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                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

      This Amended and Restated Employment Agreement (this "Agreement"), is
executed and entered into on the 16th day of December, 2005 by and between
Nastech Pharmaceutical Company Inc., a Delaware corporation (the "Company") with
offices at 3450 Monte Villa Parkway, Bothell, Washington and Steven C. Quay,
M.D., Ph.D. (the "Executive"). This agreement shall be effective on the date
determined in accordance with Section 1 hereof but, except as provided herein,
one or more other existing agreements shall continue to govern the Executive's
employment by the Company, including his compensation for services rendered,
prior to January 1, 2006 (the "Transition Date"), and certain related matters.

                                   WITNESSETH:

      WHEREAS, the Company and the Executive have executed and entered into
three prior employment agreements, including an agreement dated May 2, 2002 (the
"May 2002 Agreement"), which has a term scheduled to end at the close of
business on December 31, 2005, and an agreement dated June 3, 2005 (the "June
2005 Agreement"); and

      WHEREAS, the Company desires to modify the June 2005 Agreement so that it
complies with the requirements of Section 409A of the Internal Revenue Code and
the guidance issued thereunder, and the Executive desires the same; and

      WHEREAS, certain actions which were contemplated under and to be taken and
completed pursuant to the June 2005 Agreement (which is hereby amended and
restated) prior to the date hereof have in fact been taken and completed;

      NOW THEREFORE, in consideration of the mutual promises and agreements
herein and for other good and valuable consideration the receipt and sufficiency
of which are hereby mutually acknowledged, the Company and the Executive agree
as follows:

      1. Application and Effectiveness of Agreements. This Agreement shall
govern (i) the employment relationship between the Company and the Executive
from and after the Transition Date and (ii) other matters as set forth herein.
This Agreement shall amend and restate the June 2005 Agreement which was
effective as of July 20, 2005 (the "Approval Date"). The rights provided to the
Executive hereunder (including, in particular, the rights described in Sections
6 and 7 of this Agreement) shall not be duplicative of any rights provided under
the June 2005 Agreement. Upon this Agreement becoming effective, to the extent
they are not inconsistent with the terms of this Agreement, the May 2002
Agreement and other agreements between the Company and the Executive shall
continue to govern the employment of the Executive by the Company prior to the
Transition Date and matters growing out of that employment.

      2. Employment; Responsibilities and Authority; Board Designees; Outside
Activities.

            (a) Subject to the terms and conditions of this Agreement, the
Company shall continue to employ the Executive as its President, Chief Executive
Officer and Chairman of its Board of Directors (the "Board") during the
Employment Period (as defined in Section 3, below) and to perform such acts and
duties and furnish such services to the Company and its Subsidiaries (as defined
below) as the Board shall from time to time reasonably direct. The

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Executive shall have general and active charge of the business and affairs of
the Company as its Chief Executive Officer and President and, in such capacity,
shall have responsibility for the day-to-day operations of the Company, subject
to the authority and control of the Board.

            (b) During the Employment Period, the Company shall: (i) continue to
take such actions as may be necessary to cause the nomination and recommendation
of both (A) the Executive for election as a director and as Chairman of the
Board and (B) a nominee selected by the Executive and reasonably acceptable to
the Company (such nominee, at the option of the Executive, to be changed prior
to any annual or other meeting of the stockholders of the Company at which
directors are elected or due to the death or resignation of such nominee) for
election as a director of the Company and (ii) use all best efforts to cause
such persons to be elected to the positions provided for them above
respectively.

            (c) Subject to the terms and conditions of this Agreement, Executive
hereby accepts such employment and agrees to devote his full time and best
efforts to the duties provided herein, provided that the Executive may engage in
other business, research (subject to the further proviso set forth below),
professional, and other activities, during his employment by the Company, that
(1) involve no conflict of interest with the Company or any of its Subsidiaries
in the Business of the Company (as those terms are defined below) and (2) do not
materially interfere with the reasonable performance by Executive of his duties
under this Agreement, provided further that, in the case of any research in
medicine or in the health sciences in which the Executive may be involved other
than for the benefit of the Company or any such Subsidiary(ies), both of the
immediately following clauses "i" and "ii" must be satisfied:

                  (i) Such research shall be in subject matter unrelated to the
Business of the Company and unrelated to any other products, services, or
technology in medicine or the health sciences in which the Company shall then be
undertaking, or actively and in good faith considering, research or commercial
involvement; and

                  (ii) The Executive shall disclose to the Board or to the
Compensation Committee on a timely basis the nature and subject matter of any
such research in which he may become involved and shall keep the Board or such
committee reasonably apprised of material changes in such nature and/or subject
matter.

            (d) For purposes of this Agreement: (1) the "Business of the
Company" means the description of the Company's business as is described in Part
I, Item 1 of the Company's most recent Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission, and (2) the term "Subsidiary" means a
corporation or other entity that is at least majority owned, directly or
indirectly, by the Company. The foregoing provisos do not limit the obligations
of the Executive under Section 18(a) hereof.

      3. Term; Employment Period. The "Employment Period" under this Agreement
shall commence on the Transition Date and shall terminate at the close of
business on December 31, 2009 unless it is (a) extended by written agreement
between the parties or by continuing employment of the Executive by the Company
as provided in the following sentence or (b) earlier terminated pursuant to
Section 11 hereof. If the Executive shall remain in substantially full-time
employment by the Company beyond what would otherwise be the end of the
Employment Period without any written agreement between the parties, this
Agreement and the Employment Period shall be deemed to continue on a
month-to-month basis and either party

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shall have the right to terminate the Executive's employment hereunder at the
end of any ensuing calendar month on written notice of at least 30 days.

      4. Salary. For services rendered to the Company during the Employment
Period, the Company shall compensate the Executive with a base salary, payable
in semi-monthly installments, which shall be $500,000 per annum for the period
from the Transition Date through the end of calendar year 2006 and which shall
be increased by at least five percent (5%) effective on January 1 of each
calendar year after 2006 during the Employment Period, the actual amount of such
increase to be determined by the Board or the Compensation Committee prior to
each such calendar year.

      5. Incentive Cash Compensation.

            (a) For the Company's fiscal year that will begin on January 1,
2005, and for each subsequent fiscal year or portion thereof during the
Employment Period, the Executive shall also be eligible to receive incentive
cash compensation based on (i) the "Annual Bonus Expectancy Amount," which shall
be fifty percent (50%) of the Executive's base salary for such year, and (ii)
the Executive's performance in relation to the performance areas and performance
targets on which the Executive and the Board or the Compensation Committee shall
agree as described below.

            (b) The Company and the Executive shall agree periodically on
performance criteria for determination of the incentive cash compensation that
will be payable to the Executive with respect to each fiscal year of the
Company. To the extent possible, such agreement shall be made, as to each fiscal
year, prior to the end of the first month of such fiscal year. As an example,
such performance criteria may be comprised of several designated performance
areas and one or more performance targets in each area, and, depending on the
targets achieved, the actual amount of incentive cash compensation actually
payable to the Executive for each fiscal year will be between zero and the
Annual Bonus Expectancy Amount. The Company acknowledges that the business
objectives heretofore used in determining the Executive's incentive cash
compensation have been, and that the performance areas and performance targets
referred to herein shall continue to be, based largely on the input and
recommendations of the Company's Chief Executive Officer and that, in exercising
its review and supervisory role with respect to the determination and adoption
of those performance areas and performance targets, the Board or the
Compensation Committee, as the case may be, shall act reasonably and in
consultation and cooperation with the Chief Executive Officer and consistently
with past practice.

            (c) As soon as practical, and in any event no later than ninety (90)
days, following the end of each fiscal year of the Company, the Compensation
Committee or the Board, in consultation with the Executive, shall determine,
reasonably and in good faith, the extent to which the applicable performance
levels for such fiscal year shall have been achieved and, accordingly, shall
cause the appropriate amount of incentive cash compensation to be paid to the
Executive forthwith. If unforeseen developments occur that make the performance
areas and/or targets previously determined unachievable, infeasible, or
inadvisable -- and therefore inappropriate as a measure of the performance of
the Executive -- the Compensation Committee or the Board shall consider in good
faith the extent to which the actual performance of the

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Executive nevertheless warrants payment of the amounts that would have been
payable if the targets had been achieved; and, to such extent, payment shall be
made to the Executive.

            (d) Except as otherwise provided herein or in a future agreement
between the Executive and the Company, for any fiscal year that begins before,
but ends after, the end of the Employment Period, a pro-rated annual bonus shall
be payable to the Executive based on the portion of such fiscal year that shall
have elapsed to the end of the Employment Period, the methodology referred to
above, and the reasonable, good faith determination of the Compensation
Committee or the Board of the extent to which reasonably proportionate progress
toward achievement of the applicable performance targets was made from the
beginning of such fiscal year to the date the Employment Period ended, provided,
however, that under no circumstances shall the Executive be entitled to receive
duplicative incentive cash compensation payments under the terms of this
Agreement.

      6. New Stock Options. As further compensation, and in addition to the
stock options that have been issued to the Executive prior to June 3, 2005
(which are not affected by this Agreement and remain outstanding, vested, and
exercisable in accordance with their terms), the Company has granted to the
Executive, for service on and after the Approval Date, new options to purchase
additional shares of common stock of the Company (the "New Options") as follows:

            (a) All of the New Options were deemed granted and issued on the
Approval Date.

            (b) The New Options have a term of 10 years, running from the
Approval Date.

            (c) Among the New Options, options for the maximum permissible
number of shares are Incentive Stock Options ("ISOs") for purposes of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder
(together, the "Tax Laws"), and those ISOs were issued with the minimum per
share exercise price consistent with tax-advantaged treatment of those options
as ISOs under the Tax Laws. Those ISOs are among the New Options referred to as
vesting in each of the four annual installments provided for in paragraph "(f)"
below in this Section 6, with the numbers of shares for which such ISOs will be
exerciseable in each of those installments having been determined in such a
manner as to maximize the total number of shares as to which such tax advantaged
treatment is available; and the ISOs shall vest and become first exerciseable at
the times and under the conditions for each such installment, respectively.

            (d) The remainder of the New Options are non-statutory stock options
and were issued with a per share exercise price equal to the fair market value
of a share of common stock of the Company on the Approval Date, as determined in
accordance with the terms of the Company's 2004 Stock Incentive Plan (the "2004
Plan").

            (e) The exercise prices of the New Options and the numbers of shares
that may be purchased upon exercise of the New Options are subject to the
anti-dilution adjustments provided for in the 2004 Plan.

            (f) The New Options, in the aggregate, grant the right to purchase a
total of six hundred thousand (600,000) shares of common stock of the Company,
and they shall vest and

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become exerciseable as follows (or as expressly stated elsewhere in this
Agreement in the event of certain circumstances and events provided for herein):

      New Options for one hundred fifty thousand (150,000) shares (some of which
      are ISOs and some of which are non-statutory stock options, as provided
      above) shall vest and become exerciseable on July 20 of each of 2006,
      2007, 2008, and 2009 if Executive's employment by the Company or by an
      affiliate of the Company continues on such respective date.

            (g) The New Options which are non-statutory stock options are
transferable by Executive to members of his immediate family or to a trust for
the benefit of Executive and/or member(s) of his immediate family and/or to a
partnership, limited liability company, and/or other entity owned by Executive
and/or by member(s) of his immediate family. The terms of the New Options
include customary provisions for, among other things, the ability of the
Executive (and the cooperation of the Company), if the Executive so chooses, (A)
to pay the exercise price for the options via a same-day-sale exercise
arrangement and/or a margin account exercise arrangement with a broker-dealer or
bank and/or loan or deferral arrangements with the Company, and/or (B) to
surrender shares (either previously outstanding shares or shares being purchased
by exercise of options) to the Company at fair market value for payment of the
minimum amount required to satisfy all withholding requirements, and/or (C) to
pay all or a part of the exercise price by surrender to the Company, at fair
market value, of shares of the Company's common stock that shall then have been
owned for at least six months (or such shorter period as is permissible under
applicable law) by Executive and/or by a trust, partnership, limited liability
company, or other entity for the benefit of, or owned by, Executive and/or
member(s) of his immediate family.

            (h) The shares of Common Stock issuable upon the exercise of the New
Options shall be fully vested in the hands of the Executive immediately upon
such exercise.

      7. Restricted Shares. As further compensation for services to be rendered
on and after the Approval Date, the Company has issued to the Executive one
hundred sixty-eight thousand (168,000) shares of common stock of the Company
(the "Restricted Shares"), subject to the following provisions:

            (a) At the close of business on the Approval Date, all of the
Restricted Shares were duly authorized, validly issued and outstanding shares of
common stock of the Company owned by the Executive and were fully paid and
non-assessable.

            (b) The Restricted Shares are subject to the following restrictions:

                  (i) Subject to Section 7(c) and other provisions herein
providing for the vesting of such shares, upon the occurrence of a triggering
event as provided in Section 12(b) or 12(c) below, the Executive shall forfeit
all non-vested Restricted Shares, provided, however, that the Company shall pay
the Executive an amount, if any, equal to the par value payment made by the
Executive to the Company upon grant of the Restricted Shares upon notice given
by the Company to the Executive at any time within ninety (90) days after the
occurrence of such triggering event (the "Forfeiture/Repurchase Right").

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                  (ii) Subject to Section 7(c) and other provisions herein
providing for the vesting of such shares, the Restricted Shares shall not be
sold or otherwise transferred voluntarily by the Executive except to members of
his immediate family or to a trust for the benefit of Executive and/or member(s)
of his immediate family and/or to a partnership, limited liability company,
and/or other entity owned by Executive and/or by member(s) of his immediate
family (transfers to such persons being referred to herein as "exempt
transfers"); and, notwithstanding any such exempt transfer, the Restricted
Shares shall remain subject to the Transfer Restriction until it lapses or
terminates as provided for herein (the "Transfer Restriction").

            (c) One-fourth (1/4) of the Restricted Shares shall vest on July 20
of each of 2006, 2007, 2008, and 2009, provided that Executive remains
continuously employed by the Company and/or any Subsidiary thereof through and
on each such date. Such vesting, or vesting pursuant to other provisions of this
Agreement, shall cause and constitute the lapse and termination of the
Forfeiture/Repurchase Right and the Transfer Restriction as to the Restricted
Shares that so vest.

            (d) The customary certificates representing the Restricted Shares
may bear appropriate and customary legends referring to the
Forfeiture/Repurchase Right and the Transfer Restriction, provided that the
Company shall promptly provide to the Executive, in exchange for such
certificates, replacement certificates without such legends as to any of the
Restricted Shares that shall become vested.

            (e) Upon the occurrence of any taxable event which arises due to the
vesting of Restricted Shares, the Executive shall have the right to direct the
Company to withhold the number of Restricted Shares necessary to satisfy the tax
withholding liability and obligations of or relating to the Executive (both
Federal and State) with respect to such vesting of Restricted Shares, and the
Company shall remit the value of the withheld Restricted Shares to the proper
governmental authorities.

      8. Registration. The Company shall use its best efforts to (a) cause the
shares of Common Stock issuable upon the exercise of the New Options to be
registered and qualified for public resale on a registration statement and
re-offer prospectus filed with the U.S. Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Securities Act"), and under any
applicable state securities laws, within ninety (90) days after the Approval
Date; (b) cause Restricted Shares that vest to be similarly registered and
qualified for public resale by the date of such vesting; (c) maintain in effect
all such registrations and qualifications, or substantially similar
registrations and qualifications, until the Executive and any related family
member(s) and any entity(ies) related to him shall be free of any and all
restrictions on any such sales under the Securities Act and any applicable state
securities law(s); and (d) if such effectiveness should lapse before that time,
restore the effectiveness thereof as soon as reasonably possible. These
registrations and qualifications are in addition to the registrations and
qualifications that may be required as to other securities of the Company that
are owned by the Executive or that may be issuable pursuant to securities or
options heretofore issued to him.

      9. Benefits. During the Employment Period, the Company shall provide or
cause to be provided to the Executive at least such employee benefits as are
provided to other officers of the Company. Without limiting the preceding
sentence, the benefits provided to the Executive shall include at least family
medical and dental, disability, and life insurance.

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      10. Vacation. The Executive shall be entitled to annual vacations in
accordance with the Company's vacation policies in effect from time to time for
executive officers of the Company.

      11. Termination.

            (a) Executive's employment by the Company shall be "at will." In
other words, either the Company or the Executive may terminate Executive's
employment by the Company at the end of any calendar month, with or without
Cause or Good Reason (as such terms are defined below), in its or his sole
discretion, upon thirty (30) days' prior written notice of termination. In
addition, the Executive's employment by the Company shall be terminated by his
death or disability. Termination of Executive's employment as provided for
herein shall terminate the Employment Period.

            (b) For purposes of this Agreement, in the case of a termination of
the Executive's employment hereunder by the Executive, the term "Good Reason"
shall have the meaning set forth for it below; in the case of a termination of
the Executive's employment hereunder by the Company, the term "Cause" shall have
the meaning set forth for it below; and the other terms set out below in this
Section 11 shall have the meanings provided for them respectively:

                  (i) "Good Reason" shall mean (i) any substantial diminution in
the Executive's authority or role; (ii) failure of the Company to pay to the
Executive any amounts of base salary and/or incentive cash compensation as
provided for in Sections 4 or 5 above, or to honor promptly any of its
obligations or commitments regarding stock options or other benefits referred to
in Sections 6, 9, and/or 10 above, or to honor promptly any of its other
material obligations hereunder; (iii) a demotion in the Executive's title or
status; or (iv) at any time prior to June 30, 2009, either (or both) of the
Executive and the nominee of the Executive described in Section 2(b) hereof (and
subject to change as provided there) is not elected as a director of the
Company, in the case of both such individuals, or as Chairman of the Board, in
the case of the Executive (unless due to death or resignation of such individual
or, in the case of the nominee only, lost election as a result of the vote
against such nominee of non-affiliates of the Company if such vote represents
the majority of votes cast).

                  (ii) "Cause" shall mean (i) the Executive's willful and
repeated failure to perform his duties hereunder or to comply with any
reasonable and proper direction given by the Board if such failure of
performance or compliance is not cured within thirty (30) days following receipt
by the Executive of written notice from the Company containing a description of
such failures and non-compliance and a demand for immediate cure thereof; (ii)
the Executive being found guilty in a criminal court of an offense involving
moral turpitude; (iii) the Executive's commission of any material act of fraud
or theft against the Company; or (iv) the Executive's material violation of any
of the material terms, covenants, representations or warranties contained in
this Agreement if such violation is not cured within thirty (30) days following
receipt by the Executive of written notice from the Company containing a
description of the violation and a demand for immediate cure thereof.

            (c) "Disability" shall mean total and permanent disability as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.

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            (d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date that such Disability is established; (iii)
if this Agreement is terminated by the Company or by the Executive prior to
December 31, 2009, the effective date of the termination as provided in Section
11(a) hereof; or (iv) if this Agreement expires by its terms, December 31, 2009.

      12. Severance.

            (a) Subject to Section 21 hereof, if (i) the Company terminates the
employment of the Executive prior to December 31, 2009 against his will and
without Cause, or (ii) the Executive terminates his employment prior to December
31, 2009 for Good Reason, then (A) Executive shall be entitled to receive base
salary, incentive cash compensation (determined on a pro-rated basis as provided
in Section 5(d) hereof as to the year in which the Termination Date occurs), pay
for accrued but unused vacation time, and reimbursement for expenses pursuant to
Section 13 hereof through the Termination Date plus the balance of the
Executive's specified base salary hereunder to December 31, 2009, and (B)
notwithstanding the vesting and exercisability provisions otherwise applicable
to the New Options and the restrictions applicable to the Restricted Shares, all
of such options shall be fully vested and exercisable upon such termination and
shall remain exercisable for the remainder of their terms and all of the
Restricted Shares shall thereon become immediately and fully vested. Except to
the extent that more time is required to determine any of the incentive
compensation amounts, the Company shall pay the cash amounts provided for in
this paragraph within thirty (30) days after the six (6) month anniversary of
the date of such termination (but no later than the end of the calendar year in
which such six (6) month anniversary occurs). Notwithstanding the foregoing, the
Company shall not be required to pay any severance pay for any period following
the Termination Date if the Executive shall have materially violated the
provisions of Section 18, 19, or 20 of this Agreement and such violation is not
cured within thirty (30) days following receipt of written notice from the
Company containing a description of the violation and a demand for immediate
cure.

            (b) Subject to Section 21 hereof, if (A) the Executive voluntarily
terminates his employment prior to December 31, 2009 other than for Good Reason
or (B) the Executive's employment is terminated by the Company prior to December
31, 2009 for Cause, then the Executive shall be entitled to receive salary, pay
for accrued but unused vacation time, and reimbursement of expenses pursuant to
Section 13 hereof through the Termination Date only; vesting of the New Options
and the Restricted Shares shall cease on such Termination Date; any then
un-vested New Options shall terminate (with the then-vested New Options and
options issued pursuant to prior agreements remaining vested and exerciseable
for the remainder of their terms); and this occurrence shall be a triggering
event for purposes of the Forfeiture/Repurchase Right as provided in Section
7(b)(i), above. The Company shall pay the cash amounts provided for in this
paragraph within thirty (30) days after the six (6) month anniversary of the
date of such termination (but no later than the end of the calendar year in
which such six (6) month anniversary occurs); provided, however, that pay for
accrued but unused vacation time shall be paid as soon as practicable following
such termination, and that to the extent that Section 409A of the Internal
Revenue Code of 1986 and any guidance or regulations issued thereunder, as
amended, do not require the effectuation of the six (6) month delay described
above with respect to any other cash amounts provided for in this paragraph, the
Company shall pay such cash

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amounts within thirty (30) days after the date of such termination (but no later
than the end of the calendar year in which such termination occurs).

            (c) Subject to Section 21 hereof, if the Executive's employment is
terminated prior to December 31, 2009 due to death or Disability, the Executive
(or his estate or legal representative as the case may be) shall be entitled to
receive (i) salary, reimbursement of expenses pursuant to Section 13 hereof, and
pay for any unused vacation time accrued through the Termination Date; (ii) a
pro-rated amount of incentive cash compensation for the fiscal year in which the
Termination Date occurs (determined as provided in Section 5(d) hereof); and
(iii) a lump sum equal to base salary at the rate in effect on the date of such
termination for the lesser of (a) twelve (12) months and (b) the remaining term
of this Agreement at the time of such termination. In such case, vesting of the
New Options and Restricted Shares shall cease on such Termination Date, and any
then un-vested New Options shall terminate (with the then-vested New Options and
options issued pursuant to prior agreements remaining vested and exerciseable
for the remainder of their terms); and this occurrence shall be a triggering
event for purposes of the Forfeiture/Repurchase Right as provided in Section
7(b)(i), above. Except to the extent that more time is required to determine any
of the incentive compensation amounts, the Company shall pay the cash amounts
provided for in this paragraph on the thirtieth (30th) day following the
Executive's death, or if termination is due to Disability, within thirty (30)
days after the six (6) month anniversary of the date of such termination (but no
later than the end of the calendar year in which such six (6) month anniversary
occurs); provided, however, that to the extent that Section 409A of the Internal
Revenue Code of 1986 and any guidance or regulations issued thereunder, as
amended, do not require the effectuation of the six (6) month delay described
above with respect to any cash amounts provided for in this paragraph upon
termination due to Disability, the Company shall pay such cash amounts within
thirty (30) days after the date of such termination (but no later than the end
of the calendar year in which such termination occurs).

            (d) In addition to the provisions of Section 12(a), 12(b), or 12(c),
hereof, as the case may be, to the extent COBRA shall be applicable or as
provided by law, the Executive shall be entitled to continuation of group health
plan benefits for the periods provided by law following the Termination Date if
the Executive makes the appropriate election and payments.

            (e) Subject to Section 21 hereof, the Executive acknowledges that,
upon termination of his employment, he is entitled to no other compensation,
severance or other benefits other than those specifically set forth in this
Agreement.

      13. Expenses. The Company shall pay or reimburse the Executive for all
expenses that are reasonably incurred by him in furtherance of his duties
hereunder and such further expenses as may be authorized and approved by the
Company from time to time.

      14. Facilities and Services. The Company shall furnish the Executive with
office space, secretarial and support staff, and such other facilities and
services as shall be reasonably necessary for the performance of his duties
under this Agreement.

      15. Mitigation not Required. In the event this Agreement is terminated,
the Executive shall not be required to mitigate his losses or the amounts
otherwise payable hereunder by seeking other employment or otherwise. The
Executive's acceptance of any other employment shall not diminish or impair the
amounts otherwise payable to the Executive hereunder.

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      16. Place of Performance. The Executive shall perform his duties at such
locations as the Executive may reasonably choose, provided that the Executive
shall make reasonable efforts to accommodate the Company's needs and
considerations of efficiency in this regard.

      17. Insurance and Indemnity. With respect to his service hereunder, the
Company shall maintain, at its expense, customary directors' and officers'
liability and errors and omissions insurance covering the Executive and, if such
coverage is available at reasonable cost, for all other executive officers and
directors of the Company, in an amount both deemed appropriate by the Executive
and available in the marketplace. To the extent such defense and indemnification
are not fully and irrevocably provided by Company-supplied insurance, the
Company shall defend and indemnify the Executive, to the fullest extent
permitted by law, from and against any liability asserted against or incurred by
the Executive (a) by reason of the fact that the Executive is or was an officer,
director, employee, or consultant of the Company or any affiliate or related
party or is or was serving in any capacity at the request of the Company for any
other corporation, partnership, joint venture, trust, employment benefit plan or
other entity or enterprise or (b) in connection with any action(s), omission(s),
or occurrence(s) during the course of such service or such status as an officer,
director, employee, or consultant of or to any of the foregoing. The Company's
obligations under this Section 17 shall survive the termination of the
Executive's employment hereunder and any termination of this Agreement.

      18. Non-Competition.

            (a) The Executive agrees that, except in accordance with his duties
under this Agreement on behalf of the Company, he will not during the Employment
Period: participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have an interest, directly or
indirectly in, any enterprise which is engaged in the business of developing,
licensing, or selling technology, products or services which are directly
competitive with the Business of the Company or any of its Subsidiaries or with
any technology, products or services being actively developed, with the bona
fide intent to market same, by the Company or any of its Subsidiaries at the
time in question.

            (b) In addition, the Executive agrees that, for a period of six
months after the end of Executive's employment by the Company (unless such
employment is terminated due to a breach of the terms hereof by the Company in
failing to pay to the Executive all sums due him under the terms hereof or to
honor any of its other obligations under this Agreement, in which event the
following shall be inapplicable), the Executive shall not (1) own, either
directly or indirectly or through or in conjunction with one or more members of
his or his spouse's family or through any trust or other contractual
arrangement, a greater than five percent (5%) interest in, or otherwise control
either directly or indirectly, or (2) participate in, be employed in any
capacity by, or serve as director, consultant, agent or representative for, any
partnership, corporation, or other entity which is engaged in the business of
developing, licensing, or selling technology, products or services which are
directly competitive with the Business of the Company or any of its Subsidiaries
as of the termination of the Executive's employment with the Company or which
are directly competitive with any technology, products, or services being
actively developed by the Company or any of its Subsidiaries, with the bona fide
intent to market same, as of the termination of the Executive's employment at
the Company.

                                       10
<PAGE>

            (c) Executive further agrees, for twelve months following the end of
Executive's employment by the Company (unless such employment is terminated due
to a breach of the terms hereof by the Company as described above), to refrain
from directly or indirectly soliciting Company's collaborative partners,
consultants, certified research organizations, principal vendors, licensees or
employees except any such solicitation in connection with activities that would
not be directly competitive with and adverse to the Business of the Company or
any of its Subsidiaries or with and to any products or services being offered by
the Company or any of its Subsidiaries at the date such employment terminated or
then being actively developed, with the bona fide intent to market same, by the
Company or any of its Subsidiaries.

            (d) The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 18 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 18 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

      19. Assignment of Patents. Executive shall disclose fully to the Company
any and all discoveries he shall make and any and all ideas, concepts or
inventions he shall conceive or make that are related or applicable to the
Business of he Company or of any of its Subsidiaries or to any other products,
services, or technology in medicine or the health sciences in which the Company
shall during the Employment Period undertake, or actively and in good faith
consider, research or commercial involvement provided that either (a) such
discovery(ies), idea(s), concept(s) and/or invention(s) are made by Employee
during the Employment Period or (b) such discovery(ies), idea(s), concept(s)
and/or invention(s) are made by Employee during the period of six months after
his employment terminates and are in whole or in part the result of his work
with the Company. Such disclosure is to be made promptly after each such
discovery or conception, and each such discovery, idea, concept or invention
will become and remain the property of the Company, whether or not patent
applications are filed thereon. Upon the request and at the expense of the
Company, the Executive shall (i) make application through the patent solicitors
of the Company for letters patent of the United States and any and all other
countries at the discretion of the Company on such discoveries, ideas and
inventions, and (ii) assign all such applications to the Company, or at its
order, without additional payment by the Company except as provided below. The
Executive shall give the Company, its attorneys and solicitors, reasonable
assistance in preparing and prosecuting such applications and, on request of the
Company, execute such papers and do such things as shall be reasonably necessary
to protect the rights of the Company and vest in it or its assigns the
discoveries, ideas or inventions, applications and letters patent herein
contemplated. Said cooperation shall also include such actions as are reasonably
necessary to aid the Company in the defense of its rights in the event of
litigation. To the extent that the Executive's actions referred to in this
paragraph are performed after the end of the Executive's employment by the
Company, the Company shall promptly compensate the Executive for his time spent
in or because of such activities at the rate of Five Hundred Dollars ($500.00)
per hour; and such activities shall be scheduled in a manner reasonably
convenient to the Executive.

                                       11
<PAGE>

      20. Trade Secrets.

            (a) In the course of the term of this Agreement, it is anticipated
that the Executive shall have access to secret or confidential technical,
scientific and commercial information, records, data, formulations,
specifications, systems, methods, plans, policies, inventions, material and
other knowledge that is (are) specifically related or applicable to the Business
of the Company or of any of its Subsidiaries or to any other products, services,
or technology in medicine or the health sciences in which the Company shall
during the Employment Period undertake, or actively and in good faith consider,
research or commercial involvement and that is/are owned by the Company or its
Subsidiaries ("Confidential Material"). The Executive recognizes and
acknowledges that included within the Confidential Material are the following as
they may specifically relate or be applicable to the Company's drug delivery
business or technology, or to current or specifically contemplated future drug
delivery products or services: the Company's confidential commercial
information, technology, formulations, STA-T (Systemic Transnasal Absorption
Technology) and know-how, methods of manufacture, chemical formulations, device
designs, pending patent applications, clinical data, pre-clinical data and any
related materials, all as they may exist from time to time, and that such
material is or may be valuable special, and unique aspects of the Company's
business. All such Confidential Material shall be and remain the property of the
Company. Except as required by his duties to the Company, the Executive shall
not, directly or indirectly, either during the term of his employment or at any
time thereafter, disclose or disseminate to anyone or make use of, for any
purpose whatsoever, any Confidential Material. Upon termination of his
employment, the Executive shall promptly deliver to the Company all Confidential
Material (including all copies thereof, whether prepared by the Executive or
others) which are in the possession or under the control of the Executive. The
Executive shall not be deemed to have breached this Section 20 if the Executive
is compelled by legal process or order of any judicial, legislative, or
administrative authority or body to disclose any Confidential Material.

            (b) The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 20 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 20 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

      21. Payment and Other Provisions After Change of Control.

            (a) In the event the Executive's employment with the Company is
terminated either by the Company or by the Executive (other than because of the
Executive's death or Disability) following the occurrence of a Change of Control
(regardless of whether such termination is for Good Reason or for Cause or
otherwise) and the date of such termination is (i) prior to January 1, 2010 and
within one year following the occurrence of such Change of Control or (ii) prior
to the date upon which all of the New Options are fully vested and exerciseable
and all the Restricted Shares are fully vested, then the Executive shall be
entitled to receive from the Company, in lieu of the severance payment otherwise
payable pursuant to Section 12 hereof, salary, expense reimbursement, and pay
for unused vacation time through the termination date and, in addition, the
following:

                                       12
<PAGE>

            (i) Additional Amount Based on Base Salary. A lump-sum amount equal
to the greater of: (a) twelve (12) months of Executive's specified base salary
hereunder, and (b) the balance of Executive's specified base salary hereunder to
the end of the term of this Agreement;

            (ii) Incentive Cash Compensation. The amount of the Executive's
incentive cash compensation for the fiscal year in which the date of termination
occurs (determined on a pro-rated basis as provided in Section 5(d) hereof) plus
an additional lump-sum amount equal to the Annual Bonus Expectancy Amount
(regardless of satisfaction of any performance criteria or progress toward such
satisfaction); and

            (iii) Other Benefits. Notwithstanding the vesting and/or
exerciseability provisions otherwise applicable to the New Options and/or to any
unvested stock options issued pursuant to any prior agreement(s) between the
Executive and the Company and the vesting and restriction provisions applicable
to the Restricted Shares, all such stock options shall be fully vested and
exercisable, and all such Restricted Shares shall be fully vested, upon a Change
of Control and, in the case of the options, shall remain exercisable for the
remainder(s) of their term(s).

Except to the extent that more time is required to determine the incentive cash
compensation payable pursuant to Section 21(a)(ii) hereof, the Company shall pay
the cash amounts provided for in this Section 21(a) within thirty (30) days
after the six (6) month anniversary of the date of such termination (but no
later than the end of the calendar year in which such six (6) month anniversary
occurs).

            (b) For purposes of this Agreement, the term "Change of Control"
shall mean:

                  (i) The acquisition by any individual, entity or group (within
the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or any successor provision) (any of the
foregoing hereafter a "Person") of 40% or more of either (a) the then
outstanding shares of Capital Stock of the Company (the "Outstanding Capital
Stock") or (b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Voting Securities"), provided, however, that such an acquisition
by one of the following shall not constitute a change of control: (1) the
Company or any of its Subsidiaries, or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any of its Subsidiaries or (2)
any Person that is eligible, pursuant to Rule 13d-1(b) under the Exchange Act,
to file a statement on Schedule 13G with respect to its beneficial ownership of
Voting Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule 13D
with respect to beneficial ownership of 40% or more of the Voting Securities or
(3) any corporation with respect to which, following such acquisition, more than
60% of both the then outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock or Voting Securities immediately prior to such
acquisition in substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock or
Voting Securities, as the case may be; or

                                       13
<PAGE>

                  (ii) Individuals who, as of the Approval Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the Approval Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of Regulation
14A, or any successor section, promulgated under the Exchange Act); or

                  (iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in each
case, with respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially own,
directly of indirectly, in substantially the same proportions, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from the Business Combination; or

                  (iv) A complete liquidation or dissolution of the Company; or

                  (v) A sale or other disposition of all or substantially all of
the assets of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 60% of the then outstanding shares
of common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors are then
owned beneficially, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock or Voting Securities Immediately prior to such sale or
disposition in substantially the same proportions as their ownership of the
Outstanding Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.

            (c) In the event that (i) the Executive becomes entitled to any
payments or benefits in connection with a change in the ownership or effective
control of the Company, or in the ownership of a substantial portion of the
assets of the Company (as defined in Section 409A of the Internal Revenue Code
of 1986 and the regulations promulgated thereunder, as amended, or a
substantially similar successor provision) (a "409A Change in Control") or the
termination of the Executive's employment, whether pursuant to the terms of this
Agreement or otherwise (collectively, the "Total Benefits"), and (ii) any of the
Total Benefits will be subject to the excise tax imposed under Section 4999 of
the Internal Revenue Code of 1986, as amended, or a substantially similar
successor provision (the "Excise Tax"), the Company shall pay to the Executive
an additional amount (the "Gross-Up Payment") such that the net amount retained
by the Executive from the Gross-Up Payment, after the payment of all taxes on
the Gross-Up Payment (including but not limited to income, excise and employment
taxes and any interest and penalties imposed with respect to all such taxes), is
equal to the Excise Tax on the Total Benefits. For purposes of this Section
21(c), the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Excise Tax is (or would be) payable and state and local income taxes at the
highest marginal

                                       14
<PAGE>

rate of taxation in the state and locality of the Executive's residence (or of
such jurisdiction(s) as may apply income taxation to the Executive's income) at
the time the Gross-Up Payment is made. Any Gross-Up Payment made pursuant to
this paragraph solely on account of a 409A Change in Control shall be made on
the thirtieth (30th) day following the date of such 409A Change in Control, and
any Gross-Up Payment made pursuant to this paragraph due to the termination of
the Executive's employment shall be made within thirty (30) days after the six
(6) month anniversary of the date of such termination (but no later than the end
of the calendar year in which such six (6) month anniversary occurs). The
Executive hereby acknowledges that there are no payments which are to be made to
the Executive pursuant to this Agreement upon a Change of Control (other than
any Gross-Up Payment payable pursuant to this Section 21) unless the Executive's
employment with the Company is terminated as described in Section 21(a) hereof.

            (d) All determinations required to be made under Section 21(c) shall
be made by tax counsel selected by the Executive and reasonably acceptable to
the Company ("Tax Counsel"), which determinations shall be conclusive and
binding on the Company and on the Executive absent manifest error. Prior to any
determination of the amount of any Gross-Up Payment payable pursuant to Section
21(c), Tax Counsel shall provide the Executive and the Company with a report
setting forth its calculations and containing related supporting information.
All fees and expenses of Tax Counsel shall be borne solely by the Company. In
the event that, after a Gross-Up Payment is made pursuant to Section 21(c), it
is determined that the Excise Tax on the Total Benefits and/or the taxes on the
Gross-Up Payment exceeds the amount theretofore taken into account hereunder,
the Company shall, on the thirtieth (30th) day following the date of such
determination, make an additional Gross-Up Payment (which shall be calculated by
Tax Counsel as set forth herein) to the Executive in respect of such excess
(plus any associated interest, penalties or additions payable by the Executive
to the Internal Revenue Service or any other federal, state, local or foreign
taxing authority).

      22. Payment of Certain Costs of the Executive. Promptly from time to time
the Company shall pay directly (or promptly reimburse the Executive to the
extent that the Executive shall have paid) all actual legal, accounting, and
other fees and expenses that are or shall have been:

            (a) Incurred by the Executive in connection with his employment
arrangements with the Company, including in the preparation, revision, and/or
negotiation of this Agreement and/or

            (b) Incurred by the Executive as a result of a bona fide dispute
regarding the application of any provision of this Agreement, including all such
fees and expenses, if any, incurred in seeking to obtain or enforce any right or
benefit provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to the application of Section 280G of the
Tax Laws to any payment or benefit provided to the Executive.

Such payments shall be made within five (5) business days after delivery to the
Company of the Executive's respective written requests for payment accompanied
by evidence of fees and expenses incurred by the Executive.

      23. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and personally delivered (including
by regular messenger service,

                                       15
<PAGE>

signature required) or sent by registered or certified mail, return receipt
requested, to both his office and his residence, in the case of notices directed
to the Executive, or to its principal office, Attn: Chief Financial Officer, in
the case of notices directed to the Company, or to such other address and/or
addressee as the party to whom such notice is directed shall have designated for
this purpose by notice to the other in accordance with this paragraph. Such
notices shall be effective upon personal delivery or three days after mailing.

      24. Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof (it being
acknowledged, however, that other agreements between the Executive and the
Company remain effective as to closely related matters). This Agreement may not
be changed orally but only by an instrument in writing, signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought. Waiver of or failure to exercise any rights provided by this Agreement
in any respect shall not be deemed a waiver of any further or future rights.

      25. Binding Effect; Assignment. The rights and obligations of this
Agreement shall bind and inure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any transferee of all or
substantially all of the Company's business or properties. The Executive's
rights hereunder are personal to and shall not be transferable nor assignable by
the Executive.

      26. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.

      27. Governing Law; Arbitration. This agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of
Washington applicable to contracts made and to be performed wholly within such
state. Any dispute or controversy arising out of or relating to this Agreement
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association, and judgement upon the award may be entered in any
court having jurisdiction thereover. The arbitration shall be held in King
County, Washington or in such other place as the parties hereto may agree.

      28. Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, and cause to be executed, acknowledged,
delivered and performed, at any time and from time to time, all such further
acts, deeds, assignments, transfers, conveyances, powers of attorney and/or
assurances as may be necessary or proper to carry out the provisions or intent
of this Agreement.

      29. Severability. The parties agree that if any one or more of the terms,
provisions, covenants or restrictions of this Agreement shall be determined by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.

      30. Counterparts. This Agreement may be executed in several counterparts,
and all counterparts so executed shall constitute one agreement, binding on the
parties hereto, notwithstanding that both parties are not signatory to the
original or the same counterpart.

                                       16
<PAGE>

      IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused this
instrument to be signed by a duly authorized officer and the Executive has
hereunto set his hand as of the day and year first above written.

      COMPANY:               NASTECH PHARMACEUTICAL COMPANY INC.

                             By: /s/ PHILIP C. RANKER
                                 -----------------------------
                                 Name: Philip C. Ranker
                                 Title: Vice President of Finance and
                                        Acting Chief Financial Officer

      EXECUTIVE:                 /s/ STEVEN C. QUAY
                                 -------------------------------
                                 Steven C. Quay, M.D., Ph.D.

                                       17