2006                 |                       |                            | 458,395 |         |   |        |       |         |   |          |        |         |   |  |        |         |  |  | 458,395   |         
|Warrants expiring in 2008                 |                       |                            |        |         |   |        |       |         |   |          | 433,288 |         |   |  |        |         |  |  | 433,288   |         
|Warrants expiring in 2009                 |                       |                            |        |         |   |        |       |         |   |          |        |         |   |  | 511,364 |         |  |  | 511,364   |         

Restricted Stock Awards


|                                                                       |  |                         |         |   |      |   |           |  
|---------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | --------- | -
|                                                                       |  | Year Ended December 31, |        
|                                                                       |  |                         |        
|                                                                       |  | 2004                    |         |   | 2005 |  
|                                                                       |  |                         |         |   |      |  
|Unvested restricted shares outstanding, beginning of period            |  |                         |        |   |      |   | 145,620   |  
|Restricted shares issued                                               |  |                         | 148,020 |   |      |   | 415,253   |  
|Restricted shares forfeited                                            |  |                         | (2,400  | ) |      |   | (29,620   | )
|Restricted shares vested                                               |  |                         |        |   |      |   | (86,931   | )
|                                                                       |  |                         |         |   |      |  
|Unvested restricted shares outstanding, end of period                  |  |                         | 145,620 |   |      |   | 444,322   |  
|                                                                       |  |                         |         |   |      |  
|Non-cash restricted stock compensation expense, net of
    forfeitures |  | $                       | 488,000 |   |      | $ | 1,613,000 |  
|                                                                       |  |                         |         |   |      |  
|Average grant price during year                                        |  | $                       | 10.89   |   |      | $ | 13.90     |  
|                                                                       |  |                         |         |   |      |  

Shelf Registration Statement S-3.


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Stockholders Rights Plan




|         |              
|-------- | -------------
|Note 9  | Stock Options











S-8




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                                   |  |                          |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       |  |           |   |  |   |       | 
|---------------------------------- |  | ------------------------ | --------- | -------- | ----- | - | ----- | ------ | -------- |  | --------- | - |  | -------- | ----- |  | ----- |  | --------- | - |  | - | ----- | 
|                                   |  | Years Ended December 31, |          
|                                   |  |                          |          
|                                   |  | 2003                     |           |          | 2004  |   |       | 2005   |         
|                                   |  |                          |           |          |       |   |       |        |         
|                                   |  |                          |           | Weighted |       |   |       |        | Weighted |  |           |   |  | Weighted |      
|                                   |  |                          |           | Average  |       |   |       |        | Average  |  |           |   |  | Average  |      
|                                   |  |                          |           | Exercise |       |   |       |        | Exercise |  |           |   |  | Exercise |      
|                                   |  | Shares                   |           |          | Price |   |       | Shares |          |  | Price     |   |  | Shares   |       |  | Price | 
|                                   |  |                          |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 
|Outstanding at beginning of period |  |                          | 2,863,574 |          |       | $ | 10.34 |        |          |  | 3,010,550 |   |  | $        | 10.43 |  |       |  | 2,760,752 |   |  | $ | 11.36 | 
|Granted                            |  |                          | 644,800   |          |       |   | 8.91  |        |          |  | 217,000   |   |  |          | 11.35 |  |       |  | 703,000   |   |  |   | 14.59 | 
|Exercised                          |  |                          | (142,353  | )        |       |   | 7.24  |        |          |  | (430,132  | ) |  |          | 5.09  |  |       |  | (660,842  | ) |  |   | 8.25  | 
|Expired                            |  |                          | (48,569   | )        |       |   | 8.31  |        |          |  | (667      | ) |  |          | 12.43 |  |       |  | (65,846   | ) |  |   | 15.13 | 
|Terminated and canceled            |  |                          | (306,902  | )        |       |   | 8.61  |        |          |  | (35,999   | ) |  |          | 8.77  |  |       |  | (48,865   | ) |  |   | 9.20  | 
|                                   |  |                          |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 
|Outstanding at end of period       |  |                          | 3,010,550 |          |       | $ | 10.43 |        |          |  | 2,760,752 |   |  | $        | 11.36 |  |       |  | 2,688,199 |   |  | $ | 12.92 | 
|                                   |  |                          |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |        |             |         |                     |                  |  |                     |          |  |   |             |           |  |             |         |           |  |   |       |       | 
|------------------------ | ------ | ----------- | ------- | ------------------- | ---------------- |  | ------------------- | -------- |  | - | ----------- | --------- |  | ----------- | ------- | --------- |  | - | ----- | ----- | 
|                         |        |             |         | Options Outstanding |                  |  | Options Exercisable |         
|                         |        |             |         |                     |                  |  |                     |         
|                         |        |             |         | Weighted-           |                  |  |                     |          | 
|                         |        |             |         | Average             |                  |  | Weighted-           |          |  |   |             | Weighted- | 
|                         |        |             |         | Remaining           |                  |  | Average             |          |  |   |             | Average   | 
|                         |        | Number      |         |                     | Contractual Life |  |                     | Exercise |  |   | Number      |           |  | Exercisable |        
|Range of Exercise Prices |        | Outstanding |         |                     | (Years)          |  |                     | Price    |  |   | Exercisable |           |  | Price       |        
|                         |        |             |         |                     |                  |  |                     |          |  |   |             |           |  |             |        
|$ 4.63 - $10.50          |        |             | 616,399 |                     |                  |  | 3.8                 |          |  | $ | 8.72        |           |  |             | 481,972 |           |  | $ | 8.58  |      
|$10.80 - $12.65          |        |             | 209,500 |                     |                  |  | 4.5                 |          |  |   | 11.28       |           |  |             | 184,667 |           |  |   | 11.23 |      
|$12.94 - $12.94          |        |             | 800,000 |                     |                  |  | 6.3                 |          |  |   | 12.94       |           |  |             | 800,000 |           |  |   | 12.94 |      
|$13.06 - $13.92          |        |             | 122,800 |                     |                  |  | 3.2                 |          |  |   | 13.58       |           |  |             | 87,601  |           |  |   | 13.46 |      
|$14.72 - $16.00          |        |             | 839,500 |                     |                  |  | 7.8                 |          |  |   | 14.85       |           |  |             | 163,000 |           |  |   | 15.34 |      
|$25.00 - $25.00          |        |             | 100,000 |                     |                  |  | 6.3                 |          |  |   | 25.00       |           |  |             |        |           |  |   |      |      
|                         |        |             |         |                     |                  |  |                     |          |  |   |             |           |  |             |        
|                         | Totals |             |         | 2,688,199           |                  |  |                     | 5.9      |  |   | $           | 12.92     |  |             |         | 1,717,240 |  |   | $     | 11.79 | 
|                         |        |             |         |                     |                  |  |                     |          |  |   |             |           |  |             |        

Note 10  Income Taxes




|                     |                                  |                           |   |         |        |  |   |         |        | 
|-------------------- | -------------------------------- | ------------------------- | - | ------- | ------ |  | - | ------- | ------ | 
|                     |                                  | 2004                      |   |         | 2005   | 
|                     |                                  |                           |   |         |        | 
|Deferred tax assets: |                                  |                           |   |         |        |  |   |        
|                     | Net operating loss carryforwards |                           | $ | 26,423  |        |  | $ | 39,232  |       
|                     | Federal and State tax credits    |                           |   | 3,496   |        |  |   | 4,427   |       
|                     | Depreciation & amortization      |                           |   | 959     |        |  |   | 1,329   |       
|                     | Deferred revenue                 |                           |   | 2,190   |        |  |   | 2,044   |       
|                     | Other                            |                           |   | 2,042   |        |  |   | 636     |       
|                     |                                  |                           |   |         |        | 
|                     |                                  | Total deferred tax assets |   |         | 35,110 |  |   |         | 47,668 | 
|                     | Valuation allowance              |                           |   | (35,110 | )      |  |   | (47,668 | )     
|                     |                                  |                           |   |         |        | 
|                     | Net deferred taxes               |                           | $ |        |        |  | $ |        |       
|                     |                                  |                           |   |         |        | 





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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|          |                              
|--------- | -----------------------------
|Note 11  | Commitments and Contingencies

Leases








|                                  |       |           |        |        |         |   |       |       |  |   |        |        | 
|--------------------------------- | ----- | --------- | ------ | ------ | ------- | - | ----- | ----- |  | - | ------ | ------ | 
|                                  |       | Operating |        |        | Capital |   |       | Total | 
|                                  |       |           |        |        |         |   |       |       | 
|2006                              |       | $         | 1,785  |        |         | $ | 2,833 |       |  | $ | 4,618  |       
|2007                              |       |           | 1,832  |        |         |   | 1,909 |       |  |   | 3,741  |       
|2008                              |       |           | 1,881  |        |         |   | 1,192 |       |  |   | 3,073  |       
|2009                              |       |           | 1,931  |        |         |   | 396   |       |  |   | 2,327  |       
|2010                              |       |           | 1,903  |        |         |   |      |       |  |   | 1,903  |       
|Thereafter                        |       |           | 10,015 |        |         |   |      |       |  |   | 10,015 |       
|Less amount representing interest |       |           |       |        |         |   | (729  | )     |  |   | (729   | )     
|                                  |       |           |        |        |         |   |       |       | 
|                                  | Total |           | $      | 19,347 |         |   | $     | 5,601 |  |   | $      | 24,948 | 
|                                  |       |           |        |        |         |   |       |       | 



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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Contingencies






|          |                       
|--------- | ----------------------
|Note 12  | Contractual Agreements

Par Pharmaceutical




Questcor




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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Questcor assignment to QOL Medical, LLC 


Alnylam Pharmaceuticals, Inc. tm


Pharmacia


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Merck




Thiakis Limited peptide-1


Cytyc Corporation




|          |                           
|--------- | --------------------------
|Note 13  | Related Party Transactions



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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|          |                  
|--------- | -----------------
|Note 14  | Subsequent Events

P&G: (1-34) (1-34) (1-34)




(1-34) (1-34) (1-34)


Galenea:


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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Merck:




|          |                                                                               
|--------- | ------------------------------------------------------------------------------
|Note 15  | Quarterly Financial Data (Unaudited) (in thousands, except
    per share data)

|                                   |  |           |        |          |  |               |        |              |  |   |        |   |  |   |        |  
|---------------------------------- |  | --------- | ------ | -------- |  | ------------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                   |  | March 31, |        | June 30, |  | September 30, |        | December 31,
|Fiscal 2004 Quarter Ended          |  | 2004      |        | 2004     |  | 2004          |        | 2004        
|                                   |  |           |        |          |  |               |        |             
|Total revenues                     |  | $         | 148    |          |  | $             | 45     |              |  | $ | 203    |   |  | $ | 1,451  |  
|Operating expenses                 |  |           | (7,751 | )        |  |               | (7,485 | )            |  |   | (7,730 | ) |  |   | (7,372 | )
|Net loss                           |  |           | (7,644 | )        |  |               | (7,491 | )            |  |   | (7,555 | ) |  |   | (5,919 | )
|Loss per share  Basic and Diluted |  | $         | (0.64  | )        |  | $             | (0.62  | )            |  | $ | (0.57  | ) |  | $ | (0.41  | )

|                                   |  |           |        |          |  |               |         |              |  |   |         |   |  |   |         |  
|---------------------------------- |  | --------- | ------ | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                   |  | March 31, |        | June 30, |  | September 30, |         | December 31,
|Fiscal 2005 Quarter Ended          |  | 2005      |        | 2005     |  | 2005          |         | 2005        
|                                   |  |           |        |          |  |               |         |             
|Total revenues                     |  | $         | 3,330  |          |  | $             | 1,602   |              |  | $ | 1,223   |   |  | $ | 1,294   |  
|Operating expenses                 |  |           | (9,716 | )        |  |               | (10,292 | )            |  |   | (10,463 | ) |  |   | (10,779 | )
|Net loss                           |  |           | (6,087 | )        |  |               | (8,344  | )            |  |   | (8,814  | ) |  |   | (8,918  | )
|Loss per share  Basic and Diluted |  | $         | (0.34  | )        |  | $             | (0.47   | )            |  | $ | (0.46   | ) |  | $ | (0.44   | )

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. 10-K, 13a-15(e) 15d-15(e)


Internal Control over Financial Reporting.


Management Report on Internal Control. 13a-15(f) 15d-15(f)




| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) Pertain to the maintenance of records that in reasonable
    detail accurately and fairly reflect the transactions and
    dispositions of the assets of the Company;                                                                                                                                                                                          
|
| | 2) Provide reasonable assurance that transactions are
    recorded as necessary to permit preparation of financial
    statements in accordance with generally accepted accounting
    principles, and that receipts and expenditures of the Company
    are being made only in accordance with authorizations of
    management and directors of the Company; and
|
| | 3) Provide reasonable assurance regarding prevention or
    timely detection of unauthorized acquisition, use or disposition
    of the Companys assets that could have a material effect
    on the financial statements.                                                                                                                                       

Internal Control  Integrated
Framework




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10-K.







|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION






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


10-K.


Exhibits




82



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##### Table of Contents






SIGNATURES






| |                                          
| | -----------------------------------------
| | NASTECH PHARMACEUTICAL 
     COMPANY INC.



| |     |                                
| | --- | -------------------------------
| | By: | /s/ Steven C. Quay, M.D., Ph.D.

| |                                                             
| | ------------------------------------------------------------
| |                                                             
| | Steven C. Quay, M.D., Ph.D.                                 
| | Chairman of the Board, President and Chief Executive Officer



|                                                                   |  |                                                                                                |  | 
|------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------- |  | 
|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                                                                                      
|                                                                  
|/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                                                                                      

83



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##### Table of Contents






EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .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, effective as of March 1, 2006 (filed as
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K dated March 1, 2006 and incorporated herein
    by reference).(1)                                                                                                         
|       
|        | 10 | .7          |  | Amended and Restated Employment Agreement, dated May 2,
    2002, with Dr. 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).                                                                                           
|       
|        | 10 | .8          |  | 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).                                                                                         

84



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|        |    |             |  |                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .9          |  | 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 | .10         |  | Employment Agreement with Gregory L. Weaver, dated
    April 30, 2002 (filed as Exhibit 10.29 to the
    Companys Quarterly Report on Form 10-Q for the
    Quarter Ended June 30, 2002 and incorporated herein by
    reference).                                                                       
|       
|        | 10 | .11         |  | Change-in-Control Severance Agreement with Gregory L. Weaver,
    dated July 31, 2002 (filed as Exhibit 10.1 to the
    Companys Quarterly Report on Form 10-Q for the
    Quarter Ended September 30, 2002 and incorporated herein by
    reference).                                                   
|       
|        | 10 | .12         |  | 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 the
    Companys Current Report on Form 8-K dated
    September 7, 2005 and incorporated herein by reference).                      
|       
|        | 10 | .13         |  | 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 | .14         |  | 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 | .15         |  | 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 | .16         |  | 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 | .17         |  | 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 | .18         |  | Amendment No. 1 to the Amended and Restated Nastech
    Pharmaceutical Company Inc. 2000 Nonqualified Stock Option
    Plan.(2)                                                                                                                                                                           
|       
|        | 10 | .19         |  | 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 | .20         |  | Amendment No. 1 to the Nastech Pharmaceutical Company Inc.
    2002 Stock Option Plan.(2)                                                                                                                                                                                                                 
|       
|        | 10 | .21         |  | 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 | .22         |  | 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 | .23         |  | 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 | .24         |  | Amendment No. 3 to Nastech Pharmaceutical Company Inc. 2004
    Stock Incentive Plan.(2)                                                                                                                                                                                                                  
|       
|        | 10 | .25         |  | 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 | .26         |  | 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).   

85



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .27         |  | 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 | .28         |  | 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 | .29         |  | Stock option agreement with Gregory L. Weaver (filed as
    Exhibit 10.25 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002 and
    incorporated herein by reference).                                                                                                           
|       
|        | 10 | .30         |  | Restricted Stock Grant Agreement effective May 25, 2005 by
    and between Nastech Pharmaceutical Company Inc. and
    Mr. Gregory L. Weaver (filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    May 25, 2005 and incorporated herein by reference).                                   
|       
|        | 10 | .31         |  | Stock Option Agreement dated as of May 25, 2005 between
    Nastech Pharmaceutical Company Inc. and Mr. Gregory L.
    Weaver (filed as Exhibit 10.2 to the Companys Current
    Report on Form 8-K dated May 25, 2005 and incorporated
    herein by reference).                                                  
|       
|        | 10 | .32         |  | 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 | .33         |  | 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 | .34         |  | 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 | .35         |  | 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 | .36         |  | 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 | .37         |  | 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 | .38         |  | 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 | .39         |  | 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 | .40         |  | 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 | .41         |  | 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).                          

86



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .42         |  | 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 | .43         |  | 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 | .44         |  | 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 | .45         |  | 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).                     
|       
|        | 10 | .46         |  | 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 | .47         |  | 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 | .48         |  | 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 | .49         |  | 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 | .50         |  | 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 | .51         |  | 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 | .52         |  | 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 | .53         |  | 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 | .54         |  | 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 | .55         |  | 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 | .56         |  | 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 | .57         |  | 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).                                                                                                                                                      

87



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                       
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .58         |  | 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 | .59         |  | 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).                                                                             
|       
|        | 10 | .60         |  | 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 | .61         |  | 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 | .62         |  | 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 | .63         |  | 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 | .64         |  | 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 | .65         |  | 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 | .66         |  | Agreement dated as of September 23, 2005 by and between
    Nastech Pharmaceutical Company Inc. and QOL Medical, LLC. (filed
    as Exhibit 10.1 to the Companys Current Report on
    Form 8-K dated October 17, 2005 and incorporated
    herein by reference).(1)                                                 
|       
|        | 10 | .67         |  | 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)
|       
|        | 23 | .1          |  | Consent of KPMG LLP, independent registered public accounting
    firm.(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.                                                                                                                                                                                                                                                                  

88