10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2005

Commission File Number 000-13789

NASTECH PHARMACEUTICAL COMPANY INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 11-2658569
(I.R.S. Employer Identification No.)

3450 Monte Villa Parkway, Bothell, WA
(Address of principal executive offices) 98021
(Zip Code)

Registrant’s telephone number, including area code: (425) 908-3600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Date	Class	Shares Outstanding
April 30, 2005	Common stock - $0.006 par value		17,970,874

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005		3
Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2004 and March 31, 2005		4
Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the three months ended March 31, 2005		5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and March 31, 2005		6
Notes to Condensed Consolidated Financial Statements		7
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22
ITEM 4 – CONTROLS AND PROCEDURES		22
PART II – OTHER INFORMATION
ITEM 6 – EXHIBITS		23
SIGNATURES		24
EXHIBIT INDEX		25
EXHIBIT 10.30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Items 1, 2, 3, 4 and 5 of PART II have not been included as they are not applicable.

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share and Per Share Data)

	December 31,			March 31,
	2004			2005
ASSETS
Current assets:
Cash and cash equivalents	$	25,797		$	18,521
Restricted cash		9,000			999
Short term investments		39,677			37,583
Accounts receivable, net		—			825
Inventories		57			155
Prepaid expenses and other current assets		674			766
Total current assets		75,205			58,849
Long term investments		—			1,502
Property and equipment, net		5,160			6,113
Security deposits and other assets		410			427
Total assets	$	80,775		$	66,891
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,652		$	2,735
Accrued expenses and other liabilities		2,533			1,796
Notes payable		8,352			—
Deferred revenue - current portion		2,774			2,722
Capital lease obligations - current portion		1,532			1,685
Total current liabilities		16,843			8,938
Deferred revenue, net of current portion		3,483			3,180
Capital lease obligation, net of current portion		1,719			1,726
Other liabilities		582			626
Total liabilities		22,627			14,470
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value; 100,000 authorized: no shares issued and outstanding:		—			—
Common stock, $0.006 par value; 25,000,000 authorized: 17,895,976 and 17,931,164 shares outstanding at December 31, 2004 and March 31, 2005, respectively		107			108
Additional paid-in capital		142,853			143,247
Deferred compensation		(1,358	)		(1,357	)
Accumulated deficit		(83,453	)		(89,540	)
Accumulated other comprehensive loss		(1	)		(37	)
Total stockholders’ equity		58,148			52,421
Total liabilities and stockholders’ equity	$	80,775		$	66,891

See accompanying notes to consolidated financial statements.

3

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)

	Three months ended
	March 31,
	2004			2005
Revenue:
Product revenue, net	$	95		$	—
License and research fees		53			3,330
Total revenue		148			3,330
Operating expenses:
Cost of product revenue		64			—
Research and development		5,850			7,231
Sales and marketing		153			324
General and administrative		1,684			2,161
Total operating expenses		7,751			9,716
Loss from operations		(7,603	)		(6,386	)
Interest income		56			409
Interest and other expense		(97	)		(110	)
Net loss	$	(7,644	)	$	(6,087	)
Net loss per common share - basic and diluted	$	(0.64	)	$	(0.34	)
Shares used in computing net loss per share – basic and diluted:		11,893			17,751

See accompanying notes to consolidated financial statements.

4

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2005
(Unaudited)
(In Thousands, Except Share Data)

	Common Stock
													Accumulated
					Additional								Other			Total
					Paid-in		Deferred			Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Capital		Compensation			Deficit			Loss			Equity
Balance December 31, 2004		17,895,976	$	107	$	142,853	$	(1,358	)	$	(83,453	)	$	(1	)	$	58,148
Proceeds from the exercise of options		667		—		6		—			—			—			6
Compensation related to restricted stock		34,521		1		380		(117	)		—			—			264
Compensation related to stock options		—		—		8		118			—			—			126
Net loss		—		—		—		—			(6,087	)		—			(6,087	)
Unrealized loss on available-for-sale securities		—		—		—		—			—			(36	)		(36	)
Comprehensive loss		—		—		—		—			(6,087	)		(36	)		(6,123	)
Balance March 31, 2005		17,931,164	$	108	$	143,247	$	(1,357	)	$	(89,540	)	$	(37	)	$	52,421

See accompanying notes to consolidated financial statements.

5

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

	Three Months Ended
	March 31,
	2004			2005
Operating activities:
Net loss	$	(7,644	)	$	(6,087	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation related to stock options		126			126
Non-cash compensation related to restricted stock		—			264
Depreciation and amortization of property and equipment		280			396
Gain on sale of property and equipment		—			2
Changes in assets and liabilities:
Accounts and other receivables		(30	)		(825	)
Inventories		105			(98	)
Prepaid expenses and other assets		(243	)		(109	)
Accounts payable		(540	)		1,083
Deferred revenue		—			(355	)
Accrued expenses and other liabilities		(59	)		(693	)
Net cash used in operating activities		(8,005	)		(6,296	)
Investing activities:
Property and equipment acquisitions, net		(603	)		(1,351	)
Purchases of investments		(2,742	)		(5,074	)
Maturities of investments		3,000			5,630
Net cash used in investing activities		(345	)		(795	)
Financing activities:
Proceeds from notes payable		2,227			—
Restricted cash released		—			8,001
Payments on notes payable		(146	)		(8,352	)
Borrowings under capital lease obligations		333			506
Payments on capital lease obligations		(199	)		(346	)
Exercise of stock options		528			6
Net cash provided by (used in) financing activities		2,743			(185	)
Net decrease in cash and cash equivalents		(5,607	)		(7,276	)
Cash and cash equivalents – beginning of period		16,792			25,797
Cash and cash equivalents – end of period	$	11,185		$	18,521
Non-cash investing activity:
Change in unrealized loss on available-for-sale securities		—		$	(36	)
Supplemental disclosures of investing and financing activities:
Cash paid for interest	$	97		$	120

See accompanying notes to consolidated financial statements.

6

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Business and Summary of Significant Accounting Policies

Business

     Nastech Pharmaceutical Company Inc., (“Nastech” or the “Company”) is a pharmaceutical company focusing on development and commercialization of innovative products based on proprietary molecular biology-based intranasal drug delivery technology for delivering both small and large molecule drugs. Using this technology, the Company creates or utilizes novel formulation components or excipients that can transiently manipulate or open “tight junctions” between cells in various tissues and thereby allow therapeutic drugs to reach the blood stream. Tight junctions are cell-to-cell connections in various tissues of the body, including epithelial and endothelial layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of molecules across these natural boundaries. This technology is the foundation of the Company’s intranasal drug delivery platform, although some of the Company’s product candidates utilize this expertise outside this area. Generally, the Company seeks to apply its technology to compounds that the Company licenses to, or acquires from, collaborators or other third parties.

     The Company believes its intranasal drug delivery technology offers advantages over injectable routes for the administration of large molecules such as peptides and proteins. These advantages may include improved safety and clinical efficacy and increased patient compliance due to the elimination of injection site pain and avoidance of injection site irritation. In addition, the Company believes its intranasal drug delivery technology offers advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects and improved effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. The Company is utilizing its technologies to develop commercial products, initially with collaboration partners. In select cases, the Company also plans to internally develop, manufacture and commercialize its products.

     The Company and its collaborative partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis, breakthrough cancer pain, multiple sclerosis and erectile dysfunction. The Company’s lead product candidate, Peptide YY_3-36 (“PYY”) for obesity, is in Phase I clinical trials and is being developed with its collaboration partner, Merck & Co. Inc. (“Merck”). Additionally, the Company is developing two product candidates for the treatment of osteoporosis. Parathyroid Hormone (“PTH_(1-34)”) is in Phase I clinical trials, and the Company has filed an abbreviated new drug application (“ANDA”) for its generic calcitonin-salmon intranasal spray which the Company is developing with its collaboration partner Par Pharmaceutical, Inc. (“Par Pharmaceutical”). As of March 31, 2005, the Company has 42 patents issued and 169 patent applications filed to protect its proprietary technologies.

     As of March 31, 2005, the Company has an accumulated deficit of approximately $89.6 million and expects additional operating losses in the foreseeable future as it continues its research and development activities. The Company has funded its operating losses primarily through the sale of common stock in the public markets and private placements and also through revenues provided by its collaborative partners. The Company currently has two effective shelf registration statements with a total of approximately $33 million remaining available pursuant to which the Company may issue and sell common stock, warrants and debt securities, subject to market conditions and the Company’s capital needs. At March 31, 2005, the Company has cash, cash equivalents and investments of approximately $58.6 million, including $1.0 million in restricted cash.

     The Company faces certain risks and uncertainties regarding its ability to generate positive operating cash flow and profits. These risks include, but are not limited to, its ability to obtain additional capital, protect its patents and property rights, overcome uncertainties regarding its technologies, competition and technological change, obtain government approval for products and attract and retain key officers and employees. For a more thorough discussion of risks and uncertainties facing the Company, investors should also read and carefully consider the risk factors beginning on page 19 of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

7

Basis of Preparation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited financial statements, including the notes thereto, as of and for the year ended December 31, 2004, included in the Company’s 2004 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the “SEC”). The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended March 31, 2005 are not necessarily indicative of the results for the year ending December 31, 2005 or for any future period.

Reclassifications

     Certain reclassifications have been made to the 2004 information to conform to the current period presentation.

Recent Accounting Pronouncements

     In December 2004, the FASB released its revised standard, SFAS No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability based service awards based on its current fair value and the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. In April 2005 the SEC released Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R. In April 2005 the SEC amended its previously adopted rule to modify compliance dates for SFAS 123R, requiring adoption for fiscal years beginning after June 15, 2005. The Company is evaluating SFAS 123R and believes it will likely result in recognition of additional non-cash stock-based compensation expense and, accordingly, would increase net loss in amounts which likely will be considered material.

Principles of Consolidation

     The consolidated financial statements include the financial statements of Nastech Pharmaceutical Company Inc. and its wholly-owned subsidiary, Atossa HealthCare Inc. (collectively, “the Company”). All inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition

     Most of the Company’s revenues are generated from research and licensing arrangements. These research and licensing arrangements may include upfront non-refundable payments, development milestone payments, revenue from product manufacturing, payments for research and development services performed and product sales royalties or revenue. The Company’s revenue recognition policies are based on the requirements of Staff Accounting

8

Bulletin No. 104 “Revenue Recognition,” and, for contracts with multiple deliverables, the Company determines the appropriateness of separate units of accounting and allocates arrangement consideration based on the fair value of the elements under guidance from Emerging Issues Task Force Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Under EITF 00-21, revenue arrangements with multiple deliverables are divided into separate units, if certain criteria are met, of accounting such as product development and contract manufacturing. Revenue is allocated to these units based upon relative fair values with revenue recognition criteria considered separately for each unit.

     Nonrefundable upfront technology license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as revenue over the development period or as the Company provides the services required under the agreement. The ability to estimate total development effort and costs can vary significantly for each product candidate due to the inherent complexities and uncertainties of drug development.

     Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the contract, such as initiation or completion of specified clinical development activities. The Company believes that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on the Company’s part. The Company recognizes such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, revenue is recognized in manner similar to that of an upfront technology license fee.

     The timing and amount of revenue that the Company recognizes from licenses of technology, either from upfront fees or milestones where the Company is providing continuing services related to product development, is dependent upon on the Company’s estimates of filing dates or development costs. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of the Company’s control. The impact on revenue of changes in the Company’s estimates and the timing thereof, is recognized prospectively, over the remaining estimated product development period.

     Royalty revenue is generally recognized at the time of product sale by the licensee.

     Revenue from research and development services performed is generally received for services performed under collaboration agreements, and is recognized at the time the services are performed. Payments received in excess of amounts earned are recorded as deferred revenue.

     Product sales revenue is recognized at the time the manufactured goods are shipped to the purchaser and title has transferred.

Income Taxes

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continues to record a valuation allowance in the full amount of deferred tax assets since realization of such tax benefits is not considered to be more likely than not.

Stock-based compensation

     The Company accounts for stock-based compensation using the intrinsic value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees.” The Company follows the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and recent pronouncements, which require the

9

disclosure of pro forma net income and earnings per share as if the fair value-based method was utilized in measuring compensation expense.

     The per share weighted average fair value of stock options granted during the three months ended March 31, 2004, and 2005 was $5.06, and $7.36, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three months ended
	March 31,
	2004			2005
Expected dividend yield		0	%		0	%
Risk free interest rate		3.0	%		3.9	%
Expected stock volatility		0.82			0.79
Expected option life	5 years			6 years

     Had compensation cost been determined based on the fair value at the grant date for stock options under SFAS No. 123, net loss would have been reported as the pro forma amounts indicated below:

	Three months ended
	March 31,
	2004			2005
	(in thousands, except per share data)
Net loss as reported	$	(7,644	)	$	(6,087	)
Add: Stock-based employee compensation included in the reported net loss		126			390
Deduct: Stock-based employee compensation, determined under fair value based methods		(1,183	)		(1,114	)
Pro forma net loss	$	(8,701	)	$	(6,811	)
Net Loss per share
Basic and diluted – as reported	$	(0.64	)	$	(0.34	)
Basic and diluted – pro forma	$	(0.73	)	$	(0.38	)

Net Loss per Common Share

     Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. Outstanding employee stock options, restricted stock and warrants totaled approximately 4.1 million and 4.4 million shares at March 31, 2004 and 2005, respectively. The effect of employee stock options, unvested restricted stock and warrants at March 31, 2004 and 2005 was not included in the net loss per share calculation for the interim periods then ended as the effect would have been anti-dilutive.

Note 2 – Significant Contractual Agreements

     Merck — In September 2004, the Company entered into an Exclusive Development, Commercialization and License Agreement and a separate Supply Agreement (collectively, the “Agreements”) with Merck, for the global development and commercialization of PYY Nasal Spray, the Company’s Phase I product for the treatment of obesity. The Agreements provide that Merck will assume primary responsibility for conducting and funding clinical and non-clinical studies and regulatory approval, while the Company will be responsible for all manufacturing of PYY-related product. Merck will lead and fund commercialization, subject to the Company’s exercise of an option to co-promote the product in the United States.

     Under the Agreements, the Company received an initial cash payment of $5 million in 2004. The $5 million initial payment is being amortized over the estimated development period, a portion of which is recorded as deferred revenue in the accompanying balance sheet. If certain development and approval milestones are achieved, the Company will be eligible to receive up to an additional $131 million from Merck. If certain sales-related milestones are achieved, the Company would be eligible to receive up to an additional $210 million from Merck subject to certain other conditions. In addition to the $5 million license fee, and the other items discussed above, Merck will

10

pay the Company for manufacturing-related development activities and will purchase all clinical supply and finished product upon commercialization from the Company. The Company will also receive royalties on product sales.

     Thiakis Limited — In September 2004, the Company announced it acquired exclusive worldwide rights to the Imperial College Innovations and Oregon Health & Science University PYY patent applications in the field of intranasal delivery of PYY and the use of glucagons-like peptide-1 (GLP-1) used in conjunction with PYY for the treatment of obesity, diabetes and other metabolic conditions. Under the agreement, Nastech made an equity investment in and paid an initial license fee to Thiakis, Ltd. (“Thiakis”). The equity investment and initial license fee were expensed as research and development expenses by the Company in 2004. Under the agreement, Thiakis is entitled to receive an annual fee, additional milestone fees, patent-based royalties, and additional equity investments based upon future progress of the intellectual property and product development processes.

     Par Pharmaceutical — In October 2004, the Company entered into a license and supply agreement with Par Pharmaceutical for the exclusive U.S. distribution and marketing rights to its generic calcitonin-salmon nasal spray. Under the terms of the agreement with Par Pharmaceutical, the Company will manufacture and supply finished generic calcitonin-salmon nasal spray product to Par Pharmaceutical, while Par Pharmaceutical will distribute the product in the US. The financial terms of the agreement include milestone payments, product transfer payments for manufactured product and a profit sharing following commercialization. The Company filed its ANDA with the FDA in December 2003, which was accepted in February 2004.

     Questcor Pharmaceuticals, Inc. — In June 2003, the Company completed the sale of certain assets relating to its Nascobal® brand products, including the Nascobal® (Cyanocobalamin USP) nasal gel, to Questcor Pharmaceuticals, Inc. (“Questcor”). The Company filed a New Drug Application (“NDA”) of a nasal spray product configuration of Nascobal® in 2003 and will continue to prosecute the pending U.S. patents for the Nascobal® nasal spray product on behalf of Questcor. The Company recognized a gain of approximately $4.2 million on the sale of the assets in 2003. The gain was calculated as $14 million in non-contingent proceeds, less the net book value of the assets of $8.1 million, less costs and fees.

     Under the terms of the Asset Purchase Agreement, between the Company and Questcor, Questcor paid the Company $9 million at closing, $3 million in September 2003 and approximately $2.2 million in December 2003. Questcor has also agreed to make payments of: (i) $2 million contingent upon FDA approval of a New Drug Application for the Nascobal® nasal spray product; and (ii) $2 million contingent upon issuance of a U.S. patent for the Nascobal® nasal spray product. FDA approval for the Nascobal® nasal spray product was granted in January 2005, and the $2 million payment was received from Questcor in February 2005 and recognized as revenue in the three months ended March 31, 2005.

     In connection with the sale, Questcor and the Company entered into an agreement (the “Security Agreement”) pursuant to which Questcor granted the Company a collateral interest in all the assets related to the Nascobal® (Cyanocobalamin USP) nasal gel acquired by Questcor.

     Under the terms of a supply agreement between the parties, subject to certain limitations, the Company is obligated to manufacture and supply all of Questcor’s requirements and Questcor is obligated to purchase from the Company all of its requirements, for the Nascobal® nasal gel and, upon FDA approval, the Nascobal® nasal spray.

Note 3 – Notes Payable

     In 2003, the Company entered into a cash-secured Revolving Line of Credit with Wells Fargo Bank to allow for borrowings up to $9.0 million through December 31, 2004. In 2004, the Revolving Line of Credit was amended to incorporate a Letter of Credit Subfeature (the “Subfeature”). Under the Subfeature, approximately $648,000 of the facility was reserved for issuance of a standby letter of credit agreement to the Company’s landlord for its Bothell, Washington operations under the terms of its facility lease. In October 2004 the Company renewed and increased the Revolving Line of Credit (the “Credit Agreement”) to allow for borrowings up to $11.5 million through December 31, 2005, and the Subfeature was increased to $1.0 million. In February 2005, the Letter of Credit issued to the Company’s landlord was increased to approximately $998,000 under the terms of its facility lease.

11

     In February 2005, the Company paid off all outstanding Credit Agreement borrowings of $8,352,000 and the agreement was cancelled. As a result of the loan payoff, the Company’s restricted cash balance decreased by $8.0 million.

Note 4 – Stockholders’ Equity

     Common Stock Offerings — In June 2004, the Company completed the sale of 1,136,364 shares of its common stock, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to its $30 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $12.5 million to the Company prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At March 31, 2005, no warrants issued in connection with this private placement have been exercised.

     In December 2004, the Company completed the public offering of 4,250,000 shares of its common stock at a public offering price of $13.50 per share pursuant to its $80 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $57.4 million to the Company, prior to the deduction of fees and commissions of $4.5 million.

     SEC Shelf Registration Statements – The Company currently has two effective shelf registration statements on Form S-3. On December 18, 2003, the Company filed a shelf registration statement with the SEC, which was declared effective by the SEC on January 14, 2004, pursuant to which it may issue common stock or warrants, up to an aggregate of $30 million. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million. On September 30, 2004 the Company filed another shelf registration statement with the SEC, which was declared effective by the SEC on October 8, 2004, pursuant to which it may issue common stock, warrants or debt securities, up to an aggregate of $80 million. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $22.6 million. These shelf registration statements enable the Company to raise capital from the offering of securities covered by the shelf registration statements, as well as any combination thereof, from time to time and through one or more methods of distribution, subject to market conditions and cash needs.

     Equity Compensation Awards.

     Stock Option Plans. In June 2004, the Company established the 2004 Stock Incentive Plan (the “2004 Plan”) under which a total of 600,000 shares have been reserved for issuance. As of March 31, 2005, 180,141 shares of restricted common stock have been issued under the 2004 Plan which vest between one and three years.

     In 2002, the Company established the 2002 Stock Option Plan, pursuant to which options to purchase an aggregate of 1,367,334 shares of common stock were outstanding and 32,666 authorized shares were available for future issuance as of March 31, 2005.

     In 2000, the Company established the 2000 Nonqualified Stock Option Plan, pursuant to which options to purchase an aggregate of 644,200 shares of common stock were outstanding and 146,656 authorized shares were available for future issuance as of March 31, 2005.

     In 1990, the Company established the 1990 Stock Option Plan, pursuant to which options to purchase an aggregate of 260,500 shares of common stock were outstanding and no shares were available for future issuance as of March 31, 2005.

     In addition, in 2002 the Company approved and ratified the issuance of 561,719 stock options outside the plans to certain executive officers in connection with the commencement of their employment with the Company. The Company has filed separate registration statements on Form S-8 registering awards under each of the Company’s equity compensation plans and the 561,719 options awarded outside the plans. At March 31, 2005, options to purchase 471,719 shares remained outstanding related to these awards.

     Restricted Stock Awards. Pursuant to certain restricted stock awards granted pursuant to the Company’s 2004 Plan, the Company has issued shares of restricted common stock to certain employees and members of the board of

12

directors. Non-cash compensation expense is being recognized on a straight-line basis over the applicable vesting periods of one to three years of the restricted shares based on the fair value of such restricted common stock on the grant date. During the three-month period ended March 31, 2005, approximately 41,000 shares of restricted stock were granted and issued and approximately 7,000 unvested shares of restricted stock were forfeited. In connection with these restricted stock grants, the Company recorded approximately $450,000 as deferred compensation and approximately $260,000 as stock compensation expense during the three-month period ended March 31, 2005. No shares of restricted stock were issued during the three-month period ended March 31, 2004.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by us. These factors include, but are not limited to: (i) our ability to obtain additional funding; (ii) our ability to attract and/or maintain manufacturing, research, development and commercialization partners; (iii) our and/or a partner’s ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (iv) our and/or a partner’s ability to obtain required governmental approvals, including product and patent approvals; and (v) our and/or a partner’s ability to develop and commercialize products that can compete favorably with those of competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments, the recognition of revenue from milestone payments and other sources not related to product sales to third parties, and the timing of costs and expenses related to our research and development programs. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the Securities and Exchange Commission, including those factors discussed under the captions “Forward-Looking Information” and “Risk Factors” in our most recent Annual Report on Form 10-K/A, 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.

     We are a pharmaceutical company focusing on development and commercialization of innovative products based on proprietary molecular biology-based intranasal drug delivery technology for delivering both small and large molecule drugs. Using this technology, we create or utilize novel formulation components or excipients that can transiently manipulate or open “tight junctions” between cells in various tissues and thereby allow therapeutic drugs to reach the blood stream. Tight junctions are cell-to-cell connections in various tissues of the body, including epithelial and endothelial layers of the intranasal mucosa, the gastrointestinal tract, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of molecules across these natural boundaries. This technology is the foundation of our intranasal drug delivery platform, although some of our product candidates utilize our expertise outside this area. Generally, we seek to apply our technology to compounds that we license to, or acquire from, collaborators or other third parties.

     We believe our intranasal drug delivery technology offers advantages over injectable routes for the administration of large molecules such as peptides and proteins. These advantages may include improved safety and clinical efficacy and increased patient compliance due to the elimination of injection site pain and avoidance of injection site irritation. In addition, we believe our intranasal drug delivery technology offers advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects and improved effectiveness by avoiding problems relating to gastrointestinal and liver metabolism. We are utilizing our technologies to develop commercial products, initially with collaboration partners. In select cases, we also plan to internally develop, manufacture and commercialize our products.

     We and our collaborative partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis, breakthrough cancer pain, multiple sclerosis and erectile dysfunction. Our lead product candidate, PYY for obesity, is in Phase I clinical trials and is being developed with

13

our collaboration partner, Merck. Additionally, we are developing two product candidates for the treatment of osteoporosis. PTH_(1-34) is in Phase I clinical trials, and we have filed an ANDA for our generic calcitonin-salmon intranasal spray which we are developing with our collaboration partner Par Pharmaceutical. As of March 31, 2005, we have 42 patents issued and 169 patent applications filed to protect our proprietary technologies.

     As of March 31, 2005, we had an accumulated deficit of $89.6 million and expect additional operating losses in the foreseeable future as we continue our research and development activities. Our development efforts and the future revenues from sales of these products are expected to generate contract research revenues, milestone payments, license fees, royalties and manufactured product sales for us. As of March 31, 2005, we had approximately $58.6 million in cash, cash equivalents and investments including $1.0 million in restricted cash. We believe that our current cash position provides us with adequate working capital for at least the next 12 months or longer, depending upon the degree to which we exploit our various current opportunities that are in the pipeline and the success of our collaborative arrangements. In addition, we are planning to enter into various collaborations to accelerate our R&D programs, and to the extent these collaborations do not occur, we may be required to reduce our research and development activities or raise additional funds from new investors or in the public markets.

     In June 2004, we completed the sale of 1,136,364 shares of our common stock, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to our $30 million shelf registration statement that was declared effective by the SEC on January 14, 2004. The offering resulted in gross proceeds of approximately $12.5 million to us prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million.

     In December 2004, we completed the public offering of 4,250,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million shelf registration statement that was declared effective by the SEC on October 8, 2004. The offering resulted in gross proceeds of approximately $57.4 million to us, prior to the deduction of fees and commissions of $4.5 million. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $22.6 million.

Critical Accounting Policies and Estimates

     We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting estimates which are those that are most important to the portrayal of our financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We also have other policies that we consider key accounting policies; however, these policies do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments which are difficult or subjective.

Revenue Recognition

     Most of our revenues are generated from research and licensing arrangements. These research and licensing arrangements may include upfront non-refundable payments, development milestone payments, revenue from product manufacturing, payments for research and development services performed and product sales royalties or revenue. Our revenue recognition policies are based on the requirements of SEC Staff Accounting Bulletin No. 104 “Revenue Recognition,” and, for contracts with multiple deliverables, we allocate arrangement consideration based on the fair value of the elements under guidance from Emerging Issues Task Force Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Under EITF 00-21, revenue arrangements with multiple deliverables may be divided into separate units of accounting such as product development and contract manufacturing. Revenue is allocated to these units based upon relative fair values with revenue recognition criteria considered separately for each unit.

14

     Nonrefundable upfront technology license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as revenue over the development period or as we provide the services required under the agreement. The ability to estimate total development effort and costs can vary significantly for each product candidate due to the inherent complexities and uncertainties of drug development. If we cannot estimate the costs to complete development, but can estimate an expected NDA filing date, we will recognize license fee revenue ratably through the NDA filing date. If we are unable to reasonably estimate either total costs to complete development or an expected NDA filing date (performance period), we will defer revenue recognition until one of those estimates can be made or the project is discontinued.

     Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the contract, such as initiation or completion of specified clinical development activities. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in manner similar to that of an upfront technology license fee.

     The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuing services related to product development, is dependent upon our estimates of filing dates or development costs. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. The impact on revenue of changes in our estimates and the timing thereof, is recognized prospectively, over the remaining estimated product development period.

     Royalty revenue is generally recognized at the time of product sale by the licensee.

     Revenue from research and development services performed is generally received for services performed under collaboration agreements, and is recognized at the time the services are performed. Payments received in excess of amounts earned are recorded as deferred revenue.

     Product sales revenue is recognized at the time the manufactured goods are shipped to the purchaser and title has transferred

Stock-based compensation

     We apply Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock-based employee compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”). In the Notes to Consolidated Financial Statements, we provide pro-forma disclosures in accordance with SFAS 123 and related pronouncements. Under APB 25, compensation expense is recorded on the date of grant of an option to an employee or member of the Board only if the fair market value of the underlying stock at the time of grant exceeds the exercise price. In addition, we have granted options to certain outside consultants, which are required to be measured at fair value and recognized as compensation expense in our Consolidated Statements of Operations. We apply the Black-Scholes option-pricing model for estimating the fair value of options, which involves a number of judgments and variables including estimates of the life of the options and expected volatility which are subject to significant change. A change in the fair value estimate could have a significant effect on the amount of compensation expense calculated.

     In June 2004, our 2004 Stock Incentive Plan was approved by our shareholders and, subsequently, restricted stock grants have been issued to certain directors and employees. Non-cash compensation expense is being recognized over the applicable vesting periods of one to three years of the restricted shares.

15

     In December 2004, the FASB released its revised standard, SFAS No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability based service awards based on its current fair value and the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. In April 2005 the SEC released Staff Accounting Bulletin No. 107 providing additional guidance on the adoption of SFAS 123R. In April 2005 the SEC amended its previously adopted rule to modify the compliance dates for SFAS 123R, requiring adoption for fiscal years beginning after June 15, 2005. We are evaluating SFAS 123R and believe it will likely result in recognition of additional non-cash stock-based compensation expense and, accordingly, would increase net loss in amounts which likely will be considered material.

Income Taxes

     A critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods. To the extent we achieve profitability such deferred tax allowance would be reversed at that time.

Clinical Trial Expenses

     Clinical trial expenses, which are included in research and development expenses, represent obligations resulting from our contracts with various clinical research organizations in connection with conducting clinical trials for our product candidates. We recognize expenses for these contracted activities based on a variety of factors, including actual and estimated labor hours, clinical site initiation activities, patient enrollment rates, estimates of external costs and other activity-based factors. We believe that this method best approximates the efforts expended on a clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if actual results differ from our estimates.

Results of Operations

Revenue and cost of revenue

     The following table sets forth revenue information:

	Three Months Ended March 31,
	2004		2005
	(dollars in thousands)
Product revenue, net	$	95	$	—
License and research fees		53		3,330
Total revenue	$	148	$	3,330
Dollar increase			$	3,182

     License and research fees were significantly higher for the three months ended March 31, 2005 as compared to the same period in 2004, due primarily to a $2.0 million milestone payment received from Questcor and to the recognition of current period research and development fees and deferred license fees received in 2004 from Merck and Par Pharmaceutical over the estimated remaining development periods.

     The following table sets forth information on product revenue, cost of product revenue and cost of product revenue as a percentage of product revenue:

16

	Three Months Ended
	March 31,
	2004			2005
	(dollars in thousands)
Product revenue, net	$	95		$	—
Cost of product revenue		64			—
Cost of product revenue as a % of product revenue		67	%		—

     Product revenue consists of sales of Nascobal® nasal gel to Questcor. During the interim period ended March 31, 2004, we earned product revenue under the supply agreement. During the interim period ended March 31, 2005, we did not produce or ship any Nascobal® nasal gel. In the future, including during 2005 interim periods, we expect to receive continued product revenue under the supply agreement.

Research and development

     Research and development expense consists primarily of salaries and other personnel-related expenses, costs of clinical trials, consulting and other outside service, laboratory supplies, facilities costs, FDA filing fees and other costs. Research and development expense by project as a percentage of total research and development project expense, and total research and development expense, are as follows:

	Three Months Ended
	March 31,
	2004			2005
Peptide YY		60	%		9	%
Calcitonin		12	%		31	%
Tight Junctions and RNAi		13	%		17	%
PTH		2	%		10	%
Apomorphine		7	%		—	%
Other R&D projects (1)		6	%		33	%
		100	%		100	%
	(dollars in thousands)
Total R&D expense	$	5,850		$	7,231
Dollar increase					1,381
Percentage increase					24	%

1. Other R&D projects include, without limitation, our oral abuse-resistant opioid, feasibility studies and other projects.

     The increase in the three-month period ended March 31, 2005 over the same period in 2004 resulted primarily from the following costs:

•   Costs of clinical trials, consulting, outside services and laboratory supplies increased to $2.9 million from $2.8 million due primarily to the timing of clinical trials performed for our calcitonin, PYY, PTH and RNAi products under development.

•   Personnel-related expenses increased to $2.8 million from $2.1 million due to an increase in staffing our research and development personnel in support of our research and development programs.

•   Facilities-related costs increased to $1.2 million from $0.7 million due to rent and related expenses on additional space leased in the Bothell facility and increased depreciation and maintenance on equipment.

     We expect a continued increase in research and development expense in the foreseeable future as we continue to expand our research and development activities. These expenditures are subject to uncertainties in timing and cost to completion. We test compounds in numerous preclinical studies for safety, toxicology and efficacy. We then conduct early stage clinical trials for each drug candidate. If we are not able to engage a collaboration partner prior to the commencement of later stage clinical trials, or if we decide to pursue a strategy of maintaining commercialization rights to a program, we may fund these trials ourselves. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising

17

products. Completion of clinical trials by us and our collaboration partners may take several years or more, but the length of time varies substantially according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including:

•   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.

     Except for our Nascobal® nasal spray, which received FDA approval in January 2005, none of our other current product candidates has received FDA or foreign regulatory marketing approval. In order to achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our and our collaboration partners’ clinical data establishes the safety and efficacy of our drug candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our products. In the event that the collaboration partner has control over the development process for a product, the estimated completion date would largely be under control of such partner. We cannot forecast with any degree of certainty how such collaboration arrangements will affect our development plans or capital requirements.

     As a result of the uncertainties discussed above, we are often unable to determine the duration and completion costs of our research and development projects or when and to what extent we will receive cash inflows from the commercialization and sale of a product.

Sales and marketing

     Sales and marketing expense consists primarily of salaries and other personnel-related expenses, costs of using a contract sales organization and a contract distributor for Nascobal® nasal gel, consulting, sales materials, trade shows and advertising. Total sales and marketing expense and dollar and percentage changes are as follows:

	Three Months Ended
	March 31,
	2004		2005
	(dollars in thousands)
Total sales and marketing expense	$	153	$	324
Dollar increase				171
Percentage increase				112	%

     The increase in the three-month period ended March 31, 2005 over the same period in 2004 resulted primarily from increased business development personnel costs and increases in spending on market research. We expect sales and marketing costs, which includes business development staff and activities, to continue to increase in the foreseeable future to support activities associated with partnering our other drug candidates.

General and administrative

     General and administrative expense consists primarily of salaries and other personnel-related expenses to support our research and development activities, amortization of non-cash deferred stock option and restricted stock compensation, professional fees such as accounting and legal, corporate insurance and facilities costs. Total general and administrative expense and dollar and percentage changes are as follows:

	Three Months Ended
	March 31,
	2004		2005
	(dollars in thousands)
Total general and administrative expense	$	1,684	$	2,161
Dollar increase				477
Percentage increase				28	%

18

     The increase in the three-month period ended March 31, 2005 over the same period in 2004 was due primarily to increased compensation related expenses due to the hiring of additional personnel supporting R&D and compliance activities, legal and accounting fees, corporate insurance, non-cash stock compensation expense related to restricted stock grants and other administrative costs. We expect general and administrative expenses to remain stable or to increase in the foreseeable future, depending on the growth of our research and development and other corporate activities.

Interest Income

     We earn interest income on our invested cash and investments. The following table sets forth information on interest income, average funds available for investment and average interest rate earned:

	Three Months Ended
	March 31,
	2004			2005
	(dollars in thousands)
Interest income	$	56		$	409
Average funds available for investment	$	20,600		$	66,000
Average interest rate		1.1	%		2.4	%

     The increase in interest income in the three-month period ended March 31, 2005 over the same period in 2004 was due to higher average interest rates earned due to increasing prevailing market interest rates, combined with higher average balances available for investment.

Interest Expense

     We incur interest expense on our capital leases and our notes payable. The following table sets forth information on interest expense, average borrowings and average interest rate incurred:

	Three Months Ended
	March 31,
	2004			2005
	(dollars in thousands)
Interest expense	$	97		$	120
Ave. borrowings under capital leases and notes payable	$	9,200		$	7,400
Average interest rate		4.2	%		6.5	%

     The increase in interest expense in the three-month period ended March 31, 2005 over the same period in 2004 was due to an increase in the average interest rate as prevailing interest rates increased, combined with a shift in the borrowing mix from cash-secured bank debt to asset lease financing. In the three-month period ended March 31, 2005, average borrowings under the Wells Fargo note were approximately $4 million at approximately 3.3% interest, and average borrowings under the GE Capital leases were approximately $3.2 million at interest rates ranging from approximately 8.3% to 10%. In the three-month period ended March 31, 2004, average borrowings under the Wells Fargo note were approximately $6.7 million at approximately 1.9% interest, and average borrowings under the GE Capital leases were approximately $2.5 million at interest rates ranging from approximately 8.3% to 10%.

     In June 2003, we entered into a note payable with Wells Fargo bank at a rate of LIBOR plus 0.75%. As of December 31, 2004, the balance on the note payable with Wells Fargo was $8,352,000 and the interest rate was approximately 3.3% per annum. In February 2005 the Wells Fargo note was paid off in full and cancelled. The outstanding balance at March 31, 2005 is zero.

19

Liquidity and Capital Resources

Cash Requirements

     Our capital requirements consist primarily of the need for working capital, including funding research and development activities and capital expenditures for the purchase of equipment. From time to time, we may also require capital for investments involving acquisitions and strategic relationships. We have an accumulated deficit of approximately $89.6 million as of March 31, 2005 and expect additional operating losses in the foreseeable future as we continue to expand our research and development activities. In addition, we are planning to enter into various collaborations in furtherance of our research and development programs, and we may be required to reduce our research and development activities or raise additional funds from new investors or in the public markets.

Sources and Uses of Cash

     We have financed our operations primarily through the sale of common stock and warrants through private placements and in the public markets, revenues received from our collaboration partners, equipment financing facilities and notes payable.

     In December 2003, we filed a shelf registration statement with the SEC, which was declared effective by the SEC in January 2004, pursuant to which we may issue common stock or warrants, up to an aggregate of $30 million. In September 2004 we filed another shelf registration statement with the SEC, which was declared effective by the SEC in October 2004, pursuant to which we may issue common stock, warrants or debt securities, up to an aggregate of $80 million. These shelf registration statements enable us to raise capital from the offering of securities covered by the shelf registration statements, as well as any combination thereof, from time to time and through one or more methods of distribution, subject to market conditions and our cash needs.

     In June 2004, we completed the sale of 1,136,364 shares of our common stock, and warrants to purchase up to 511,364 shares of common stock at an exercise price of $14.40 per share, pursuant to our $30 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $12.5 million to us prior to the deduction of fees and commissions of $229,000. The warrants vested on December 25, 2004, and are exercisable until June 25, 2009. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $10.1 million.

     In December 2004, we completed the public offering of 4,250,000 shares of our common stock at a public offering price of $13.50 per share pursuant to our $80 million effective shelf registration statement. The offering resulted in gross proceeds of approximately $57.4 million to us, prior to the deduction of fees and commissions of $4.5 million. At March 31, 2005, the amount remaining available on this shelf registration statement was approximately $22.6 million.

     Our research and development efforts and collaborative arrangements with our partners enable us to generate contract research revenues, milestone payments, license fees, royalties and manufactured product sales for us.

•   Under our collaborative arrangement with Merck, we received an initial cash payment of $5 million in October 2004. The $5 million initial payment is being amortized over the estimated development period. We are also eligible to receive milestone payments upon achievement of specified product development goals or sales targets. If certain development and approval milestones are achieved, we will be eligible to receive up to $131 million from Merck. If certain sales related milestones are achieved, we will be eligible to receive up to an additional $210 million from Merck, subject to certain other conditions. Merck will also pay us for manufacturing-related development activities and will purchase from us clinical supply and finished product. We will also receive royalties on product sales based on certain sales-related thresholds.

•   Under our collaborative arrangement with Par Pharmaceutical, we received an initial cash payment which is being 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

20

manufactured product and a profit sharing upon commercialization of generic calcitonin-salmon intranasal spray.

•   In January 2005, we received FDA approval of our Nascobal® nasal spray and we received a $2 million payment from Questcor in February 2005.

Total sources and uses of cash for the three-month periods ending March 31, 2004 and 2005 are as follows:

	Three Months Ended
	March 31,
	2004			2005
		(dollars in thousands)
Cash used in operating activities	$	(8,005	)	$	(6,296	)
Cash used in investing activities		(345	)		(795	)
Cash provided by (used in) financing activities		2,743			(185	)
Net decrease in cash and cash equivalents	$	(5,607	)	$	(7,276	)

     Our operating activities used cash of $6.3 million in the first three months of 2005 compared to $8.0 million in the first three months of 2004. Cash used in operating activities relates primarily to funding net losses, adjusted by changes in balance sheet account balances and partially offset by non-cash charges related to depreciation and amortization of property and equipment and stock compensation. We expect to use cash for operating activities in the foreseeable future as we continue our research and development activities.

     Our investing activities used cash of $0.8 million in the first three months of 2005, compared to $0.3 million in the first three months of 2004. Changes in cash from investing activities are due primarily to purchases of short-term investments net of maturities and investments in property and equipment. We expect to continue to invest in our research and development infrastructure, including the purchase of equipment to support our research and development activities.

     Our financing activities used cash of $0.2 million in the first three months of 2005, compared to providing cash of $2.7 million in the first three months of 2004. Cash provided in the 2004 period primarily related to an increase in borrowing of $2.2 million. During the three months ended March 31, 2005, we repaid approximately $8.4 million on our Revolving Line of Credit and drew down approximately $0.5 million on a capital lease facility. As a result of the loan payoff, our restricted cash balance decreased by $8.0 million.

Liquidity

     We had a working capital (current assets minus current liabilities) surplus of $49.9 million as of March 31, 2005 and $58.4 million as of December 31, 2004. As of March 31, 2005, we had approximately $58.6 million in cash, cash-equivalents and investments, including $1.0 million in restricted cash. We believe, although there can be no assurance, that our current cash position provides us with adequate working capital for at least the next 12 months or longer, depending upon the degree to which we exploit our various current opportunities that are in the pipeline and the success of our collaborative arrangements. This belief is based, in part, on the assumption that we have completed and are planning to enter into various collaborations to accelerate our research and development programs which will provide us with additional financing. To the extent these collaborations do not proceed as planned, we may be required to reduce our research and development activities or, if necessary and possible, raise additional capital from new investors or in the public markets.

     As of February 22, 2005, we had unused capital lease credit lines of approximately $3.5 million out of total available credit lines of approximately $4.0 million. Our loan balance of approximately $8.4 million at December 31, 2004 was paid in full and cancelled on February 18, 2005. Our available capital lease line of $4.0 million expires December 31, 2005 and is available for use in financing equipment and leasehold assets.

21

Contractual Obligations

     Our contractual obligations have changed during the three months ended March 31, 2005 as follows.

•   At March 31, 2005 we have a zero balance in notes payable compared to approximately $8.6 million (including interest) at December 31, 2004 due to the payoff of the note in February 2005;

•   At March 31, 2005 our operating lease obligations increased to approximately $20.6 million (through 2016) from approximately $20.4 million at December 31, 2004. This is due to a lease renewal adding approximately $0.6 million in rental payments from July 2005 through June 2010, partially offset by approximately $0.4 million in rents paid during the three months ended March 31, 2005;

•   Our capital lease obligations increased by approximately $0.2 million to approximately $3.8 million (including interest) at March 31, 2005 due to approximately $0.5 million in new leases signed offset by payments made during the three months ended March 31, 2005; and

•   Our purchase obligations increased by approximately $1.5 million to approximately $1.7 million at March 31, 2005 due to purchase order activity during the three months ended March 31, 2005.

Off-Balance Sheet Arrangements

     As of March 31, 2005, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market rate risk for changes in interest rates relates primarily to our investment of cash in excess of near term requirements. We have a prescribed methodology whereby we invest our excess cash in debt instruments of U.S. government agencies and high quality corporate issuers (Standard & Poor’s “A” rating and higher or Moody’s Investors Service A2 rating and higher). To mitigate market risk, securities have a maturity date within 18 months, no category of issue can exceed 50% of the portfolio, and holdings of any one issuer excluding the U.S. government do not exceed 20% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated. Because of the relatively short maturities of our investments, we do not expect interest rate fluctuations to materially affect the aggregate value of our financial assets. We do not utilize derivative financial instruments.

ITEM 4 – CONTROLS AND PROCEDURES

     (a) Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of senior management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that the Company is required to disclose in reports filed under the Securities Exchange Act of 1934, as amended.

     (b) Internal Control Over Financial Reporting. There have been no changes in the Company’s internal controls over financial reporting or in other factors during the fiscal quarter ended March 31, 2005, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date the Company carried out its most recent evaluation.

22

     PART II – OTHER INFORMATION

ITEM 6 – EXHIBITS

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized, in Bothell, State of Washington, on May 9, 2005.

NASTECH PHARMACEUTICAL COMPANY INC.
By:	/s/ Steven C. Quay
	Steven C. Quay, M.D., Ph.D.
	Chairman of the Board, President and Chief Executive Officer
By:	/s/ Gregory L. Weaver
	Gregory L. Weaver
	Chief Financial Officer

24

EXHIBIT INDEX

Exhibit
No.	Description
1.1	Underwriting Agreement dated December 8, 2004, by and among Nastech Pharmaceutical Company Inc. and Citigroup Global Markets Inc., Needham & Company, Inc., WR Hambrecht + Co., LLC and Delafield Hambrecht, Inc. for themselves and as representatives of the underwriters. (filed as Exhibit 1.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 8, 2005, and incorporated herein by reference).
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	Certificate of Incorporation of the Company dated September 20, 1983 (filed as Exhibit 3.1 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.2	Certificate of Amendment to the Certificate of Incorporation of the Company dated November 30, 1989 (filed as Exhibit 3.2 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.3	Certificate of Amendment to the Certificate of Incorporation of the Company dated November 8, 1993 (filed as Exhibit 3.3 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.4	Certificate of Amendment to the Certificate of Incorporation of the Company dated December 30, 1996 (filed as Exhibit 3.4 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.5	Certificate of Amendment to the Certificate of Incorporation of the Company dated August 15, 1999 (filed as Exhibit 3.5 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.6	Certificate of Designation of Rights, Terms and Preferences of Series A Junior Participating Preferred Stock of the Company dated March 2, 2000 (filed as Exhibit A to our Current Report on Form 8-K dated February 22, 2000 and incorporated herein by reference).
3.7	Certificate of Correction to a Certificate of Amendment to the Certificate of Incorporation of the Company dated July 28, 2004 (filed as Exhibit 3.7 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.8	Certificate of Correction to a Certificate of Amendment to the Certificate of Incorporation of the Company dated July 28, 2004 (filed as Exhibit 3.8 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).
3.9	Certificate of Correction to a Certificate of Amendment to the Certificate of Incorporation of the Company dated July 28, 2004 (filed as Exhibit 3.9 to our Registration Statement on Form S-3, File No. 333-119429, and incorporated herein by reference).

25

Exhibit
No.	Description
3.10	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 for facilities at 45 Davids Drive, Hauppauge, NY (filed as Exhibit 10B to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 1995 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 1, 2002 and incorporated herein by reference).
10.3	Amended and Restated Employment Agreement, dated May 2, 2002, with Steve 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).
10.4	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).
10.5	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).
10.6	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).
10.7	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).
10.8	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).
10.9	Nastech Pharmaceutical Company Inc. 2004 Incentive Stock Plan (filed as Exhibit 99 to the Company’s Registration Statement on Form S-8, File No. 333-118206, and incorporated herein by reference).
10.10	Termination and Mutual Release Agreement, dated September 30, 2002, with Schwarz

26

Exhibit
No.	Description
	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).
10.11	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).
10.12	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).
10.13	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).
10.14	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).
10.15	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).
10.16	Form of Warrant (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated September 4, 2003, and incorporated herein by reference).
10.17	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).
10.18	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).
10.19	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).
10.20	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).
10.21	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).
10.22	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)
10.23	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)

27

Exhibit
No.	Description
10.24	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).
10.25	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)
10.26	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).
10.27	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).
10.28	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).
10.29	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).
10.30	Lease Agreement for facilities at 45 Davids Drive, Hauppauge, NY, effective as of July 1, 2005. (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.

28

EX-10.30

                                                                   EXHIBIT 10.30

      LEASE AGREEMENT made and entered into as of this 1st day of July, 2005, by
and between David A. Yarom, whose mailing address is 46 Westland Drive, Glen
Cove, NY 11542 (hereinafter referred to as "LESSOR"), and Nastech Pharmaceutical
Company Inc., a Delaware Corporation with a place of business at 45 Davids
Drive, Hauppauge, New York (hereinafter referred to as "LESSEE").

1.    LEASE.

      The LESSOR hereby leases to the LESSEE and the LESSEE hereby leases from
the LESSOR, subject to the conditions hereinafter set forth, the building, known
as 45 Davids Drive, Hauppauge, NY, together with the right of LESSEE, its
employees and invitees to use entrances, parking areas, walkways, public and
common areas and any other appurtenances to the Leased Property.

2.    LESSOR'S WARRANTIES.

      2.1   The LESSOR represents and warrants (which representations and
warranties shall survive the execution of this Lease), that he is the sole Owner
of the Leased Property; that he has the right to lease the herein premises to
the Lessee.

      2.2   Neither the LESSOR nor its agents have made or make any
representations or warranty with respect to the Leased Property except as
expressly set forth herein.

      2.3   LESSOR represents premises are zoned light industrial.

      2.4   The LESSEE acknowledges that it has examined the Leased Property and
that the Leased Property is accepted, as is, in its present condition and state
of repair.

3.    TERM

      3.1   The Term of this lease shall be for five (5) years to commence on
July 1, 2005 and to end on June 30, 2010, unless sooner terminated in accordance
with the provisions of this lease, or otherwise. In the event that the
commencement date of this Lease or any extension or renewal thereof falls on
other than the first day of the month, then the LESSEE shall pay a pro-rated
rent for said partial month, and the balance of the term of the lease shall be
adjusted to run from the first day of the following month.



      Should the LESSEE hold over or remain in possession of the Leased Property
after the expiration of this lease, or any renewal or extension thereof, without
the LESSOR's consent, such holdover shall not be deemed or construed to be a
renewal or an extension of this lease, but shall only operate to create a "month
to month" tenancy which may be terminated by the LESSOR at the end of any
calendar month upon 30 days prior written notice to the LESSEE. During any such
month of the "month to month" tenancy, fixed, minimum base rent shall be payable
at one and one-half times the rate as that in effect during the last month of
the preceding term, and the provisions of this lease shall be applicable to such
"month to month" or holdover tenancy.

4.    RENT

      4.1   The LESSEE agrees to pay to LESSOR's office at the address first
hereinabove set forth, or at such other place as LESSOR may designate, in
writing, the amount of the fixed minimum base rent, "fixed rent", in advance on
the first day of each calendar month during the term of this Lease and any
extension or renewal thereof or any month to month tenancy created hereunder,
according to the annexed "Rent Schedule." LESSEE agrees to make such rental
payments in full without any right to prior demand or set-off or deduction
whatsoever, except as expressly provided herein.

      Any extension of time for payment of any installment of rent granted by
the LESSOR shall not constitute a waiver of the LESSOR's right to have all other
payments of rent made in a timely manner as herein specified. Time is of the
essence with respect to each monthly installment of rent due hereunder, beyond
any applicable grace periods hereunder.

      In the event LESSEE fails to pay the rent on or before the 10th day of the
month in which same is due ("Grace Period"), the LESSEE shall pay the LESSOR as
a "late charge", an additional sum equal to six (6%) percent of the rent
remaining unpaid.

      4.2   It is intended that the " fixed rent" provided for in paragraph 4.1
hereof, shall be net of any cost, tax, imposition, expense, charge, abatement or
setoff or other deduction whatsoever, with respect to the leasing operation,
management, maintenance, repair, rebuilding, use or occupation of the Leased
Property with respect to any interest of LESSOR therein except only as otherwise
expressly provided in paragraph 7.6 of this lease. The LESSEE agrees to pay all
such costs, impositions, expenses, charges with respect to the Leased Property
as "Additional Rent" and indemnify the LESSOR against such costs, expenses and
charges.

5.    SECURITY DEPOSIT

      The LESSEE shall deposit with the LESSOR, upon execution of this Lease,
the sum of $18,000.00 (Eighteen Thousand Dollars) as security for the full and
faithful performance by the LESSEE of all of the terms, covenants and conditions
of this Lease upon the LESSEE's part to be performed. Said security deposit
shall be returned to the LESSEE, with interest, within thirty (30) days after
the time fixed as the expiration of the lease or any extension or renewal
thereof herein, or any other permitted earlier termination provided the LESSEE
has fully and faithfully carried out all of the said terms, covenants and
conditions on LESSEE's part to be performed. In the event of a bonafide sale,
subject to this lease, the LESSOR shall transfer the security to the vendee for
the benefit of the LESSEE and the LESSOR shall be considered released by the
LESSEE from all liability for the return of such security; and the LESSEE agrees
to look to the new LESSOR solely for the return of the said security. The
security deposited under this lease shall not be mortgaged, assigned or
encumbered by the LESSEE without the prior, written consent of the LESSOR, nor
shall it be used as or towards the final rental payments due hereunder.

6.    TAX ABATEMENTS



      The parties agree that the LESSEE shall receive the benefit of any
decrease in taxes attributable to the premises due by reason of any business tax
exemptions, if any, or the equivalent thereto, with respect to the Leased
Property, applicable to the period beginning on the commencement date of the
lease, but only for the period LESSEE is a tenant hereunder and only if LESSEE
is not in default hereunder, beyond applicable periods of notice or grace.

7.    ADDITIONAL RENT

      7.1   The LESSEE shall pay as Additional Rent, before any fine, penalty,
interest or cost may be added thereto for the non-payment thereof, any sewer
rents, water rates and water charges and other governmental levies and charges,
general and special, ordinary and extraordinary, unforeseen as well as foreseen,
which are assessed or imposed upon and attributable to the Leased Property or
any part thereof or which become payable during the term of this lease. If any
such payments are payable in more than one installment to the authority (i.e.,
real estate taxes), then LESSEE shall be entitled to make such payments in
installments, as billed for same.

      7.2   The LESSEE shall also pay as additional rent, all charges for
real-estate taxes, gas, water, sewer, electricity, , heat, garbage removal, and
telephone and other communications and utilities services used, rendered or
supplied upon or in connection with the Leased Property and the cost of repair,
maintenance, replacement and reading of any meters measuring LESSEE's
consumption thereof, and LESSEE shall indemnify the LESSOR against any liability
or damages on such account. Other than as may be required by law, the LESSOR
shall not be required to furnish to the LESSEE any facilities or services of any
kind such as, but not limited to, water, steam heat, gas, hot water, garbage
removal, electricity, light, power or any and all forms of communications, all
costs for which remain LESSEE's responsibility.

      7.3 a  All of the items in subsection 7.1 and 7.2 hereof shall be referred
to as "Additional Rent" and shall be the responsibility of the LESSEE. If any of
the impositions required to be paid pursuant to paragraphs 7.1 and 7.2 hereof
are billed to LESSEE by the LESSOR directly, then such Additional Rent shall be
paid to LESSOR within fifteen (15) days from the date of an itemized bill from
LESSOR. Payments of Additional Rent made after said due date shall carry
interest at the Chemical Bank or any successor bank thereto prime rate
established at the time the monies are due, plus 2%.

      7.3 b. Anything herein to the contrary not withstanding, LESSOR shall
supply LESSEE with all reasonable documentation to support its bill for
additional rent if requested by the LESSEE.

      7.4   LESSOR represents that the premises are fully assessed for real
estate taxes without exemption and have, to date, received no notice of any
change in assessed valuation. All taxes or payments assessed prior to but
payable in whole or in installments after the effective date of the lease and
all taxes assessed during the term but payable in whole or in installments after
the lease term shall be adjusted and pro-rated so that the LESSOR shall pay his
pro-rata share of such taxes for the period prior to and following the lease
term, and the LESSEE shall pay its pro-rate share of such taxes for the lease
term.

      7.5   LESSEE, at its own cost and expense, may faithfully contest any
impositions mentioned in paragraphs 7.1 and 7.2 hereof in any manner permitted
by law, in LESSEE's name, and whenever necessary, in LESSOR's name. LESSOR will
reasonably cooperate with LESSEE in such contest. Such contest may include
appeals from any judgment, decrees or orders until a final determination is made
by a court or governmental department or authority having final jurisdiction in
the matter. However, notwithstanding such contest, LESSEE shall pay the
contested imposition in the manner and on the dates due unless the imposing
authority permits the withholding of payment pending outcome of such appeal or
contest, without



risk or jeopardy to LESSOR's property, and further provided that the LESSEE
shall set up adequate reserves with respect to such payments and the LESSOR
shall give his consent to such withholding, which consent shall not be
unreasonably withheld. Any refund with respect to impositions paid by LESSEE
shall be the property of the LESSEE. LESSEE shall arrange for and pay all costs
associated with the contest any impositions mentioned in paragraphs 7.1 and 7.2.

      7.6   LESSEE shall not be obligated or required hereunder to pay any
estate, excise, inheritance, succession, capital levy, mortgage or transfer tax
of LESSOR, or any income, profit, franchise or revenue tax upon the income or
receipts of LESSOR, or any other tax, assessment charge or levy upon the rent
reserved under this lease, or any tax or other imposition, charge or levy (i)
not commonly deemed to be either a real estate tax or ad valorem or similar
personal property, ownership or use tax, and (ii) not arising solely from the
ownership, occupation or operation of the demised premises, although the same
may be or become a lien upon the real property or improvements thereon, nor
shall LESSEE be obligated or required hereunder to pay interest, amortization or
principal on any mortgage given by LESSOR covering or affecting the fee of the
demised premises, or expenses of leasing or sale, nor LESSOR's depreciation
expense.

      7.7   If during the term of this lease there shall be levied or assessed
any imposition on rents or against the fixed annual rent or against LESSOR, or
the Leased Property not in effect on the commencement date of the Lease Term, as
a substitute in whole or in part of real estate taxes on land or buildings such
imposition shall be included within those payable by LESSEE pursuant to
paragraph 7.1 above.

      7.8   In the event the LESSEE fails to pay the Additional Rent or any part
thereof when due, the LESSOR shall have all of the rights and remedies with
respect thereto as the LESSOR has for the non-payment of the rent called for
pursuant to paragraph 4.1 hereof, except for the penalty described in section
7.3.

8.    USE OF LEASED PROPERTY

      The LESSEE may use and occupy the Leased Property for fill and finish,
design, manufacture and sale of its products, warehousing of inventory, light
assembly, electronic component testing and general business and uses incidental
to the aforementioned purposes, except that the LESSEE shall not use or occupy
and/or permit the Leased Property or any part thereof to be used or occupied,
for any unlawful business, use or purpose, nor for any business, use or purpose
deemed disreputable , nor for any purpose other than as permitted above, which,
in the reasonable judgment of the LESSOR, would reduce the value of the said
premises, nor for any purpose or in any manner which is in violation of any
present or future governmental laws or regulations. The LESSEE shall promptly,
after discovery of any such unlawful, disreputable use take all necessary steps,
legal and equitable, to compel the discontinuance of such use and to oust and
remove any sublessees, occupants or other persons guilty of such unlawful or
disreputable use. The LESSEE shall indemnify the LESSOR against all costs,
expenses, liability losses, damages, injunctions, suits, fines, penalties,
claims and demands including reasonable counsel fees arising out of any
violation or default in these covenants. The LESSEE shall also not use or occupy
or permit the Leased Property to be used or occupied or permit anything to be
done in or on he Leased Property in a manner which will in any way violate any
certificate of occupancy or building or zoning law affecting the Leased Property
or which would make void or voidable any insurance then in force with respect
thereto or which will cause or be likely to cause structural damage to the
building or any part thereof or which will constitute a public or private
nuisance. In the event that the LESSEE's hazardous or particular use of use of
the premises increases the LESSOR's insurance premiums for the premises, the
LESSEE shall pay the increase attributable thereto as additional rent.

9.    MAINTENANCE AND REPAIR



      The LESSEE shall not cause or permit any waste, damage or injury to the
Leased Property and shall, at the expiration of this lease, return the Leased
Property to the LESSOR in as good and safe order and condition as when received
hereunder, reasonable wear and tear excepted. The LESSEE, at its sole expense,
shall keep such Leased Property as now or hereafter constituted with all
improvements made thereto and the HVAC, adjoining walks, curbs, walls, roof,
parking areas, driveways and access roads used by LESSEE in good and safe
condition, reasonable wear and tear excepted and shall make all repairs,
replacements or renewals whether ordinary or extraordinary, seen or unforeseen,
including all interior and exterior structural repairs. All repairs, fixtures
and equipment shall be at least equal in quality and material and workmanship to
that originally existing in the Leased Property. The LESSOR shall in no event be
required to make any repair, alteration, or improvement to the Leased Property
except repair necessitated due to LESSOR's misconduct. LESSEE shall be
responsible for costs attribable to and arrange for the maintenance of the
parking areas, loading docks, walkways, etc., and such maintenance shall
include, but not be limited to, snow removal, landscaping, lawn care and
resealing. LESSEE shall be responsible for costs attributable to and arrange for
the maintenance of the parking areas, loading docks, walkways, etc., and such
maintenance shall include, but not be limited to, snow removal, landscaping and
lawn care, resealing and repaving, and all other maintenance. This provision
shall not be deemed to require LESSEE to repair, restore or rebuild all or any
part of the Leased Property in the event of casualty, destruction or
condemnation as set forth in paragraph 12.

10.   IMPROVEMENTS

      No alteration, addition or improvement to the Leased Property shall be
made by the LESSEE without the prior written consent of the LESSOR, which shall
not be unreasonably withheld, and without LESSEE first obtaining any and all
required permits therefor. At the time that the LESSOR provides written consent
for proposed alterations, additions or improvements, LESSOR shall also indicate
whether the LESSEE shall be required to remove said alterations, additions or
improvements and restore those portions of the premises at lease end or earlier
termination thereof. This requirement that LESSEE first obtain LESSOR's written
consent for alterations, additions or improvements shall not apply to LESSEE's
installation of machinery, equipment and fixtures used in the conduct of
LESSEE's business (hereinafter referred to as LESSEE's "Trade Fixtures") except
for equipment or machinery which may affect the structural integrity of the
building. Any alteration, addition or improvement made by the LESSEE, after such
consent shall have been given, and any fixtures installed as a part thereof
(except LESSEE's Trade Fixtures, which shall be removed by LESSEE upon
termination of this Lease), shall be deemed to be part of the premises and shall
become the property of the LESSOR upon the termination or expiration of this
Lease any renewal or extension thereof. No signs may be installed or affixed to
the exterior of the Premises without LESSOR's prior written approval, which
approval shall not be unreasonably withheld.

      Within 30 days of presentation of paid bills, LESSOR shall re-pay LESSEE
for 50% of the cost incurred by LESSEE, up to a total of $24,000., of the
following improvements to the premises:

1.    Upgrade lavatories/restrooms.

2.    Upgrade main building entrance including handicapped access.

3.    Upgrade the air conditioning system to improve heating/cooling.

      In no event shall LESSOR be liable or obligated to LESSEE for more than
$24,000. All construction/alterations at the premises shall be performed in
conformity with all applicable codes and laws. LESSOR reserves the right to
inspect said repairs/alterations at reasonable times to confirm completion of
work in bills presented under this article.



11.   COMPLIANCE WITH LAWS

      The LESSEE shall through the term of this lease, at its sole expense,
promptly comply with all laws and regulations of all federal, state, municipal
governments and appropriate departments, agencies, commissions, boards and
offices thereof, and the orders and regulations of the National Board of Fire
Underwriters or any other party, now or hereafter exercising similar functions
which may be applicable to the business, use, operation or maintenance of the
Leased Property by LESSEE. The LESSEE shall comply with the requirements of all
policies of public liability, fire and all other types of insurance at any time
in force with respect to the Leased Property. The LESSEE, at its sole expense,
shall obtain all licenses and/or permits which may be required for the conduct
of its business within the terms of this lease and for making of repairs,
alterations, improvements or additions necessary for the particular business and
in conformity with any health or building department requirements, and the
LESSOR, where required, will join with the LESSEE in applying for all such
permits or licenses. LESSEE shall promptly provide LESSOR with copies of all
such permits and/or certificates of occupancy covering all such repairs,
alterations, improvements or additions.

12.   INSURANCE AND RISK OF LOSS

      12.1  Except as set forth herein, no destruction or damage to any building
or improvement on the Leased Property by fire, windstorm, or any other casualty,
or a taking by condemnation or other governmental authority of less than 25% of
the Leased Property, shall entitle LESSEE to surrender possession of the Leased
Property, to terminate the Lease or to violate any of its provisions. In the
event of a governmental taking of up to 25% of the building located upon the
Leased Property, or up to 50% of the parking areas located on the Leased
Property, or in the event of any damage to or destruction of the Leased Property
by fire or other casualty, the LESSOR shall promptly restore and/or relocate the
Leased Property as nearly as possible to its condition prior to such damage or
destruction and shall use the net proceeds of any insurance or condemnation for
that purpose only. In such case of government taking, and provided LESSEE's
business cannot operate from said premises during the reconstruction or
restoration of same, LESSOR shall pro-rate the rent and deduct therefrom the
proportionate amount not able to be used up to the 25%. In the event of a
government taking or condemnation of the building in excess of 25% thereof, or
of the parking areas by more than 50%, this lease shall be terminated at the
option of the LESSEE upon giving LESSOR thirty (30) days written notice from the
date of such condemnation, and the LESSEE shall, upon vacating the Leased
Premises, be released from further liability hereunder effective upon the date
of taking. All insurance or condemnation proceeds resulting from a casualty
claim shall be held by the LESSOR or the mortgagee(s) of the premises, and
applied in payment of restoration and/or relocation of the Premises as such
restoration relocation progresses. Such restoration, relocation, repair or
replacement, rebuilding or alteration shall be commenced by LESSOR as soon as
practicable, after receipt of insurance proceeds, unless such destruction or
damage is of such magnitude that LESSOR or its mortgagee, in their sole
discretion shall decide not to rebuild or restore, in which event LESSOR shall
give LESSEE written notice of such intention, with ninety (90) days from the
date of fire or casualty, and thereupon this Lease shall terminate with LESSEE
being under no further obligation with respect to future payments under the term
of the Lease. Unless LESSOR shall terminate as provided for herein, LESSOR shall
make the repairs and restorations under the conditions hereof, subject to delays
due to adjustment of insurance claims, labor troubles and causes beyond LESSOR's
control, but in any event, such Premises shall be substantially restored within
twelve (12) months from the date of such casualty or loss. In the event the
Premises are not substantially restored within said twelve (12) month period,
then, within ten (10) days after the expiration of said period of time, LESSEE
shall have the right to terminate this Lease, by written notice to the LESSOR,
and LESSEE shall thereafter be under no further obligation hereunder with
respect to Future Rents or obligations. LESSEE shall also have the right to
terminate if, in its discretion, so much the premises is destroyed that it
cannot operate its business or if the damage occurs during the last year of the
lease term. After any such casualty, LESSEE shall cooperate with LESSOR's
restoration by removing from the premises as promptly as possible, all of



LESSEE's moveable equipment, furniture and other property. Nothing contained
herein shall relieve LESSEE from liability which may exist as a result of damage
from fire or other casualty caused by its negligence, acts or omissions or those
of its agents or invitees. Notwithstanding the foregoing, each party shall look
first to any insurance in its favor before making any claim against the other
party for recovery for loss or damage resulting from fire or other casualty to
the extent that such insurance is in force and collectible. LESSEE acknowledges
that LESSOR will not carry insurance on LESSEE's inventory, furniture and/or
furnishings or any equipment, improvements or fixtures removeable by LESSEE and
agrees that LESSOR will not be obligated to repair any damage thereto or replace
the same. LESSEE hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this article shall govern and
control in lieu thereof.

      12.2  During the term of this lease, or any renewal thereof, LESSEE shall
at its own cost and expense provide and keep in force the following insurance:

            12.2.1 Comprehensive public liability insurance for the mutual
benefit of LESSOR, and LESSEE against claims for bodily injury, death or
property damage occurring in or about the Leased Property (including, without
limitation, bodily injury, death or property damage resulting directly or
indirectly from or in connection with any change, alteration, improvement or
repair thereof), with limits of not less than $2,000,000.00 for bodily injury or
death and property damage, which insurance may be carried under a so-called
"blanket" or "umbrella" policy;

            12.2.2 Such other insurance, in such amounts that may from time to
time be reasonably requested by LESSOR, LESSOR's mortgagee or any governmental
authority, against other insurable hazards which at the time are reasonably
available and commonly insured against in the case of premises or buildings
similarly situated, with due regard to the height and the type of the premises,
its constructions, use and occupancy including, but not limited to, boiler
insurance and machinery insurance.

            12.2.3 Insurance covering the Premises for the mutual benefit of
LESSOR, LESSEE, and any mortgagees hereunder, against loss or damage by fire and
lightning and such other risks as are customarily including in extended coverage
endorsements attached to fire insurance policies covering property similar to
such premises in an amount equal to $1,000,000 (excluding foundations and
excavation costs and LESSEE's contents).

      12.3  All insurance to be provided and kept in force by LESSEE under the
provisions hereof shall include as additional insureds, the LESSOR, LESSEE and
any named mortgagee hereunder as their respective interests may appear.

      12.4  All policies required herein to be obtained by LESSEE and
certificates thereof shall be delivered to LESSOR at or before the commencement
of the term hereof and shall be taken with responsible companies satisfactory to
LESSOR and authorized to do business in the State of New York. All policies
shall be for a period of not less than one (1) year and shall contain a
provision whereby the same cannot be cancelled unless LESSOR is given at least
thirty (30) days written notice of such cancellation. Such policies shall also
contain waivers of subrogation in favor of the LESSOR. LESSEE shall procure and
pay for renewals of such insurance from time to time and LESSEE shall promptly
deliver to LESSOR certificates thereof at least fifteen(15) days before the
expiration thereof, providing for fire and extended coverage and certificates
for liability coverage prior to the expiration thereof.

      12.5  LESSEE hereby released LESSOR, its agents and assignees from any and
all liability or responsibility to it or anyone claiming through or under it by
way of subrogation or otherwise, for any loss or damage to property or business,
including loss or damage to LESSEE's goods or property, or to the Leased
Property from fire, lightning, water, or any of the extended coverage
casualties, whether or not insured unless caused by the willfull misconduct of
LESSOR.



13.   ASSIGNMENT/SUBLETTING

      13.1  The LESSEE may not sublet or assign the Leased Property for any
portion of the remainder of the term of this lease, or any extension or renewal
thereof, without the prior written consent of the LESSOR which consent LESSOR
agrees shall not be unreasonably withheld. However, LESSOR may set such
conditions as he reasonably deems appropriate to such consent, including but not
limited to, the right of the LESSOR and any mortgagees hereunder to approve the
form of assignment/sublease, the financial condition of the assignee/sublessee,
the type of business or occupation of the sublessee or assignee which shall not
be, disreputable, illegal and that the LESSEE shall remain primarily liable for
the payment of the rent and Additional Rent herein and for the performance of
all of the other terms of this lease required to be performed by the LESSEE.
LESSEE shall give LESSOR written notice of its desire to so sublease or assign,
which notice shall be accompanied by a copy of the proposed Sublease or
assignment. The consent by LESSOR to any assignment or subletting shall not be
construed in any way to relieve LESSEE from obtaining the express consent in
writing of LESSOR to any further assignment or subletting. Consent shall not be
required for an assignment or subletting by the LESSEE to a corporation which
owns, is owned by, or is under common control of LESSEE, whether such ownership
or control is immediate or through ownership or control of other Corporations,
or to a corporate successor of LESSEE, whether by merger, acquisition or stock
purchase. For purposes of the foregoing sentence, in order to establish
ownership or common control, each order to establish ownership or common
control, each Corporation in the chain of ownership or control must own at least
50% of the voting securities of its immediate subsidiary in such chain of
ownership or control. Notwithstanding such consent, LESSEE shall not be relieved
from liability under the lease, and further, such subletting or assignment shall
comply with the remaining prerequisites listed above.

      13.2  In the event that the LESSOR consents to any assignment or
subletting of the Leased Premises by the LESSEE, the LESSOR may impose a
condition upon said consent that LESSEE thereafter to pay to LESSOR a sum equal
to 50% (i) subtenant or assignee which is in excess of the fixed annual rent and
Additional Rent and other amounts then being paid by LESSEE to LESSOR pursuant
to the terms of this Lease, and (ii) any other profit or gain realized by LESSEE
directly as a result of any such assignment or subletting (in computing any
profit to be paid LESSOR hereunder there shall be deducted all reasonable
expenses incurred by LESSEE in connection with the assignment or particular
subletting, including any reasonable attorneys fees or customary brokerage
commissions paid to an unaffiliated broker or agent). Nothing contained in this
paragraph shall require LESSEE to pay to LESSOR any profit or gain realized by
LESSEE from any such assignment or subletting until LESSEE has actually received
payment thereof by such assignee or subtenant.

      13.3  Notwithstanding any of the above, following LESSEE's written notice
of a proposed assignment or Sub-Lease as provided in Section 13.1, of more than
75% of the Leased Property, LESSOR shall have the sole option, in its
discretion, in lieu of granting or accepting any assignment or sublease, to
terminate the Lease hereunder. This right of LESSOR to terminate pursuant to
this section shall not apply to an Sub-Lease or assignment not requiring
LESSOR's prior consent.

14    COVENANT OF QUIET ENJOYMENT

      The LESSEE, upon paying the rent and all Additional Rent and other charges
herein provided for and performing all of the other terms of this lease on its
part to be performed shall quietly have and enjoy the Leased Property, during
the term of this lease or any renewal thereof without hinderance or molestation.

15.   RIGHT OF ENTRY



      The LESSOR or its agents shall have the right to enter the Leased Property
at all reasonable times upon reasonable notice (except in emergencies) in order
to examine it, and to show it to mortgagees, or prospective lessees (within the
last six (6) months of the term) or to make such repairs, alterations,
improvements or additions as necessary to keep the Premises in proper order and
repair. The LESSOR shall be allowed to take all material into or upon the Leased
Property that may be required therefor without the same constituting an eviction
of the LESSEE in whole or in part. Neither the rent nor the Additional Rent
shall abate while repairs, alterations, improvements or additions are being
made, whether by reason of loss or interruption of the business of the LESSEE.
or otherwise. LESSOR shall not unreasonably delay in making repairs/alterations
referred to in this paragraph. During the six months prior to the expiration of
this Lease, LESSOR may list the Leased Property with a broker or real estate
agent for the purpose of reletting the Leased Property and may post "To Let" or
other appropriate signs on the property. If required by law, rule or regulation,
the LESSOR shall have the right at any time without effecting an actual or
constructive eviction and without incurring any liability to the LESSEE therefor
to change the arrangement or location of entrances or passageways, doors and
doorways, corridors, elevators, driveways, stairs, toilets or other public parts
of the building (and if LESSOR undertakes same, shall complete same with
reasonable diligence) and to change the name, number or designation by which the
building is commonly known. If at any time during the term of this lease the
Leased Property or any part thereof shall be abandoned for more than 10
consecutive days by the LESSEE, the LESSOR may at its option enter into the
Leased Property by force or otherwise, without being liable to the LESSEE for
damages for any payment of any kind whatsoever (unless damage to the Premises
caused by the gross negligence of the LESSOR) and may in its uncontrolled
discretion, as an agent of the LESSEE, relet the Leased Property or any part
thereof for the whole or any part of the then unexpired term and for the
purposes of such reletting, LESSOR may make necessary alterations and
modifications of the Leased Property and may receive and collect all rent
payable by virtue of such reletting. If the LESSOR shall, because of non-payment
of rent, the Additional Rent or other breach of condition or covenants or
agreement on the part of the LESSEE, re-enter and repossess the Leased Property
pursuant to the conditions and limitations contained therein by summary
proceeding or otherwise, the LESSOR may, at its option, hold the LESSEE liable
for the difference between the rent and other charges that would have been
payable hereunder during the remainder of the leased term, as if this lease had
contained in full force and the net rent for such period realized by the LESSOR
by means of reletting to any party or parties on such terms and conditions as
any in the uncontrolled discretion of the LESSOR be provided and the LESSEE
shall pay monthly in advance at such periods at the rent hereunder would have
fallen due, if this lease continued, the difference between the original amount
of each monthly payment as herein provided plus such sums, if any, due from the
LESSEE as Additional Rent and the net proceeds of reletting after deducting
expenses of every nature and description incurred by the LESSOR, including
commissions and the reasonable cost of all alterations and modifications to the
Leased Property made in reletting same.

16    SURRENDER OF LEASED PROPERTY

      The LESSEE shall on the last day of the term, or upon the sooner
termination of the lease, any extension or renewal thereof, peacefully and
quietly surrender the Leased Property to the LESSOR, broom clean, in as good
condition or repair as at the commencemyn of the term, with normal wear and tear
thereof excepted. The LESSEE shall remove all improvements and replacements
which are LESSEE's property and, if such removal damages the Leased Property,
LESSEE shall repair and restore the Leased Property in conformity with this
paragraph.

17    SELF-HELP

      LESSEE convenants and agrees that if it shall at any time fail to make any
payments or perform any act which the LESSEE is obligated to make or perform
under this lease within fifteen (15) days after LESSEE's time to make any such
payment or perform any act has expired including applicable periods of notice or
grace then the LESSOR may, but shall not be



obligated so to do, and without waiving, or releasing the LESSEE from any
obligations of the LESSEE in this lease contained, make any payment or perform
any act which the LESSEE is obligated to perform under this lease, in such
manner and to such extent as shall be necessary, and in exercising any such
rights, reasonably pay necessary and incidental costs and expenses, employ
counsel and incur and pay reasonable attorneys' fees. Notwithstanding the
foregoing, LESSOR may make any such payment or perform any such act before
LESSEE's time to do so as provided herein has expired if the same is necessary
to protect the structural integrity of the building or as required by law,
governmental authority, LESSOR's mortgagee, insurance company or rating company,
and charge to LESSEE the incidental costs and expenses in connection with the
performance of any such act by LESSOR, shall be deemed Additional Rent hereunder
and, except as otherwise in this lease expressly provided, shall be payable to
LESSOR on demand or at the option of the LESSOR may be added to any rent then
due or thereafter becoming due under this lease, and LESSEE covenants to pay any
such sum or sums with interest as aforesaid and LESSOR shall have (in addition
to any other right or remedies of LESSOR), the same rights and remedies in the
event of the non-payment thereof by LESSEE as in the case of default by LESSEE
in the payment of rent.

18    DEFAULT

      18.1  The occurrence of any of the following shall constitute an event of
default:

            (a)   Delinquency in the payment of any rent or Additional Rent
payable under this lease after (5) days notice from LESSOR beyond any applicable
grace period.

            (b)   Delinquency or failure by the LESSEE in the performance of or
compliance with any of the conditions contained in this lease other than those
referred to in the foregoing subparagraph (a), for a period of fifteen (15) days
after written notice by LESSOR of such occurrence, unless said delinquency or
failure is not capable of being cured wtihin said period of time, but LESSEE
commences curing within fifteen (15) days and diligently works towards
completing such cure which, in any event, must be completed withnt sixty (60)
days.

            (c)   Filing by the LESSEE in any court pursuant to any statute,
either of the United States or any state, of a petition in bankruptcy or
insolvency, or for reorganization, or for the appointment of a receiver or
trustee of all or a portion of the LESSEE's property, or an assignment by the
LESSEE for the benefit of creditors.

            (d)   Filing against the LESSEE in any court pursuant to any
statute, either of the United States or of any state, of a petition in
bankruptcy or insolvency, or for reorganization, or for appointment of a
receiver or trustee of all or a portion of the LESSEE's property, if within
sixty (60) days after the commencement of any such proceedings against the
LESSEE such petition shall not have been dismissed or discharged.

            (e)   If LESSEE shall assign, record, mortgage or encumber this
lease or sublet the whole or any part of the Leased Property, otherwise than as
expressly permitted hereunder.

            (f)   If LESSEE shall abandon the Leased Property for more than 10
consecutive days or fail to keep the premises occupied to the extent necessary
to maintain fire insurance coverage. The LESSEE shall not be deemed to have
abandoned the Premises if LESSEE continues to make payments of rent when due and
Additional Rent required under the Lease.

            (g)   If any execution, attachment or levy shall be issued against
LESSEE or a substantial portion of LESSEE's property which is not dismissed,
discharged, stayed or bonded within thirty (30) days after issuance, or where
the premises shall be, or attempted to



be, taken or occupied by someone other than LESSEE (except where permitted by
assignment or sublease).

            (h)   If a petition or a proceeding is filed or commenced by or
against LESSEE for its dissolution of liquidation, or if its property is taken
by any governmental authority in connection with a dissolution or liquidation,
and if filed or commenced against LESSEE, the same is not dismissed within
thirty (30) days.

            (i)   If LESSEE shall dissolve or if it shall sell or liquidate
substantially all of its assets Except as permitted pursuant section 13.1
herein.

      18.2  Upon the occurrence of an event of default, the LESSOR at any time
thereafter may give written notice to the LESSEE specifying such event of
default and stating that this lease shall expire on the date specified in such
notice, which shall be at least ten (10) days after the giving of such notice,
and upon the date specified in such notice this lease and all rights of the
LESSEE hereunder shall terminate. LESSEE hereby waives any and all rights of
redemption under the laws of the State of New York.

      18.3  Upon the termination of this lease pursuant to paragraph 18.2 of
this article the LESSEE shall peacefully surrender the Leased Property to the
LESSOR, and the LESSOR, upon or at any time after any such termination, may
without further notice re-enter the Leased Property and repossess it as
permitted by summary proceedings, ejectment or otherwise, and may dispossess the
LESSEE and remove the LESSEE and all other persons and property from the Leased
Property and may have, hold and enjoy the Leased Property and the right to
receive all rental income therefrom.

      18.4  At any time after any such termination, the LESSOR may relet the
Leased Property or any part thereof, in the name of the LESSOR or otherwise, for
such term (which may be greater or less than the period which would otherwise
have constituted the balance of the term of this lease, or the renewal term, if
any) and on such conditions (which may include concessions or free rent) as the
LESSOR, in its discretion, may determine, and may collect and receive the rent
therefor. The LESSOR shall in no way be responsible or liable for any failure to
relet the Leased Property or any part thereof, or for any failure to collect any
rent due upon such reletting.

      18.5  No such termination of this lease shall relieve the LESSEE of its
liability and obligations under this lease, and such liability and obligations
shall survive any such termination. In the event of any such termination,
whether or not the Leased Property or any part thereof shall have been relet,
the LESSEE shall pay to the LESSOR the rent and Additional Rent required to be
paid by the LESSEE up to the time of such termination, and thereafter the
LESSEE, until the end of what would have been the term of this lease in the
absence of such termination, shall be liable to the LESSOR for, and shall pay to
the LESSOR, as and for liquidated and agreed current damages for the LESSEE's
default:

            (a)   the equivalent of the full amount of the rent and Additional
Rent which would be payable under this lease by the LESSEE if this lease were
still in effect, less:

            (b)   the net proceeds of any reletting effected pursuant to the
provisions of paragraph 18.4 of this article, after deducting all the LESSOR's
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
reasonable attorneys' fees, reasonable alteration costs and expenses of
preparation for such reletting.

      18.6  The LESSEE shall pay such current damages, herein called deficiency,
to the LESSOR monthly on the days on which the rent and Additional Rent would
have been payable under this lease if this lease were still in effect, and the
LESSOR shall be entitled to



recover from the LESSEE each monthly deficiency as such deficiency shall arise,
or obtain a judgment (which is hereby consented to) for the full amount due or
to become due as per paragraph (a) above, giving credit, from time to time in
the nature or a partial satisfaction piece, for the items in sub-paragraph (b)
above, which, if previously collected from LESSEE, shall be remitted and
returned to LESSEE, as collected.

      18.7  In case suit shall be brought for recovery of possession of the
Leased Premises, for the recovery of rent or any other amount due under the
provisions of this Lease, or because of any breach of any other covenant herein
contained on the part of the LESSEE to be kept or performed, LESSEE shall pay to
LESSOR all expenses incurred therefor, including reasonable attorneys fees, All
said monies, including legal fees, shall be deemed to be Additional Rent herein.

19    CUMULATIVE REMEDIES, WAIVER ORAL CHANGE

      19.1  Every term, condition, agreement or provision contained in this
lease shall be deemed to be also a covenant.

      19.2  The specified remedies to which the LESSOR may resort under the
terms of this lease are cumulative and are not intended to be exclusive of any
other remedies or means of redress to which LESSOR may be lawfully entitled in
case of any breach by LESSEE of any provision of this lease. This provision,
however, shall not be deemed a waiver of LESSEE's right to insist upon an
election of remedies by LESSOR where otherwise required by law.

      19.3  The failure of LESSOR to insist in any one or more cases upon the
strict performance of any of the terms, covenants, conditions, provisions or
agreements of this lease or to exercise any option herein contained shall not be
construed as a waiver or a relinquishment for the future of any such term,
covenant, conditions, provision, agreement or option. A receipt and acceptance
by LESSOR of performance of anything required by this lease to be performed,
with the knowledge of the breach of any term, covenant, provision or agreement
of this lease, shall not be deemed a waiver of such breach, nor shall any such
acceptance of rent in a lesser amount than herein provided for (regardless of
any endorsement of any check, or any statement in any letter accompanying any
payment of rent) operate or be construed either as an accord and satisfaction or
in any manner other than as payment on account of the earliest rent then unpaid
by LESSEE, and no waiver by LESSEE of any term, covenant, conditions, provision
or agreement of this lease shall be deemed to have been made unless expressed in
writing and signed by LESSOR.

      19.4  In addition to the other remedies in this lease provided, LESSOR
shall be entitled to obtain an injunction against any violation or attempted to
threatened violation, of any of the terms, covenants, conditions, provisions or
agreements of this lease.

      19.5  This lease may not be changed orally, but only by agreement in
writing signed by the party against whom enforcement of the change, modification
or discharge is sought or by his agent.

20    ESTOPPEL CERTIFICATE

      LESSEE agrees, at any time and from time to time, upon not less than ten
(10) days prior request by the LESSOR to execute, acknowledge and deliver a
statement in writing certifying that this lease is unmodified and in full force
and effect (or if there have been modifications that the same is in full force
and effect as modified and stating the modification), and the dates to which the
rent and other charges have been paid in advance, and if there are any defaults
or rent abatements or offsets claimed, it being intended that any such statement
delivered pursuant to this paragraph may be relied upon by the LESSOR, any
prospective



purchaser of the fee or mortgagee or assignee of any mortgage upon the fee of
the Leased Premises.

21    SUBORDINATION

      This lease is and shall be subject and subordinated to the lien of any
mortgage or mortgages on or affecting the Leased Premises, or any part thereof,
at the date hereof, and to any mortgage or mortgages hereafter made affecting
the Leased Premises, and to all renewals, modifications, consolidations,
replacements or extensions thereof, irrespective of the time of recording such
mortgage provided, however, that the Mortgagee agrees not to disturb LESSEE's
occupancy so long as LESSEE performs its obligations under this Lease. The
provisions of this subordination shall be self-operative, but in confirmation of
this subordination LESSEE shall, at LESSOR's, or mortgagee's request, execute
and deliver such further instruments as may be reasonably desired by the holders
of said mortgages, if any, and LESSEE hereby appoints LESSOR its irrevocable
attorney-in-fact to execute and deliver any such instruments for LESSEE.

22    SHORT FORM LEASE

      The LESSEE will at any time at the request of LESSOR, execute duplicate
originals of an instrument in recordable form which will constitute a short form
or memorandum of lease, setting forth a description of the Leased Property, the
term of lease and oother portions hereof except the rent provisions, that LESSOR
may reasonably request, provided same expressly states that it is subject to,
and is not in any respect a modificationof, this Lease Agreement.

23    SECURITY INTEREST

      LESSEE acknowledges that a security interest has been granted by the
LESSOR on certain monies due or to become due under this Lease. The original
counterpart of the Lease shall be marked "Secured Party's Original" and all
other counterparts thereof shall be marked "Duplicate" and no security interest
can be created except by possession of the original counterpart.

24    LIMITATION OF LIABILITY

      LESSOR shall be under no personal liability with respect to any of the
provisions of this lease, and if it is in breach or default with respect to its
obligations or otherwise, under this lease, LESSEE shall look solely to the
equity of LESSOR in the Leased Property including the proceeds and profits
therefrom for the satisfaction of LESSEE's remedies. It is expressly understood
and agreed that LESSOR's liability under the terms, covenants, warranties and
obligations of this lease shall in no event exceed the amount of its equity in
the Leased Property.

25    ENCUMBRANCES

      The LESSEE shall not cause any of the Leased Property to be encumbered
with any lien, mortgage, security or any other encumbrances during the term of
this lease or any renewal thereof, nor shall the LESSEE have the right to
mortgage its interest in this lease. The LESSOR, however, shall have the
absolute right to mortgage the Leased Property without notice to the LESSEE and
the LESSEE agrees to subordinate this lease or any renewal thereof to the lien
of any mortgage or mortgages on or affecting the Leased Property or any part
thereof, in accordance with paragraph 21 hereof.

26    BROKERS



      LESSEE hereby represents that no broker was dealt with in connection with
the lease and agrees to indemnify the LESSOR against any and all claims for a
brokerage commission by any person or entity claiming to have dealt with LESSEE.

27    NOTICES

      All notices to be given hereunder shall be in writing, personally
delivered or deposited in the United States mail, certified or registered, with
postage prepaid, and addressed, to the party at the address on page 1 hereof or
such other address as designated in writing by a party hereto. Notices shall be
deemed given when so personally delivered or when deposited in the United States
mail as above provided, with a copy, if to LESSOR to:



              Mason & Mason, PC
              Law Offices
              394 Old Country Rd.
              Garden City, NY   11530
              ATTN: Michael Mason, Esq.
              Phone:(516) 739-3090
              Fax: (516) 739-3077

If to LESSEE:

              PRYOR CASHMAN SHERMAN & FLYNN
              410 PARK AVE
              NEW YORK NY 10022
              Attn: Eliezer Hecht, Esq.
              (212) 421-4100

              With a Copy to :
              Gregory L. Weaver
              Chief Financial Officer
              3450 Monte Villa Parkway
              Bothell, WA 98021-8906
              (425)908-3615

28    CAPTIONS

      The paragraph captions are for convenience only and shall not limit or be
deemed to construe or interpret the terms and provisions hereof.

29.   APPLICABLE LAW

      This lease and any dispute arising hereunder shall be construed and
enforced in accordance with the laws of the State of New York.

30    SUCCESSORS

      Subject to the provisions of paragraph 13 hereof, this lease shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
successors and assigns of the parties hereto.

31.   ENTIRE AGREEMENT

      This instrument constitutes the entire agreement between the parties
hereto and there are no verbal or collateral understandings, agreements,
representations, or warranties not expressly set forth herein.

32.   Original Lease

      Lessor and Lessee are parties to a lease for the Leased Premises dated
April 23, 1995 (the "Original Lease"). The parties hereby agree that, upon the
the effective date of this Lease, the Original Lease shall terminate in its
entirety and be of no further force and effect.

33.   Tenant Early Termination Right

      Anything herein to the contrary notwithstanding, provided the Lessee is
not in default under any term, covenant or condition of this lease, including
but not limited to the obligation to pay rent, at any time after the expiration
of the third year from the commencement



date of this lease, Lessee shall have the right to terminate the Lease upon six
(6) months written notice to Lessor (the "Termination Period"). At the end of
the Termination Period, Lessee shall vacate the Lease Premises and this Lease
shall terminate and be of no further force and effect, as though the end of the
Termination Period was the original expiration date of the Lease.

34.   RESTORATION AT LEASE END

      At the expiration of this lease, or sooner termination hereof, LESSEE
shall remove those alterations, additions or improvements, and restore those
portions of the premises, as required in Article 10 herein. LESSEE shall also
remove those alterations, additions or improvements WHICH WERE INSTALLED AFTER
THE DATE OF THIS LEASE, and restore those portions of the premises, for which
consent was required under this lease, but not obtained.

ATTEST:

David A. Yarom, LESSOR

By /s/ David A. Yarom
   ------------------
      DAVID A. YAROM

Dated: March 25, 2005

ATTEST:

Nastech Pharmaceutical Company Inc.

BY: /s/ Gregory L. Weaver
   ----------------------

Dated: March 16, 2005



DAVID A. YAROM.
                                      with
                       NASTECH PHARMACUTICAL COMPANY INC.

                                  RENT SCHEDULE

a) $83,400.00 base rent for the period July 1, 2005 through June 30, 2006,
payable in advance on the first day of each calendar month in equal monthly
installments of $6,950.00 each.

b) $87,600.00 base rent for the period July 1, 2006 through June 30, 2007,
payable in advance on the first day of each calendar month in equal monthly
installments of $7,300.00 each.

c) $92,000.00 base rent for the period July 1, 2007 through June 30, 2008,
payable in advance on the first day of each calendar month in equal monthly
installments of $7,666.67 each.

d) $96,600.00 base rent for the period July 1, 2008 through June 30, 2009,
payable in advance on the first day of each calendar month in equal monthly
installments of $8,050.00 each.

e) $101,400.00 base rent for the period June 1, 2009 through June 30, 2010,
payable in advance on the first day of each calendar month in equal monthly
installments of $8,450.00 each.

EX-31.1

                                                                    Exhibit 31.1

                      CHIEF EXECUTIVE OFFICER CERTIFICATION

REQUIRED BY RULES 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED

I, Steven C. Quay, M.D., Ph.D., Chairman of the Board, President and Chief
Executive Officer of Nastech Pharmaceutical Company Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nastech Pharmaceutical
Company Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:

      a) designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

      c) evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures as of the end of
      the period covered by this report based on such evaluation;

      d) disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

      a) all significant deficiencies in the design or operation of internal
      control over financial reporting which are reasonably likely to adversely
      affect the registrant's ability to record, process, summarize and report
      financial information; and

      b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

Date: May 9, 2005

                                By: /s/ Steven C. Quay
                                    --------------------------------------------
                                    Name:  Steven C. Quay, M.D., Ph.D.
                                    Title: Chairman of the Board, President and
                                           Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                      CHIEF FINANCIAL OFFICER CERTIFICATION

REQUIRED BY RULES 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED

I, Gregory L. Weaver, Chief Financial Officer of Nastech Pharmaceutical Company
Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nastech Pharmaceutical
Company Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:

      a) designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

      c) evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures as of the end of
      the period covered by this report based on such evaluation;

      d) disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

      a) all significant deficiencies in the design or operation of internal
      control over financial reporting which are reasonably likely to adversely
      affect the registrant's ability to record, process, summarize and report
      financial information; and

      b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

Date: May 9, 2005

                                           By:    /s/ Gregory L. Weaver
                                                  ------------------------------
                                           Name:  Gregory L. Weaver
                                           Title: Chief Financial Officer

EX-32.1

                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven C. Quay, M.D., Ph.D., Chairman of the Board, President and Chief
Executive Officer of Nastech Pharmaceutical Company Inc. ("Nastech"), certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nastech on Form 10-Q
for the fiscal quarter ended March 31, 2005 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
and that information contained in the Quarterly Report on Form 10-Q fairly
presents in all material respects the financial condition and results of
operations of Nastech.

Date: May 9, 2005

                                  By: /s/ Steven C. Quay
                                      ------------------------------------------
                                      Name:  Steven C. Quay, M.D., Ph.D.
                                      Title: Chairman of the Board, President
                                             and Chief Executive Officer

A signed original of this written statement required by Section 906 has been
provided to Nastech and will be retained by Nastech and furnished to the
Securities Exchange Commission or its staff upon request.

This certification accompanies each periodic report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by Nastech for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Gregory L. Weaver, Chief Financial Officer of Nastech Pharmaceutical Company
Inc. ("Nastech"), certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Nastech Pharmaceutical Company Inc. on Form 10-Q for the fiscal
quarter ended March 31, 2005 fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that
information contained in the Quarterly Report on Form 10-Q fairly presents in
all material respects the financial condition and results of operations of
Nastech.

Date: May 9, 2005

                                  By: /s/ Gregory L. Weaver
                                      ------------------------------------------
                                      Name:  Gregory L. Weaver
                                      Title: Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to Nastech and will be retained by Nastech and furnished to the
Securities Exchange Commission or its staff upon request.

This certification accompanies each periodic report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by Nastech for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.