FILED PURSUANT TO RULE 424(B)(5)

We are selling 4,250,000 shares of our common stock. We have granted the underwriters an option to purchase up to 637,500 additional shares of common stock to cover over-allotments.

Our common stock is quoted on the Nasdaq National Market under the symbol “NSTK.” The last reported sale price of our common stock on the Nasdaq National Market on November 23, 2004 was $15.52 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page S-9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the related prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

You should rely on the information incorporated by reference or provided in this prospectus supplement or the accompanying prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this document.

A registration statement on Form S-3 (File no. 333-119429) utilizing a shelf registration process relating to the securities described in this prospectus supplement has been filed with the Securities and Exchange Commission and was declared effective on October 8, 2004. Under this shelf registration process, we may, from time to time, sell up to $80,000,000 of common stock, warrants to purchase common stock or debt securities, of which this offering is a part.

This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering of common stock and also adds, updates and changes information contained in the accompanying prospectus and the documents incorporated by reference. The second part is the prospectus, which gives more general information, some of which may not apply to this offering of common stock. To the extent the information contained in this prospectus supplement differs or varies from the information contained in the accompanying prospectus or any document incorporated by reference, the information in this prospectus supplement shall control.

You should rely only on the information contained in or incorporated by reference into this prospectus supplement and the accompanying prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. This prospectus supplement is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful. You should not assume that the information we have included in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date of this prospectus supplement or the accompanying prospectus or that any information we have incorporated by reference is accurate as of any date other than the date of the document incorporated by reference regardless of the time of delivery of this prospectus supplement or of any such shares of our common stock.

This document includes product names, trade names and trademarks of other companies. All such product names and trademarks appearing in this document are the property of their respective holders.

SUMMARY

This summary highlights information contained elsewhere or incorporated by reference in this prospectus supplement and the accompanying prospectus. This is not intended to be a complete description of the matters covered in this prospectus supplement and the accompanying prospectus and is subject to and qualified in its entirety by reference to the more detailed information and financial statements (including the notes thereto) included or incorporated by reference in this prospectus supplement and the accompanying prospectus. When we refer to “we,” “us,” “our” or “the Company,” we mean Nastech Pharmaceutical Company Inc., unless the context indicates otherwise.

Business

We are an emerging 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 novel formulation components or excipients that can transiently manipulate or open “tight junctions” 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 surface, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of therapeutic drugs 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 will offer 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 elimination of injection pain and avoidance of injection site irritation. In addition, we believe our intranasal drug delivery technology will offer advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects like nausea and vomiting 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 collaboration partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis, erectile dysfunction, breakthrough cancer pain and multiple sclerosis. Our lead product candidate, Peptide YY_3-36 (“PYY”) for obesity, is in Phase I clinical trials and is being developed with our collaboration partner Merck & Co., Inc. (“Merck”). Additionally, we are developing two product candidates for the treatment of osteoporosis. Parathyroid Hormone PTH_1-34 (“PTH_1-34”) is in Phase I clinical trials, and we have filed an abbreviated new drug application (“ANDA”) for our generic calcitonin-salmon intranasal spray, which we are developing with our collaboration partner Par Pharmaceutical, Inc. (“Par Pharmaceutical”). We currently have 38 patents issued and 151 patent applications filed.

Product Candidates

The following table summarizes the current status of our principal product candidates.


	Initial				Delivery Technology/
Product	Indication	Clinical Status	Next Steps	Marketing Rights	Intellectual Property

Peptide YY _3-36	Obesity	Three Phase I studies completed	Joint development with Merck conducting clinical and pre-clinical studies and Nastech performing manufacturing activities	Merck (world- wide) Nastech (co- promotion rights in the U.S.)	Tight junction/ patents and applications
Parathyroid Hormone PTH _{1 -34}(Peptide)	Osteoporosis	Two Phase I studies completed	Pre-clinical and Phase I clinical studies	Nastech	Tight junction/ patents and applications
Calcitonin-salmon (Peptide)	Osteoporosis	ANDA submitted and accepted for review by the FDA	FDA review of ANDA	Par Pharmaceutical (U.S.) Nastech (rest of world)	Other/formulation patent applications
Apomorphine HCl (Small molecule)	Erectile dysfunction	Four Phase II studies completed	Currently seeking a partner	Nastech	Other/formulation patents and applications
Morphine Gluconate (Small molecule)	Breakthrough cancer pain	One Phase II study completed	Currently seeking a partner	Nastech	Other/formulation patents and applications
Beta Interferon (Protein)	Multiple sclerosis	One Phase I study completed	Currently seeking a partner	Nastech	Tight junction/ patents and applications

Peptide YY_3-36

PYY, a high affinity Y2 receptor agonist, may represent a new approach to the treatment of obesity. This hormone is naturally produced in the abdomen by specialized endocrine cells in proportion to the caloric content of a meal and is believed to reduce food intake by modulating appetite responses in the hypothalamus. Results from a study conducted by Dr. Stephen R. Bloom and colleagues published in The New England Journal of Medicine (September 4, 2003, Volume 349, Number 10, Pages 941-948), found that obese subjects had lower levels of PYY than non-obese subjects, suggesting that PYY deficiency may contribute to the pathogenesis of obesity and that PYY supplementation may have therapeutic benefit. The study further demonstrated a 16.5% calorie reduction in obese subjects for the 24-hour period following a single intravenous injection of PYY, based on diary recorded food intake. We have developed a proprietary intranasal formulation of PYY and have filed patent applications containing over 350 claims in the U.S. and seven other countries, as well as pursuant to the Patent Cooperation Treaty. We and Merck are currently in Phase I clinical trials with this program.

Parathyroid Hormone (PTH_1-34)

PTH_1-34 is part of the naturally occurring human parathyroid hormone that helps regulate calcium and phosphorus metabolism. We have developed a proprietary intranasal formulation of PTH_1-34 and have filed two U.S. patent applications containing an aggregate of 103 claims. We are currently in Phase I clinical trials in this program. Currently, Eli Lilly and Company’s (“Eli Lilly”) Forteo is the only commercially available parathyroid hormone therapy approved for the treatment of post-menopausal osteoporosis in women as well as osteoporosis in men. We view a potentially non-invasive, intranasally delivered alternative to Forteo as a significant market opportunity.

Our Phase I clinical program was launched in the second quarter of 2004. Our clinical study to date provides the basis for formulation optimization of our PTH_1-34 intranasal spray, which is the next step in the program. Two clinical trials have been completed with PTH_1-34. The next step in the clinical development of our PTH_1-34 program will be formulation optimization of our PTH_1-34 intranasal sprays, which will result in a candidate formulation to be taken forward in pre-clinical and clinical trials.

Calcitonin-Salmon

Calcitonin is a natural peptide hormone produced by the thyroid gland that acts primarily on bone. Bone is in a constant state of remodeling, whereby old bone is removed and new bone is created. Calcitonin inhibits bone removal and thereby promotes bone formation. Calcitonin-salmon appears to have actions essentially identical to calcitonins of mammalian origin, but its potency is greater due to a longer duration of action. We believe that our calcitonin-salmon intranasal spray could be a generic alternative to Novartis AG’s (“Novartis”) Miacalcin, a currently approved and marketed calcitonin-salmon intranasal spray.

In December 2003, we filed with the U.S. Food and Drug Administration (the “FDA”) an ANDA for generic calcitonin-salmon intranasal spray for osteoporosis. As part of the ANDA process, we have conducted a clinical trial and laboratory tests including spray characterization and spray content, designed to demonstrate the equivalence of our product to the currently marketed drug, Miacalcin. In February 2004, the FDA accepted the filing of our ANDA. In June 2004, we announced that the FDA had conducted a successful Pre-Approval Inspection of our generic calcitonin-salmon intranasal spray manufacturing facility with no cited deviations from current Good Manufacturing Practices (“cGMP”). At this time, we believe that we have provided the FDA with a complete written response to all of its questions relating to this ANDA.

Apomorphine Hydrochloride

Apomorphine Hydrochloride (“HCl”) is a centrally acting dopamine agonist. The subcutaneous injection of apomorphine has been shown to induce erections in men with erectile dysfunction. Marketing authorization for sublingual apomorphine HCl for erectile dysfunction was granted in Europe in May 2001. We believe that we have developed an intranasal formulation of apomorphine HCl, which allows for easier use than subcutaneous administration and may allow lower doses and reduced side effects compared to the commercialized sublingual formulation.

Morphine Gluconate

Morphine is a well known opioid analgesic currently marketed in multiple dosage forms including those for injectable, oral and rectal administration. We believe that an intranasal dosage form of our patented morphine gluconate, an enhanced bioavailable form of morphine, will enable patient-friendly self-administration and provide a rapid systemic absorption of the drug for fast pain relief, particularly among patients with breakthrough cancer pain. We have developed a proprietary formulation of morphine gluconate and completed a Phase II clinical trial.

Beta Interferon

Interferons are a family of naturally occurring proteins and glycoproteins classified as cytokines. They are produced by cells in response to viral infection and other biological inducers and mediate antiviral, antiproliferative and immunomodulatory activities. Beta interferon is currently administered by injectable dosage form only. We believe that an intranasal dosage form would potentially increase patient compliance and efficacy with fewer side effects compared to an injectable product. We have developed a proprietary intranasal formulation of beta interferon and have completed a Phase I clinical trial.

Business Strategy

Our goal is to become the leader in the development and commercialization of innovative, intranasal drug delivery products and technologies. Key elements of our strategy include:

• Applying our tight junction technology to product candidates and other drug delivery methods;

• Pursuing collaborations with leading pharmaceutical and biotechnology companies;

• Opportunistically developing and commercializing product candidates on our own; and

• Utilizing our manufacturing expertise and capabilities.

Recent Developments

Strategic Alliance with Merck to Develop and Commercialize PYY Intranasal Spray

On September 24, 2004, we entered into an exclusive development, commercialization and license agreement and a separate exclusive supply agreement with Merck for the development and commercialization of PYY intranasal spray for the treatment of obesity. The collaborative arrangement provides that Merck will assume primary responsibility for pre-clinical and clinical studies and regulatory approvals, while we will be responsible for all manufacturing of PYY-related product. Merck will lead and fund world-wide commercialization, and we have the right to co-promote the product in the United States.

Under the 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 our 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.

We believe our collaboration with Merck demonstrates we have taken a significant step toward becoming a leader in the development of innovative, intranasal drug delivery products and technologies. We also believe that this collaboration partnership demonstrates the value PYY holds as a potential treatment option for obesity.

Acquisition from Thiakis of Exclusive World-Wide Right to PYY Patent Applications for Intranasal Administration

On September 27, 2004, we announced our acquisition of 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 used in conjunction with PYY for the treatment of obesity, diabetes and other metabolic conditions. The patent applications were sublicensed from Thiakis Limited (“Thiakis”), the exclusive licensee of the applications. Under the agreement, we made an equity investment in Thiakis and paid an initial license fee. Thiakis is entitled to receive additional milestone fees and patent-based royalties based on future progress of the patent application and product development processes.

Acquisition of Exclusive World-Wide Rights to the Patent Estate of The University of Cincinnati Relating to Certain Analogs of PYY

On November 19, 2004, we entered into a license agreement with The University of Cincinnati for the exclusive worldwide rights to the patent estate of The University of Cincinnati with respect to certain analogs of PYY relating to all routes of delivery. The financial terms of the agreement with The University of Cincinnati include an initial license fee, maintenance fees, milestone payments and royalties upon commercialization. We may develop formulations for product candidates derived from this patent estate, which will be subject to an exclusive commercialization option by Merck.

Strategic Alliance with Par Pharmaceutical for Distribution of Generic Calcitonin-Salmon Intranasal Spray

On October 22, 2004, we entered into a license and supply agreement granting Par Pharmaceutical the exclusive U.S. distribution and marketing rights to our generic calcitonin-salmon intranasal spray. Under the terms of the agreement with Par Pharmaceutical, we will obtain FDA approval, manufacture and supply finished generic calcitonin-salmon intranasal spray product to Par Pharmaceutical. Par Pharmaceutical will distribute the product in the United States. The financial terms of the agreement include milestone payments, product transfer payments for manufactured product and a profit sharing upon commercialization. Our ANDA filed with the FDA was accepted for review on February 17, 2004.

Corporate Information

We were incorporated in Delaware on September 23, 1983. Our principal executive offices are located at 3450 Monte Villa Parkway, Bothell, Washington 98021, and our telephone number is (425) 908-3600. We have an internet web address at “http://www.nastech.com.” The information available on or through our website is not a part of this prospectus supplement and the accompanying prospectus.

The Offering

Unless specifically stated, information in this prospectus supplement assumes the underwriters will not exercise their over-allotment option and no other person will exercise any other outstanding options or warrants.


Common stock offered by Nastech Pharmaceutical Company Inc.		4,250,000 shares

Common stock outstanding after the offering		17,814,856 shares

Use of proceeds		We intend to use the net proceeds from this offering for general corporate purposes, including funding of our clinical research and development programs, clinical development of our product candidates, capital expenditures and working capital needs. Prior to the use of the net proceeds for any such purposes, we may also invest the net proceeds in short-term, interest-bearing, investment-grade securities. See “Use of Proceeds.”

Nasdaq National Market symbol		NSTK

The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of November 23, 2004 and excludes:

• 3,393,342 shares of common stock authorized for issuance under our stock option plans, under which options to purchase 2,766,752 shares, with an average exercise price of $11.35 per share, were outstanding and 626,590 shares were available for grant as of such date; and

• 1,551,973 shares of common stock reserved for issuance upon the exercise of warrants outstanding as of such date, with a weighted average exercise price of $10.52 per share.

Summary Financial Information

The tables below present our summary consolidated financial data for the periods indicated. The statement of operations data for the nine months ended September 30, 2003 and 2004 and the balance sheet data as of September 30, 2003 and 2004 have been derived from our unaudited consolidated financial statements, which are incorporated by reference into this prospectus supplement and the accompanying prospectus. The statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 are derived from our consolidated financial statements that have been audited by KPMG LLP, independent registered public accounting firm, and incorporated by reference into this prospectus supplement and the accompanying prospectus. The statements of operations data for the years ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our audited consolidated financial statements, which are not incorporated by reference into this prospectus supplement and the accompanying prospectus. The results of operations for the interim periods are not necessarily indicative of the results for a full fiscal year or for any future period.

The accompanying summary consolidated financial information should be read together with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the accompanying consolidated financial statements and related notes that are incorporated by reference into this prospectus supplement and the accompanying prospectus.



																	Nine Months Ended
		Year Ended December 31,															September 30,

Statement of Operations Data:		1999			2000(1)			2001(2)			2002(3)			2003(4)			2003			2004(5)


		(in thousands, except per share data)
Revenue:
Product revenue, net		$	740		$	906		$	996		$	1,408		$	1,805		$	1,797		$	300
License and research fees			3,807			3,235			1,607			7,515			17,635			16,732			96

Total revenue			4,547			4,141			2,603			8,923			19,440			18,529			396
Operating expenses:
Cost of product revenue			268			358			503			289			498			435			190
Research and development			9,341			6,399			6,595			11,613			17,097			11,956			16,030
Acquired in-process research and development			—			2,300			—			—			—			—			—
Royalties			1,436			1,517			487			9			—			—			—
Sales and marketing			1,051			655			595			1,863			2,377			2,115			656
General and administrative			1,885			3,247			3,977			8,138			5,679			4,301			6,090
Restructuring charge			—			—			—			595			—			—			—

Total operating expenses			13,981			14,476			12,157			22,507			25,651			18,807			22,966

Net loss from operations			(9,434	)		(10,335	)		(9,554	)		(13,584	)		(6,211	)		(278	)		(22,570	)
Gain on sale of product			—			—			—			—			4,236			4,236			—
Interest income			1,084			644			322			278			227			156			182
Interest expense			—			—			—			(162	)		(393	)		(338	)		(302	)

Net income (loss)		$	(8,350	)	$	(9,691	)	$	(9,232	)	$	(13,468	)	$	(2,141	)	$	3,776		$	(22,690	)

Net income (loss) per common share:
	Basic	$	(1.32	)	$	(1.51	)	$	(1.16	)	$	(1.34	)	$	(0.20	)	$	0.36		$	(1.83	)
	Diluted	$	(1.32	)	$	(1.51	)	$	(1.16	)	$	(1.34	)	$	(0.20	)	$	0.35		$	(1.83	)
Shares used in computing net income (loss) per share:
	Basic		6,335			6,437			7,956			10,028			10,751			10,388			12,412
	Diluted		6,335			6,437			7,956			10,028			10,751			10,942			12,412



																Nine Months Ended
	Year Ended December 31,															September 30,

Balance Sheet Data:	1999			2000(1)			2001(2)			2002(3)			2003(4)			2003			2004(5)


	(in thousands)
Cash and short-term investments	$	14,638		$	6,256		$	11,760		$	9,021		$	25,081		$	29,529		$	19,171
Working capital		12,912			5,799			10,404			3,342			14,766			20,309			10,181
Total assets		20,199			11,661			15,440			23,050			31,138			37,049			30,246
Accumulated deficit		(20,312	)		(30,003	)		(39,235	)		(52,703	)		(54,844	)		(48,927	)		(77,534	)
Total stockholders’ equity		16,625			9,565			13,494			8,645			17,906			23,467			9,524

(1) In 2000, we acquired Atossa HealthCare, Inc. (“Atossa”) in a transaction that was accounted for under the purchase method. In connection with the acquisition, we recognized a charge of $2.3 million for acquired in-process research and development.

(2) In 2001, we completed two private placements totaling 2,117,361 shares of common stock from which we received net proceeds of $9.5 million.

(3) In 2002, we received net proceeds of $5.0 million from a private placement of 250,000 shares of common stock.

(4) In 2003, we received net proceeds of $10.0 million from a private placement of 1,513,069 shares of common stock.

(5) In the first nine months of 2004, we received net proceeds of $12.3 million from a private placement of 1,136,364 shares of common stock.

You should carefully consider the risks described below before making an investment decision.

We do not generate operating income and will require additional financing in the future. If additional capital is not available, we may have to curtail or cease operations.

Our business currently does not generate the cash that is necessary to finance our operations. We incurred net operating losses of $22.6 million in the first nine months of 2004, $6.2 million in 2003, $13.6 million in 2002 and $9.6 million in 2001. Subject to the success of our development programs and potential licensing transactions, we may need to raise additional capital to fund research and development, to develop and commercialize our product candidates, to enhance existing services, to respond to competitive pressures and to acquire complementary businesses or technologies. Our future capital needs depend on many factors, including:


	•	the scope, duration and expenditures associated with our research and development programs;

	•	continued scientific progress in these programs;

	•	the outcome of potential licensing transactions, if any;

	•	competing technological developments;

	•	our proprietary patent position, if any, in our products; and

	•	the regulatory approval process for our products.

We may seek to raise necessary funds through public or private equity offerings, debt financings or additional strategic alliances and licensing arrangements. We may not be able to obtain additional financing on terms favorable to us, if at all. General market conditions may make it very difficult for us to seek financing from the capital markets. We may be required to relinquish rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us in order to raise additional funds through alliance, joint venture or licensing arrangements. If adequate funds are not available, we may have to delay, reduce or eliminate one or more of our research or development programs and reduce overall overhead expenses. These actions would likely reduce the market price of our common stock.

We have not been profitable on an annual basis for eight years, and we may never become profitable.

We have incurred net losses in each of the past eight years. As of September 30, 2004, we had an accumulated deficit of approximately $77.5 million and expect additional operating losses in the foreseeable future as we continue our research and development activities.

The process of developing our products requires significant research and development efforts, including basic research, preclinical and clinical development, as well as FDA regulatory approval. These activities, together with our sales, marketing, general and administrative expenses, have resulted in operating losses in the past, and there can be no assurance that we can achieve profitability in the future. Our ability to achieve profitability depends on our ability, alone or with our collaborators, to develop our drug candidates, conduct clinical trials, obtain necessary regulatory approvals, and manufacture, distribute, market and sell our drug products. We cannot assure you that we will be successful at any of these activities or predict when we will ever become profitable.

We are dependent on our collaborative arrangements with third parties for a substantial portion of our revenue, and our development and commercialization activities may be delayed or reduced if we fail to negotiate or maintain successful collaborative arrangements.

We are dependent on our current and any other possible future collaborators to commercialize many of our product candidates and to provide the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business. If we fail to secure or maintain successful

We entered into new collaboration partnerships with Merck in September 2004 and Par Pharmaceutical in October 2004. Over the next several years, we will depend on these collaborative partnerships for a significant portion of our revenue. The expected future milestone payments and cost reimbursements under these collaborations will provide an important source of financing for our research and development program, thereby facilitating the application of our technology to the development of our PYY product and enabling the commercialization of our generic calcitonin-salmon intranasal spray, which may produce significant royalty revenue. These collaborative agreements can be terminated by our partners in their discretion upon the satisfaction of certain notice requirements. Our partners are not precluded from independently pursuing competing products and drug delivery approaches or technologies. Even if our partners continue their contributions to our collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Our partners may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations. In addition, our partners may experience financial difficulties at any time that could prevent them from having available funds to contribute to these collaborations. If our collaborating partners fail to conduct their commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, we will earn little or no revenue from those products and we will not be able to achieve our objectives or build a sustainable or profitable business.

Our success depends to a significant degree upon the commercial success of products manufactured by us pursuant to supply agreements or marketed by our collaborating partners.

Even if we are able to develop products and obtain the necessary regulatory approvals, our success depends to a significant degree on the commercial success of products manufactured by us pursuant to supply agreements or marketed by our collaborating partners. If these products fail to achieve or subsequently maintain market acceptance or commercial viability, our business would be significantly harmed because our revenue is dependent upon sales of these products.

Even if we are successful in commercializing a product candidate, it is possible that the commercial opportunity for intranasally-administered products will be limited.

None of our product candidates utilizing our intranasal drug delivery technology have been brought to market. Accordingly, while we believe there is a commercial market for our intranasal drug delivery technology, there can be no assurance that our intranasal drug delivery technology will become a viable commercial alternative to other drug delivery methods. Many factors may affect the market acceptance and commercial success of any potential products, including:


	•	establishment and demonstration of the effectiveness and safety of the drugs;

	•	timing of market entry as compared to competitive products;

	•	the benefits of our drugs relative to their prices;

	•	actual and perceived benefits and detriments of intranasal drug delivery, which may be affected by press and academic literature;

	•	marketing and distribution support of our products; and

	•	any restrictions on labeled indications.

Our revenues and profits from any particular generic pharmaceutical products decline as our competitors introduce their own generic equivalents.

and supply finished generic calcitonin-salmon intranasal spray to Par Pharmaceutical. Par Pharmaceutical will distribute the product in the United States Novartis, the supplier of branded calcitonin-salmon intranasal spray, may introduce a generic version through Sandoz US, its wholly-owned subsidiary. Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies. To the extent that our collaborating partner and we succeed in being the first to market a generic version of a significant product, our initial sales and profitability following the introduction of such product will be subject to material reduction upon a competitor’s introduction of the equivalent product. Our ability to sustain our sales and profitability on any product over time is dependent on both the number of new competitors for such product and the timing of their approvals.

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

Many of our research and development programs are at an early stage. Clinical trials in patients are long, expensive and uncertain processes. The length of time generally varies substantially according to the type of drug, complexity of clinical trial design, regulatory compliance requirements, intended use of the drug candidate and rate of patient enrollment for the clinical trials. Clinical trials may not be commenced or completed on schedule, and the FDA may not ultimately approve our product candidates for commercial sale. Further, even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment. Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. For example, positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials. All of our potential drug candidates are prone to the risks of failure inherent in drug development. The clinical trials of any or all of our drug candidates, including apomorphine HCl intranasal spray, generic calcitonin-salmon intranasal spray, beta interferon, morphine gluconate, oral abuse-resistant opioid, and PYY intranasal spray could be unsuccessful, which would prevent us from commercializing the drug. The FDA conducts its own independent analysis of some or all of the pre-clinical and clinical study data submitted in a regulatory filing and often comes to different and potentially more negative conclusions than the analysis performed by the drug sponsor. Our failure to develop safe, commercially viable drugs approved by the FDA would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our stock price. In addition, significant delays in clinical trials will impede our ability to seek regulatory approvals, commercialize our drug candidates and generate revenue, as well as substantially increase our development costs.

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

We, our collaboration partners, and our product candidates are subject to extensive regulation by governmental authorities in the U.S. and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following actions: warning letters; fines and other civil penalties; unanticipated expenditures; delays in approving or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution.

Our product candidates cannot be marketed in the United States without FDA approval or clearance. The FDA has approved only one of our product candidates, Nascobal nasal gel, and cleared only one, our Mammary Aspirate Specimen Cytology Test (“MASCT”) device, for sale in the United States. Our other product candidates are in development, and will have to be approved by the FDA before they can be marketed in the United States. Obtaining FDA approval requires substantial time, effort, and financial resources, and there can be no assurance that any approval will be granted on a timely basis, if at all. If the FDA does not approve our product candidates in a timely fashion, or does not approve them at all, our

In addition, both before and after regulatory approval, we, our collaboration partners, and our product candidates are subject to numerous FDA requirements covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution, and export. The FDA’s requirements may change and additional government regulations may be promulgated that could affect us, our collaboration partners, and our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business.

In addition, some of our product candidates, including our morphine gluconate and abuse-resistant opioid, will be subject to the requirements of the Controlled Substances Act and implementing regulations thereunder, which are administered by the United States Drug Enforcement Administration (the “DEA”). Establishments may not handle controlled drug substances until they have been inspected and registered by the DEA. The DEA also imposes recordkeeping and reporting requirements, procurement and manufacturing quotas, sales restrictions, and other obligations. Facilities must be equipped to meet DEA security requirements. We currently hold a DEA registration to conduct research at our Hauppauge facility relating to drug formulations containing DEA Schedule II controlled substances. However, there can be no assurance that we will be able to maintain our DEA registration or that we will be able to obtain additional registrations required to continue to research or commercially distribute our product candidates.

Our operating results are subject to significant fluctuations and uncertainties, and our failure to meet expectations of public market analysts or investors regarding operating results may cause our stock price to decline.

Our operating results are subject to significant fluctuations and uncertainties due to a number of factors including, among others:


	•	timing and achievement of licensing transactions, including milestones and other performance factors associated with these contracts;

	•	time and costs involved in patent prosecution and development of our proprietary position;

	•	continued scientific progress and level of expenditures in our research and development programs;

	•	cost of manufacturing scale-up and production batches, including vendor provided activities and costs;

	•	time and costs involved in obtaining regulatory approvals;

	•	changes in general economic conditions and drug delivery technologies;

	•	expiration of existing patents and related revenues; and

	•	new products and product enhancements that we or our competitors introduce.

As a result of these factors and other uncertainties, our operating results have fluctuated significantly in recent years, resulting in net losses of $22.7 million in the first nine months of 2004, $2.1 million in 2003, $13.5 million in 2002 and $9.2 million in 2001.

Our revenues and operating results, particularly those reported on a quarterly basis, will continue to fluctuate significantly. This fluctuation makes it difficult to forecast our operating results. Therefore, we believe that quarterly comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. In addition, our operating results in a future quarter

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

We specialize in the intranasal delivery of pharmaceutical products and rely on the issuance of patents, both in the United States and internationally, for protection against competitive drug delivery technologies. Although we believe that we exercise the necessary due diligence in our patent filings, our proprietary position is not established until the appropriate regulatory authorities actually issue a patent, which may take over three years from initial filing or may never occur. We currently have 38 patents issued and 151 patent applications filed.

Moreover, even the established patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Although we believe our issued patents are valid, third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of these discoveries or technologies. As a result of such determinations, we may be enjoined from pursuing research, development or commercialization of potential products or may be required to obtain licenses, if available, to the third party patents or to develop or obtain alternative technology. Responding to challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns.

Furthermore, it is possible that others will infringe or otherwise circumvent our issued patents and that we will be unable to fund the cost of litigation against them or elect not to pursue litigation. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts. We also cannot assure you that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology. There may also exist third party patents or patent applications relevant to our potential products that may block or compete with the technologies covered by our patent applications and third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of invention.

In addition, we may not be able to protect our established and pending patent positions from competitive drug delivery technologies, which may provide more effective therapeutic benefit to patients and which may therefore make our products, technology and proprietary position obsolete.

If we are unable to adequately protect our proprietary technology from legal challenges, infringement or alternative technologies, we will not be able to compete effectively in the pharmaceutical delivery business.

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

Intellectual property, such as patents and license agreements based on those patents, generally are of limited duration. Our operating results depend on our patents and intellectual property licenses. Therefore, the expiration or other loss of rights associated with intellectual property and intellectual property licenses can negatively impact our business.

Our future results of operations depend, to a significant degree, upon our and our collaborating partners’ ability to successfully commercialize additional pharmaceutical products. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk. Successful product development in the pharmaceutical industry is highly uncertain, and very few research and development projects result in a commercial product. Product candidates that appear promising in the early phases of development, such as in early human clinical trials, may fail to reach the market for a number of reasons, such as:


	•	product candidate may not perform as expected in later or broader trials in humans and limit marketability of such product candidate;

	•	necessary regulatory approvals may not be obtained in a timely manner, if at all;

	•	product candidate may not be able to be successfully and profitably produced and marketed;

	•	third parties have proprietary rights to a product candidate, and do not allow sale on reasonable terms;

	•	product candidate may not be financially successful because of existing therapeutics that offer equivalent or better treatments; or

	•	suppliers of product pumps or actuators required to atomize our formulations may increase their price or cease to manufacture them without prior notice.

To date, none of the product candidates utilizing our current intranasal drug delivery technology have been approved by the FDA. Accordingly, there can be no assurance that any of our product candidates currently in development will ever be successfully commercialized, and delays in any part of the process or our inability to obtain regulatory approval could adversely affect our operating results by restricting introduction of new products by us or our collaborating partners.

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

Even if we are able to develop our products and obtain necessary regulatory approvals, we have limited experience or capabilities in marketing or commercializing our products. We currently have a limited sales, marketing or distribution infrastructure. Accordingly, we are dependent on our ability to find collaborative marketing partners or contract sales companies for commercial sale of our internally-developed products. Even if we find a potential marketing partner, we may not be able to negotiate a licensing contract on favorable terms to justify our investment or achieve adequate revenues.

Coverage and reimbursement status of newly approved drugs is uncertain and the failure to obtain adequate reimbursement coverage could limit our ability to generate revenue.

Our products may prove to be unsuccessful if various parties, including government health administration authorities, private healthcare insurers and other healthcare payers, such as health maintenance organizations and self-insured employee plans that determine reimbursement to the consumer, do not accept our products. Sales of therapeutic and other pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from these third party payers. Third party payers are increasingly challenging the prices charged for medical products and services. We cannot assure you that reimbursement will be available at all or at levels sufficient to allow our marketing partners to achieve profitable price levels for our products. If we fail to achieve adequate reimbursement levels, patients may not purchase our products and sales of these products will be absent or reduced.

We may be required to defend lawsuits or pay damages for product liability claims.

Our business inherently exposes us to potential product liability claims. We face substantial product liability exposure in human clinical trials and for products that we sell, or manufacture for others to sell, after regulatory approval. The risk exists even with respect to those drugs that are approved by regulatory agencies for commercial distribution and sale and manufactured in facilities licensed and regulated by regulatory agencies. Product liability claims, regardless of their merits, could be costly and divert management’s attention, and adversely affect our reputation and the demand for our products.

We currently have product liability insurance coverage in the amount of $10 million per occurrence and a $20 million aggregate limitation, subject to deductibles of $10,000 per occurrence and $50,000 in the aggregate. From time to time, the pharmaceutical industry has experienced difficulty in obtaining product liability insurance coverage for certain products or coverage in the desired amounts or with the desired deductibles. We cannot assure you that we will be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes or that the insurance coverage we do obtain will not contain large deductibles or fail to cover certain liabilities or that it will otherwise cover all potential losses.

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

Competition in the drug delivery industry is intense. In particular, we face substantial competition from companies pursuing the commercialization of products using intranasal drug delivery technology such as West Pharmaceuticals Services, Inc. (“West Pharmaceuticals”), Intranasal Technology, Inc. (“Intranasal Technology”) and Innovative Drug Delivery Systems, Inc. (“IDDS”). Established pharmaceutical companies such as AstraZeneca plc (“AstraZeneca”) and GlaxoSmithKline plc (“GlaxoSmithKline”) also have in-house intranasal drug delivery research and development programs that have successfully developed and are marketing products using intranasal drug delivery technology. We also face indirect competition from other companies with expertise in alternate drug delivery technologies such as oral, injectable, patch-based and pulmonary administration. These competitors include Alkermes, Inc. (“Alkermes”), Nektar Therapeutics, Inc. (“Nektar”), Skye Pharma plc (“Skye Pharma”), and Penwest Pharmaceuticals Co. (“Penwest Pharmaceuticals”).

Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to drug delivery field or secure protection that we may need for development of our technologies and products. We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

Many of our competitors have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, and established collaborating relationships with pharmaceutical companies. Our competitors, either alone or with their collaboration partners, may succeed in developing drug delivery technologies that are similar or preferable in effectiveness, safety, cost and ease of commercialization, and our competitors may obtain intellectual property protection or commercialize such products sooner than we do. Developments by others may render our product candidates or our technologies obsolete or, if developed earlier than our products, may achieve market acceptance which could negatively impact the opportunities for our products regardless of the merits of our technology.

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

A substantial portion of our products for both clinical and commercial use is currently manufactured at our facility in Hauppauge, New York, and we are currently customizing our facility in Bothell, Washington to enable large-scale manufacturing. Our manufacturing capacity of the New York facility is approximately 6 million product units per year, and our manufacturing capacity of the Washington facility will be approximately 54 million product units per year upon completion of FDA review in 2005. If we have a problem at either of our manufacturing facilities, it could cause a delay in clinical trials or the

We use hazardous chemicals and radioactive and biological materials in our business. Any disputes relating to improper use, handling, storage or disposal of these materials could be time-consuming and costly.

Our research and development operations involve the use of hazardous, radioactive and biological, potentially infectious, materials. We are subject to the risk of accidental contamination or discharge or any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to damages, fines and penalties in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials, and our liability could exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our business.

Reforms in the healthcare industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.

Increasing expenditures for healthcare have been the subject of considerable public attention in the United States. Both private and government entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the United States healthcare system have been introduced or proposed in Congress and in some state legislatures, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and the proposed rules thereunder impose new requirements for the distribution and pricing of prescription drugs in 2004, which could reduce reimbursement of prescription drugs for healthcare providers and insurers. Although we cannot predict the full effect on our business of the implementation of this legislation, we believe that legislation that reduces reimbursement for our products could adversely impact how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely impact our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market our products. In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our products, which may adversely impact product sales.

If we lose our key personnel, or if we are unable to attract and retain additional personnel, then we may be unable to successfully develop our business.

If we are unable to retain one or more of our corporate officers, Dr. Steven C. Quay, Chairman of the Board, President and Chief Executive Officer, Dr. Gordon C. Brandt, Executive Vice President Clinical Research and Medical Affairs, Dr. Paul H. Johnson, Senior Vice President, Research and Development and Chief Scientific Officer, Gregory L. Weaver, CPA, MBA, Chief Financial Officer and Corporate Secretary, David E. Wormuth, Senior Vice President, Operations, Timothy M. Duffy, Vice President, Marketing and Business Development, or any of our other key managers or key technical personnel, our business could be seriously harmed. Except for the employment agreements with Dr. Quay and Mr. Weaver, we generally do not execute employment agreements with members of our management team. Whether or not a member of management has executed an employment agreement, there can be no assurance that we will be able to retain our key managers or key technical personnel or replace any of them if we lose their services for any reason. We spend significant amount of efforts and resources on recruiting candidates to our Washington state and New York offices that are each located a significant


	•	compromise our ability to negotiate and enter into additional collaborative arrangements;

	•	delay our ongoing discovery research efforts;

	•	delay preclinical or clinical testing of our product candidates;

	•	delay the regulatory approval process; or

	•	prevent us from successfully commercializing our product candidates.

In addition, if we have to replace any of these individuals, we will not be able to replace knowledge that they have about our operations.

We may encounter difficulties managing our growth, which could adversely affect our business.

We increased the number of our full-time employees from 41 on December 31, 2001 to 92 on September 30, 2004, and we expect to continue to grow to meet our strategic objectives. If our growth continues, it may place a strain on us, our management and our resources. Our ability to effectively manage our operations, growth and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may not be able to successfully implement these tasks on a larger scale and, accordingly, we may not achieve our research, development and commercialization goals. If we fail to improve our operational, financial and management information systems, or fail to effectively monitor or manage our new and future employees or our growth, our business could suffer significantly. In addition, no assurance can be made that we will be able to secure adequate facilities to house our staff, conduct our research or achieve our business objectives.

The market price of our common stock could be subject to significant fluctuations. Among the factors that could affect our stock price are:


	•	negative results from our clinical or pre-clinical studies or adverse FDA decisions related to our product candidates or third party products that are in the same drug class as our products;

	•	changes in revenue estimates or publication of research reports by analysts or the decision of analysts to drop coverage of us;

	•	failure to meet analysts’ revenue estimates;

	•	speculation in the press or investment community;

	•	strategic actions by us or our competitors, such as acquisitions or restructurings;

	•	actions by institutional stockholders;

	•	low average daily trading volumes due to relatively small number of shares outstanding;

	•	general market conditions; and

	•	domestic and international economic factors unrelated to our performance.

Additionally, numerous factors relating to our business may cause fluctuations or declines in our stock price.

The stock markets in general and the markets for pharmaceutical stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

A significant number of shares of our common stock are subject to options and warrants, and we expect to sell additional shares of our common stock in the future. Sales of these shares will dilute the interests of other security holders and may depress the price of our common stock.

As of November 23, 2004, there were 13,564,856 shares of common stock outstanding. As of such date, there were vested outstanding options to purchase 1,853,731 shares with an average exercise price of $10.69 per share, unvested outstanding options to purchase 913,021 shares with an average exercise price of $12.70 per share, and outstanding warrants to purchase 1,551,973 shares. All of the outstanding warrants had exercise prices that were less than the market price of our common stock as of November 23, 2004. In addition, we may issue additional common stock and warrants from time to time to finance our operations. For example, we completed an offering of 1,136,364 shares of our common stock in June 2004 to raise capital for general corporate purposes.

We may also issue additional shares to fund potential acquisitions or in connection with additional stock options granted to our employees, officers, directors and consultants under our stock option plans. The issuance, perception that issuance may occur, or exercise of warrants or options will have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.

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

We have paid no cash or stock dividends on any of our classes of common stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock may be the sole source of potential gain for the foreseeable future.

The anti-takeover provisions of our stockholder rights plan may entrench management, may delay or prevent beneficial takeover bids by third parties and may prevent or frustrate any stockholder attempt to replace or remove the current management even if the stockholders consider it beneficial to do so.

We have a stockholder rights plan designed to protect our stockholders from coercive or unfair takeover tactics. Under the plan, we declared a dividend of one preferred stock purchase right for each share of common stock outstanding on March 17, 2000. Each preferred stock purchase right entitles the holder to purchase from us 1/ 1000 of a share of Series A Junior Participating Preferred Stock for $50. In the event any acquiring entity or group accumulates or initiates a tender offer to purchase 15% or more of our common stock, then each holder of a preferred stock purchase right, other than the acquiring entity and its affiliates, will have the right to receive, upon exercise of the preferred stock purchase right, shares of our common stock or shares in the acquiring entity having a value equal to two times the exercise price of the preferred stock purchase right.

The intent of the stockholder rights plan is to protect our stockholders’ interests by encouraging anyone seeking control of our company to negotiate with our board of directors. However, our stockholder rights plan could make it more difficult for a third party to acquire us without the consent of our board of directors, even if doing so may be beneficial to our stockholders. This plan may discourage, delay or prevent a tender offer or takeover attempt, including offers or attempts that could result in a premium over the market price of our common stock. This plan could reduce the price that investors might be willing to pay for shares of our common stock in the future. Furthermore, the anti-takeover provisions of our stockholder rights plan may entrench management and make it more difficult for stockholders to replace management even if the stockholders consider it beneficial to do so.

An interruption in the supply of our raw and bulk materials needed to make our products could cause our product development and commercialization to be slowed or stopped.

We currently obtain supplies of critical raw and bulk materials used in our research and development and manufacturing efforts from several suppliers. However, we do not have long-term contracts with any of these suppliers. While our existing arrangements supply sufficient quantities of raw and bulk materials needed to accomplish the clinical development of our product candidates, there can be no assurance that we would have the capability to manufacture sufficient quantities of our product candidates to meet our needs if our suppliers are unable or unwilling to supply such materials. Any delay or disruption in the availability of raw or bulk materials could slow or stop product development and commercialization of the relevant product. Our dependence upon third parties for the manufacture of our bottles, pumps, and cap components of our intranasal products and the related supply chain may adversely affect our cost of goods, our ability to develop and commercialize products on a timely and competitive basis, and the production volume of our intranasal products.

This prospectus supplement, the accompanying prospectus and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current views with respect to future events or our financial performance, and involve certain known and unknown risks, uncertainties and other factors, including those identified below, which may cause our or our industry’s actual or future results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statements or from historical results. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include information concerning our possible or assumed future results of operations and statements preceded by, followed by, or that includes the words “may,” “will,” “could,” “would,” “should,” “believe,” “expect,” “plan,” “anticipate,” “intend,” “estimate,” “predict,” “potential” or similar expressions.

Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We have no duty to update or revise any forward-looking statements after the date of this prospectus or to conform them to actual results, new information, future events or otherwise.

The following factors, among others, could cause our or our industry’s future results to differ materially from historical results or those anticipated:


	•	our ability to obtain additional funding;

	•	our efforts to establish and maintain collaboration partnerships for the development of PYY intranasal spray, PTH_1-34, generic calcitonin-salmon intranasal spray, apomorphine HCl intranasal spray, morphine gluconate intranasal spray, beta interferon, abuse-resistant opioid or other programs;

	•	the success or failure of our research and development programs;

	•	the advantages and disadvantages of pharmaceuticals delivered intranasally;

	•	the need for improved and alternative drug delivery methods;

	•	our efforts to collaborate with other pharmaceutical and biotechnology companies that have products under development;

	•	our ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization;

	•	our ability to obtain governmental approvals, including product and patent approvals;

	•	our ability to successfully manufacture the products of our research and development programs and our marketed products to meet cGMP and to manufacture these products at a financially acceptable cost;

	•	our ability to attract and retain our key officers and employees and manufacturing, sales, distribution and marketing partners;

	•	costs associated with any product liability claims, patent prosecution, patent infringement lawsuits and other lawsuits;


	•	our ability to develop and commercialize our products before our competitors; and

	•	the projected size of the drug delivery market.

We assume no obligation to update and supplement forward-looking statements that become untrue because of subsequent events.

These factors and the risk factors beginning on page S-9 of this prospectus supplement are all of the important factors of which we are currently aware that could cause actual results, performance or achievements to differ materially from those expressed in any of our forward-looking statements. We operate in a continually changing business environment, and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that projected results or events will be achieved or will occur.

Our common stock is listed on the Nasdaq National Market under the symbol “NSTK.” The following table sets forth, for each of the quarterly periods indicated, the range of high and low sales prices of our common stock, as reported on the Nasdaq National Market.

On November, 23, 2004, the last sale price of our common stock as reported on the Nasdaq National Market was $15.52 per share.

Payment of dividends and the amount of dividends depend on matters deemed relevant by our board of directors, such as our results of operations, financial condition, cash requirements, future prospects and any limitations imposed by law, credit agreements and debt securities. To date, we have not paid any cash dividends or stock dividends on our common stock. In addition, we currently anticipate that we will not pay any dividends in the foreseeable future and intend to use retained earnings, if any, for working capital purposes.

The net proceeds from the sale of the 4,250,000 shares of our common stock offered in this offering are estimated to be approximately $ million ($ million if the underwriters’ over-allotment option is exercised in full), assuming a public offering price of $ per share and after deducting the underwriting discounts and commission and estimated offering expenses.

We intend to use the net proceeds from this offering for general corporate purposes, including funding of our clinical research and development programs, clinical development of our product candidates, capital expenditures and working capital needs. Amounts and timing of the expenditures will depend on numerous factors, such as the status of our clinical trials and research and development efforts, technological advances and competitive environment of our product candidates. Prior to the use of the net proceeds for any such purposes, we may also invest the net proceeds in short-term, interest-bearing, investment-grade securities.

The following table shows our capitalization as of September 30, 2004 on an actual basis and on an as adjusted basis to give effect to our sale of the 4,250,000 shares of common stock in this offering, assuming a public offering price of $15.52 per share, after deducting underwriting discounts, commissions, and estimated offering expenses. This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto that are incorporated by reference in this prospectus supplement and the accompanying base prospectus.

The number of shares of common stock outstanding is based on the number of shares outstanding as of September 30, 2004, and does not include, as of that date:


	•	1,600,116 shares of common stock issuable upon the exercise of warrants outstanding at September 30, 2004 with a weighted average exercise price of $10.54.

	•	2,919,751 shares of common stock issuable upon the exercise of options outstanding at September 30, 2004 with a weighted average exercise price of $11.01.

	•	630,404 shares of common stock reserved for future stock option grants and restricted stock awards as of September 30, 2004 under our stock option plans.

	•	The table above assumes no exercise of the underwriters over-allotment option to purchase an additional 637,500 shares of our common stock.

Our net tangible book value as of September 30, 2004 was $9.4 million, or $0.70 per share of common stock. Net tangible book value per share is determined by dividing our net tangible book value, which consists of tangible assets less total liabilities, by the number of shares of common stock outstanding as of that date. Dilution in net tangible book value per share represents the difference between the amount per share paid by the purchasers of shares of common stock in the offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of 4,250,000 shares of common stock in this offering, assuming a public offering price of $15.52 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses, our net tangible book value as of September 30, 2004 would have been approximately $70.4 million, or $3.99 per share. This represents an immediate increase in the net tangible book value per share of $3.29 per share to existing stockholders and an immediate dilution of $11.53 per share to purchasers of the shares of common stock being offered through this prospectus supplement. The following table illustrates this per-share dilution:

The foregoing table does not take into effect further dilution to new investors that could occur upon:


	•	the exercise by the underwriters’ of their over-allotment option to purchase up to an additional 637,500 shares of common stock; and

	•	the exercise of outstanding options or warrants.

The calculation of net tangible book value and other computations above assume that no options or warrants were exercised after September 30, 2004. As of September 30, 2004, 2,919,751 shares of common stock were issuable upon exercise of outstanding options at a weighted average exercise price of $11.01 per share and warrants outstanding to purchase a total of 1,600,116 share of common stock at a weighted average exercise price of $10.54 per share. If all these options and warrants had been exercised as of September 30, 2004, our net tangible book value on that date would have been $58.4 million or $3.26 per share, the increase in net tangible book value attributable to new investors would have been $2.12 per share and the dilution in net book value to new investors would have been $10.13 per share.

The tables below present selected financial data for the periods indicated. The statement of operations data for the nine months ended September 30, 2003 and 2004 and the balance sheet data as of September 30, 2003 and 2004 have been derived from our unaudited consolidated financial statements, which are incorporated by reference into this prospectus supplement and the accompanying prospectus. The statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 are derived from our consolidated financial statements that have been audited by KPMG LLP, independent registered public accounting firm, and incorporated by reference into this prospectus supplement and the accompanying prospectus. The statements of operations data for the years ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our audited consolidated financial statements, which are not incorporated by reference into this prospectus supplement and the accompanying prospectus. The results of operations for the interim periods are not necessarily indicative of the results for a full fiscal year or for any future period.

The accompanying selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying consolidated financial statements and related notes that are incorporated by reference into this prospectus supplement and the accompanying prospectus.


(1)	In 2000, we acquired Atossa in a transaction that was accounted for under the purchase method. In connection with the acquisition, we recognized a charge of $2.3 million for acquired in-process research and development.

(2)	In 2001, we completed two private placements totaling 2,117,361 shares of common stock from which we received net proceeds of $9.5 million.

(3)	In 2002, we received net proceeds of $5.0 million from a private placement of 250,000 shares of common stock.

(4)	In 2003, we received net proceeds of $10.0 million from a private placement of 1,513,069 shares of common stock.

(5)	In the first nine months of 2004, we received net proceeds of $12.3 million from a private placement of 1,136,364 shares of common stock.

You should read the following discussion and analysis of our financial condition and results of operation together with our consolidated financial statements and related notes that are incorporated by reference into this prospectus supplement.

We are an emerging 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 novel formulation components or excipients that can transiently manipulate or opens “tight junctions” 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 surface, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of therapeutic drugs 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 and our collaboration partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis, erectile dysfunction, breakthrough cancer pain and multiple sclerosis. Our lead product candidate, PYY for obesity, is in Phase I clinical trials and is being developed with 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. We currently have 38 patents issued and 151 patent applications filed.

We prepare our consolidated financial statements in accordance 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.

Most of our revenues are generated from complex research and licensing arrangements. These research and licensing arrangements may include upfront non-refundable payments, development milestone payments, royalties, revenue from product manufacturing, research and development services performed and product sales revenue.

Upfront non-refundable fees received under research collaboration agreements are generally recognized over the term of the related research period. The effect of any changes in estimated development time or costs of development are recognized prospectively. Any such changes could impact future revenue recognition depending on whether estimated time or costs increase or decrease. Upfront non-refundable fees received under license agreements, which do not require any further research and development activities or other continuing involvement on our part, are recognized upon delivery.

Development milestone payments are typically progress payments for specific events of development, such as completion of preclinical or clinical activities, regulatory submission or approval, or manufacturing objectives prior to commercialization of a product. These milestone payments are generally non-refundable and recognized as revenue when the milestone has been achieved.

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.

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

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 Note 2(l) of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2003 and in Note 1 of the Notes to Consolidated Financial Statements included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, 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 of Directors only if the fair market value of the underlying stock at the time of grant exceeds the exercise price. In 2001, 2002, 2003 and the first nine months of 2004, our stock option grants were based on the closing price of our stock on the date of grant, with the exceptions of grants to our chief executive officer in May 2002, and an extension made in October 2002, of the expiration date of certain stock option grants to members of the Board of Directions, as described more fully in Note 8 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2003. 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 restricted stock grants were 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.

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

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. These costs are expensed based on the expected total number of patients in the trial, the rate at which the patients enter the trial and the period over which the clinical research organizations are expected to provide services. 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.

The following table sets forth information on the breakdown of total revenue for the periods indicated:

Our total revenue was significantly lower in the first nine months of 2004 compared to the corresponding period in 2003, primarily because of license and research fees received by us and recognition of previously deferred amounts in the first nine months of 2003 as a result of the divestiture agreement with Pharmacia & Upjohn Company (“Pharmacia”) in January 2003, pursuant to which we reacquired all rights to the intranasal apomorphine product. The 118% increase in total revenue in 2003 compared to 2002 was driven primarily by an increase in license and research fees as a result of the divestiture agreement with Pharmacia, and to a lesser extent from fees from services performed for Questcor Pharmaceuticals, Inc. (“Questcor”) in filing the New Drug Application (“NDA”) for the Nascobal® spray product totaling $1,025,000. The 243% increase in total revenue in 2002 compared to 2001 was driven primarily by an increase in license and research fees related to collaboration and license agreement for intranasal apomorphine product with Pharmacia.

The following table sets forth the breakdown of our license and research fees for the periods indicated:

A significant portion of our license and research fees in 2003 and 2002 came from revenue received under the collaboration and license agreement and the divestiture agreement with Pharmacia, representing 84% of total revenue in 2003 and 83% of total revenue in 2002. We entered into a collaboration and license agreement with Pharmacia in February 2002, pursuant to which Pharmacia received exclusive worldwide rights to develop and market intranasal apomorphine product for the treatment of male and female sexual dysfunction. Under the agreement, we received an upfront payment of $3.0 million in February 2002 and an additional payment of $2.0 million for the transfer of an NDA in April 2002, both of which we are amortizing over the estimated development period on a straight-line basis through December 31, 2005. Upon termination of the collaboration and license agreement in April 2003, we recognized all remaining deferred revenues. Accordingly, we recognized $3.3 million in 2003 and $1.8 million in 2002 as license and research fees.

We also recognized an aggregate of $3.0 million in 2002 as license and research fees for achieving development milestones under the collaboration and license agreement. In addition, Pharmacia agreed to pay us for certain research and development costs for activities conducted by us since the execution of the collaboration and license agreement, and we recognized $11,000 in 2003 and $2.6 million in 2002 as license and research fees related to such activities.

We entered into a divestiture agreement with Pharmacia in January 2003, under which we reacquired all rights to the intranasal apomorphine products that were previously granted to Pharmacia under a collaboration and license agreement in February 2002. Under the divestiture agreement, Pharmacia made a cash payment of $13.5 million consisting of a $6.0 million divestiture payment, $7.0 million research and development funds and $0.5 million for reimbursement of expenses of the divestiture transaction. We recognized $13.0 million of such payments as license and research fees in 2003. We did not recognize license or research fees from Pharmacia in the first nine months of 2004.

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

Product revenue consists of sales of Nascobal® nasal gel and royalty revenue from sales of Nascobal® nasal gel. From 1997 until September 30, 2002, we granted to Schwarz Pharma, Inc. (“Schwarz Pharma”) exclusive rights to market Nascobal® in the U.S. while retaining worldwide manufacturing rights. Accordingly, we recorded revenue from sales of manufactured Nascobal® nasal gel to Schwarz Pharma and royalty revenue received from Schwarz Pharma. On September 30, 2002, we terminated the license agreement with Schwarz Pharma and reacquired rights to Nascobal® nasal gel. During the period from October 1, 2002 to June 17, 2003, we earned revenue from our own direct sales of Nascobal® nasal gel to drug wholesalers using a contract sales organization and a contract distributor. On June 17, 2003, we completed the sale of the assets relating to our Nascobal® brand products, including the Nascobal® nasal gel, to Questcor. In connection with the sale, we entered into a supply agreement with Questcor under which Questcor is obligated to purchase from us all of its requirements for the Nascobal® nasal gel and, upon FDA approval, the Nascobal® nasal spray. Since the sale, we earn product sales revenue under the supply agreement and we expect to receive product sales revenue under this supply agreement in the future.

Primarily as a result of the change described above, product revenue decreased by 83% in the first nine months of 2004 compared to the corresponding period in 2003. In addition, gross margin decreased to 37% in the first nine months of 2004 compared to 76% in the corresponding period in 2003. The 72% increase in cost of product revenue in 2003 compared to 2002 was driven, in part, by an increase in product revenue as a result of our own direct sales of Nascobal® nasal gel from October 1, 2002 to June 17, 2003. The cost of product revenue as a percentage of product revenue increased to 28% in 2003 from 21% in 2002, primarily due to inclusion of $315,000 of royalty revenue in the first nine months of 2002 in product revenue on which no cost of product revenue was recorded. The 43% decrease in cost of product revenue in 2002 compared to 2001 resulted primarily from manufacturing efficiencies, as well as a write-off in 2001 related to a production batch failing product release standards.

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


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

The 34% increase in research and development expense in the first nine months 2004 compared to the corresponding period in 2003 resulted primarily from the following:


	•	Personnel-related expenses increased by 38% to $6.6 million in the first nine months of 2004 compared to $4.8 million in the corresponding period in 2003 due to an increase in staffing our research and development personnel in support of our research and development programs.

	•	Costs of clinical trials, consulting, outside services and laboratory supplies increased by 22% to $6.1 million in the first nine months of 2004 compared to $5 million in the corresponding period in 2003 due primarily to the timing of clinical trials performed for our PYY, calcitonin, RNAi and intranasal apomorphine products under development.

	•	Research and development administrative expenses increased by 350% to $0.9 million in the first nine months of 2004 compared to $0.2 million in the corresponding period in 2003 due primarily to an increase in patent license fees paid.

	•	Facilities costs increased by 25% to $2.5 million in the first nine months of 2004 compared to $2 million in the corresponding period in 2003 due to rent and related expenses on additional space leased at the Bothell facility and an increase in depreciation of equipment resulting from additional capital expenditure.

The 47% increase in research and development expense in 2003 compared to 2002 resulted primarily from the following:


	•	Personnel-related expenses increased by 55% to $6.7 million in 2003 compared to $4.4 million in 2002 due to an increase in research and development activities for our products under development and our tight junctions technology.

	•	Costs of clinical trials, consulting, outside services and laboratory supplies increased by 39% to $7.1 million in 2003 compared to $5.1 million in 2002 due to clinical trials performed for our intranasal apomorphine and PYY products under development.

	•	Facilities costs increased by 45% to $2.7 million in 2003 compared to $1.8 million in 2002 due to rent and related expenses of the Bothell facility, offset in part by closure of the Adams Avenue facility in the fourth fiscal quarter of 2002.

	•	FDA filing fees in 2003 were approximately $0.3 million due to the filing of the NDA for the Nascobal® nasal spray. There were no FDA filing fees in 2002.

The 76% increase in research and development expense in 2002 compared to 2001 resulted primarily from the following:


	•	Costs of clinical trials, consulting, outside services and laboratory supplies increased by 134% to $5.1 million in 2002 due to an increase in research and development activities for our intranasal apomorphine product as a result of the February 2002 collaboration and license agreement with Pharmacia.

	•	Facilities costs increased by 143%, to $1.8 million in 2002 due to occupancy of the Bothell facility in June 2002 and a higher allocation of rent costs to research and development expense as a result of an increase in research and development activities.

	•	Personnel-related expenses increased by 23% to $4.4 million in 2002 due to an increase in research and development activities for our intranasal apomorphine product.

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, 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 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.

None of our 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 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.

We did not incur any royalty expense in the first nine months of 2004 and in 2003. In 2002, we recognized royalty expenses of $9,000, a decrease of $478,000, or 98%, compared to 2001. The decrease resulted from a decrease in sales of Stadol®NS^TM by Bristol-Myers Squibb Co. and the corresponding decrease in royalties payable to the University of Kentucky Research Foundation, as well as the discontinuance of royalties for Stadol®NS^TM from the expiration of the U.S. patent on Butorphanol Tartrate in August 2001.

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 for the periods indicated are as follows:

The decrease in the first nine months of 2004 compared to the corresponding period in 2003 resulted primarily from reduced sales and marketing expenses following the sale of the assets relating to our Nascobal® brand products to Questcor in June 2003. In the first six months of 2003, we incurred costs associated with marketing programs to support our own direct sales of Nascobal® nasal gel prior to our sale of the assets relating to our Nascobal® brand. We expect sales and marketing costs, which includes business development staff and activities, to increase moderately in the foreseeable future to support activities associated with partnering our other drug candidates.

In October 2002, after we terminated the agreement with Schwarz Pharma and reacquired rights to Nascobal® nasal gel, we initiated marketing programs to re-launch direct sales of Nascobal® nasal gel. The 28% increase in sales and marketing expense in 2003 compared to 2002 and the 213% increase in 2002 compared to 2001 were driven primarily due to expenses incurred as part of this re-launch. In June 2003, we discontinued direct sales of Nascobal® nasal gel.

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, amortization of intangibles and facilities costs. Total general and administrative expense and dollar and percentage changes for the periods indicated are as follows:

The 42% increase in general and administrative expenses in the first nine months of 2004 compared to the corresponding period in 2003 was due primarily to increases in legal and accounting fees, corporate insurance, non-cash stock compensation expense related to restricted stock grants and other administrative costs. In addition, the first nine months of 2003 included a $0.5 million expense reduction related to the reimbursement of legal expenses received as part of the divestiture agreement with Pharmacia.

The 30% net decrease in general and administrative expenses in 2003 compared to 2002 resulted primarily from the following reasons:


	•	Costs of legal fees, accounting fees, corporate insurance and other administrative costs decreased by 43% to $2.1 million in 2003 compared to $3.7 million in 2002. In January 2003, we entered into a divestiture agreement with Pharmacia under which we reacquired all rights to the intranasal apomorphine product. In preparation of this transaction, we incurred significant legal costs in 2002.


		In 2003, as part of the divestiture agreement, we received and recorded a $0.5 million legal cost reimbursement from Pharmacia. Patent legal fees decreased by $0.4 million in 2003 compared to 2002 due to the addition of an in-house patent counsel in 2003.

	•	Amortization of non-cash deferred stock option compensation decreased by 66% to approximately $0.5 million in 2003 compared to $1.4 million in 2002. We recorded approximately $0.5 million of non-cash compensation expense in 2003 and $0.8 million in 2002 related to stock options granted to our Chief Executive Officer in connection with the extension of his employment agreement through December 31, 2005, as well as approximately $0.6 million of compensation expense in 2002 related to extending the expiration dates for all options held by certain members of the Board of Directors.

	•	Facilities costs decreased by 41% to $0.4 million in 2003 compared to $0.6 million in 2002 primarily due to the closure of the Adams Avenue facility in the fourth fiscal quarter of 2002.

	•	Personnel–related expenses decreased by 5% to $2.4 million in 2003 compared to $2.3 million in 2002 due primarily to additional costs incurred in 2002 associated with relocation of personnel to our Bothell, Washington location in 2002.

	•	Amortization of intangibles increased by 85% to $0.4 million in 2003 compared to $0.2 million in 2002 due to amortization of the Nascobal® related assets. In June 2003, we completed the sale of the assets relating to our Nascobal® brand products to Questcor, at which time the amortization ceased.

The 105% net increase in general and administrative expense in 2002 compared to 2001 resulted primarily from the following reasons:


	•	Costs of legal fees, accounting fees, corporate insurance and other administrative costs increased by 151% to $3.7 million in 2002 primarily as a result of an incurrence of significant legal costs associated with the divestiture agreement with Pharmacia, as well as an increase in patent legal costs of approximately $0.7 million in 2002 compared to 2001 due to an increase in our activities in support of our intellectual property portfolio.

	•	We recorded amortization of non-cash deferred stock option compensation of $1.4 million in 2002 compared to none in 2001. In 2002, we recorded approximately $0.8 million of non-cash compensation expense related to stock options granted to our Chief Executive Officer in connection with the extension of his employment agreement through December 31, 2005, as well as approximately $0.6 million of compensation expense related to extending the expiration dates for all options held by certain members of the Board of Directors.

	•	Personnel-related expenses increased by 31% to $2.3 million in 2002 due primarily to additional costs incurred in 2002 associated with relocation of personnel to our Bothell, Washington location.

	•	Amortization of intangibles increased by 278% to $0.2 million in 2002 due to amortization of the Nascobal® related assets which we reacquired from Schwarz Pharma in September 2002. In 2001, we recorded $57,000 of amortization of goodwill associated with the acquisition of Atossa. The goodwill amortization ceased as of December 31, 2001.

	•	Facilities costs decreased by 19% to approximately $0.6 million in 2002 due primarily to the closure of the Adams Avenue facility in the fourth fiscal quarter of 2002.

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.

In 2002, we recorded a restructuring charge of approximately $0.6 million from the termination of the lease of our Adams Avenue facility effective as of February 14, 2003. The restructuring charge was comprised of approximately $0.9 million in a write-off of leasehold improvements and approximately $0.1 million for additional costs related to vacating the Adams Avenue Facility, which was partially offset

In 2003, we recognized a gain of approximately $4.2 million on the sale of the assets related to our Nascobal® brand products to Questcor. The gain was calculated as $14.0 million in non-contingent proceeds, less the net book value of assets of $8.1 million, less costs and fees. At the time of the sale, approximately $1.0 million of gain relating to the fair value of work to be completed on the NDA filing for the Nascobal® nasal spray product was deferred and later recognized in 2003 as license and research fee revenue.

The following table sets forth information on interest income, average funds available for investment and average interest rate earned for the periods indicated:

The 17% increase in interest income in the first nine months of 2004 compared to the corresponding period in 2003 was primarily due to higher average balances available for investment. The 18% decrease in interest income in 2003 compared to 2002 and the 14% decrease in 2002 compared to 2001 were driven primarily by a decrease in the average interest rate earned on funds available for investment due to a decrease in the prevailing market interest rates during these periods.

We incur interest expense on our capital leases and notes payable. The following table sets forth information on interest expense, average borrowings and average interest rate earned for the periods indicated:

The 11% decrease in interest expense in the first nine months of 2004 compared to the corresponding period in 2003 was due to a decrease in the average interest rate, partially offset by higher average balances owed. In the first nine months of 2004, average borrowing under the Wells Fargo note was approximately $7.7 million, at rates averaging approximately 2.4%, and average borrowing under the GE Capital leases was approximately $2.7 million, at rates ranging from approximately 8.3% to 10.0%. In the first nine months of 2003, average borrowing under the Schwarz Pharma and Wells Fargo notes was $7 million, at interest rates ranging from 1.5% to 7.5%, and average borrowing under the GE Capital leases was approximately $0.9 million, at interest rates ranging from approximately 8.3% to 10.0%.

The 143% increase in interest expense in 2003 compared to 2002 was driven primarily by a 233% increase in the average borrowings, partially offset by a decrease in the average interest rate. In June 2003,

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 $77.5 million as of September 30, 2004 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 to accelerate our research and development 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.

We also have contractual obligations in the form of facility leases, notes payable and capital leases. The following chart summarizes our contractual obligations as of September 30, 2004:

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. On December 18, 2003, we filed a shelf registration statement with the SEC, which was declared effective by the SEC on January 14, 2004, pursuant to which we may issue common stock or warrants, up to an aggregate of $30 million. We filed another shelf registration statement which was declared effective by the SEC on October 8, 2004, pursuant to which we may issue common stock, warrants or debt securities, up to an aggregate of $80 million of which this offering is a part. 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.

We believe that 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. We expect to realize future revenues from our collaborative arrangement with Par Pharmaceutical in the form of milestone payments, product transfer payments for manufactured product and a profit sharing upon commercialization of generic calcitonin-salmon intranasal spray. In addition, 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

We used cash of $20.5 million in our operating activities in the first nine months of 2004 compared to $1.5 million in the corresponding period in 2003. We used cash of $7.7 million in our operating activities in 2003, compared to $6.5 million in 2002 and $7.4 million in 2001. Cash used in operating activities relates primarily to funding net losses and changes in deferred revenue from collaborators, accounts and other receivables, and accrued expenses and other liabilities, partially offset by depreciation and amortization and non-cash compensation related to stock options. We also recognized a gain on sale of product of $4.2 million in 2003 from our sale of the assets relating to our Nascobal® brand products to Questcor, as well as a non-cash restructuring charge of approximately $0.6 million in 2002 associated with our exit of the Adams Avenue facility. We expect to use cash for operating activities in the foreseeable future as we continue our research and development activities.

Our investing activities provided cash of $0.8 million in the first nine months of 2004 compared to $4.2 million in the corresponding period in 2003. Our investing activities provided cash of $3.5 million in 2003, compared to using cash of $3.8 million in 2002 and $0.2 million in 2001. Changes in cash from investing activities are due primarily to purchases of short-term investments net of maturities and purchases of property and equipment. In addition, our sale of the assets relating to our Nascobal® brand products to Questcor resulted in a cash inflow of $14.0 million in 2003. We expect to continue to make significant investments in our research and development infrastructure, including purchases of property and equipment to support our research and development activities.

Our financing activities provided cash of $16.4 million in the first nine months of 2004 compared to $11.4 million in the corresponding period in 2003. Our financing activities provided cash of $12.0 million in 2003, compared to $7.6 million in 2002 and $13.1 million in 2001. Changes in cash from financing activities are primarily due to issuance of common stock and warrants, issuance of notes payable, proceeds from equipment financing facilities and exercise of stock options and warrants. We raised $12.2 million in the first nine months of 2004, $10.0 million in 2003, $5.0 million in 2002 and $9.5 million in 2001 through private placements of common shares and warrants. For a discussion of our effective shelf registration statements on Form S-3, see “Liquidity and Capital Resources — Sources and Uses of Cash.”

We had a working capital (current assets minus current liabilities) surplus of $10.2 million as of September 30, 2004, $14.8 million as of December 31, 2003, $3.3 million as of December 31, 2002 and $10.4 million as of December 31, 2001. As of September 30, 2004, we had $13.5 million in cash and cash-equivalents, as well as $5.6 million in short-term investments and $5.1 million in net accounts receivable.

As of October 31, 2004, we had unused credit lines of approximately $3.3 million out of total available credit lines of approximately $14.3 million.

As of September 30, 2004, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We and our collaboration partners are developing a diverse portfolio of product candidates for multiple therapeutic areas including obesity, osteoporosis, erectile dysfunction, breakthrough cancer pain and multiple sclerosis. Our lead product candidate, PYY for obesity, is in Phase I clinical trials and is being developed with 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. We currently have 38 patents issued and 151 patent applications filed.

The following table summarizes the current status of our principal product candidates.

Obesity is a chronic condition that affects millions of people worldwide and often requires long-term or invasive treatment to promote and sustain weight loss. According to recent estimates from the National Institutes of Health, nearly two-thirds of U.S. adults are overweight and nearly one-third are obese. Obesity among adults has doubled in the past two decades. Research studies have shown that obesity increases the risk of developing a number of adverse conditions including type 2 diabetes, hypertension, coronary heart disease, ischemic stroke, colon cancer, post-menopausal breast cancer, endometrial cancer, gall bladder disease, osteoarthritis and obstructive sleep apnea.

Under the 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 of the product candidate. We are also eligible to receive milestone payments upon our 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.

We believe our collaboration with Merck demonstrates we have taken a significant step toward becoming a leader in the development of innovative, intranasal drug delivery products and technologies. We also believe this collaboration partnership demonstrates the value PYY holds as a potential treatment option for obesity.

We believe we possess a broad and effective PYY intellectual property estate, which includes the combination of:


	•	our own patent estate containing ten pending U.S. patent applications and seven pending foreign patent applications;

	•	an exclusive sublicense to the Cedars-Sinai patent estate secured earlier this year containing the only issued patent directed to the use of PYY or functional analogs to induce satiety;

	•	our acquisition of exclusive worldwide rights to the PYY patent applications within the field of intranasal administration, licensed from Imperial College and Oregon Health Sciences University through Thiakis; and

	•	our acquisition of an exclusive license to five issued patents and two pending applications from the University of Cincinnati related to second generation PYY analogs that produce weight loss.

We have sublicensed the rights to the development and commercialization of this portfolio exclusively to Merck as part of our alliance with Merck.

Clinical Trial Data. We have completed three Phase I studies, each designed to answer specific dosing, scheduling and tolerance questions. To date, we have enrolled over sixty subjects and administered over 900 doses in the PYY program.

In a Phase IA dose ranging study of 15 healthy subjects, intranasal administration of PYY resulted in blood levels which equaled or exceeded normal post-meal PYY levels. The half-life of PYY was approximately one hour, which is similar to what occurs naturally after a meal. The safety profile was encouraging with no intranasal discomfort and no significant vital sign changes in any subject.

In a Phase IB dose finding study of 12 otherwise healthy overweight subjects, intranasal administration of PYY statistically significantly reduced, in the nine responding subjects, appetite and caloric intake both at the lunch meal 60 minutes after administration, as well as for the entire 24-hour period following administration. Two subjects did not respond and a third subject withdrew because of unrelated complications. Side effects were generally mild and all resolved without treatment. Based on this data, we believe the intranasal formulation of PYY effectively increases plasma concentrations of this peptide following a single dose, and is safe and well tolerated at all dose levels tested.

In a Phase IC dose sequencing study of 36 otherwise healthy obese subjects, the subjects received placebo or PYY once, twice or three times daily one hour before each meal for eight consecutive days. The study showed that 24-hour caloric reduction over all days of treatment was related to the number of daily PYY administrations, with those receiving one dose experiencing a mean reduction of 77 calories per day, two doses experiencing a mean reduction of 197 calories per day, and those receiving PYY three times daily experiencing a mean reduction of 490 calories per day. Subjects receiving PYY three times a day recorded a weight reduction of 1.3 pounds over the last six days of the study. PYY was well tolerated, with the only side effects at one percent or greater being nausea, headache and dizziness. Nausea was reported by subjects in 11% of the PYY doses administered, headache in 5% and dizziness in 1%. We believe the intranasal formulation of PYY effectively increases plasma concentrations of this peptide following a dose of 200 micrograms, and was found to be safe and well tolerated at dose levels up to 600 micrograms per day.

Current Clinical Initiatives. We and Merck are working together to advance PYY into additional pre-clinical and clinical studies. A product development team with employees from both companies is working on all aspects of the PYY product development program, with Merck overseeing all critical decisions. Merck will be primarily responsible for conducting such studies and obtaining regulatory approval throughout the world.

Osteoporosis is the development of low bone mass that compromises bone strength and increases the risk of bone fracture. According to Datamonitor, the osteoporosis pharmaceutical market is currently $7 billion and is expected to grow as the population ages. Currently, Eli Lilly’s Forteo is the only commercially available PTH therapy approved for the treatment of post-menopausal osteoporosis in women as well as osteoporosis in men. PTH is the only product that has been shown in clinical trials to build bone rather than slow its rate of loss. Despite the cost and the requirement for daily injections into the thigh or abdomen, Forteo recorded sales revenue of approximately $60 million in the third quarter of 2004.

In addition, Novartis’ Miacalcin, a currently approved and marketed intranasal calcitonin-salmon spray, has been shown to increase spinal bone mass in post-menopausal women with established osteoporosis and is the only osteoporosis treatment specifically labeled to be used for women for whom estrogens are contraindicated. Miacalcin had aggregate worldwide sales of nearly $400 million in 2003, of which the U.S. accounted for an estimated $240 million.

Clinical Trial Data. Our Phase I clinical program was launched in the second quarter of 2004. Our clinical study to date provides the basis for formulation optimization of our PTH_1-34 intranasal spray, which is the next step in the program. Two clinical trials have been completed with PTH_1-34.

Current Clinical Initiatives. The next step in the clinical development of our PTH_1-34 program will be formulation optimization of our PTH_1-34 intranasal sprays, which will result in a candidate formulation to be taken forward in pre-clinical and clinical trials.

Clinical Trial Data. In December 2003, we filed with the FDA an ANDA for generic calcitonin-salmon intranasal spray for osteoporosis. As part of the ANDA process, we have conducted a clinical trial and laboratory tests including spray characterization and spray content, designed to demonstrate the equivalence of our product to the currently marketed drug, Miacalcin. In February 2004, the FDA accepted the filing of our ANDA for the product. In June 2004, we announced that the FDA had conducted a successful Pre-Approval Inspection of our generic calcitonin-salmon intranasal spray manufacturing facility with no cited deviations from cGMP. At this time, we believe that we have provided the FDA with a complete written response to all of its questions relating to this ANDA.

Current Clinical Initiatives. There are no additional clinical trials underway for generic calcitonin-salmon intranasal spray.

Erectile dysfunction has been estimated to affect up to 30 million men in the United States alone according to a study conducted by Dr. T.F. Lue and his colleagues and published in The New England Journal of Medicine (June 15, 2000, Volume 342, Number 24, Pages 1802-1813). In the Massachusetts Male Aging Study, based on a cross sectional, community-based, random sample survey of 1,300 men aged between 40 and 70 years, 52% of men were found to have some degree of erectile dysfunction. In 1997, the year before Pfizer Inc.’s (“Pfizer”) Viagra’s launch, the erectile dysfunction market totaled only $137 million compared with Viagra sales of $1.9 billion in 2003.

Apomorphine HCl is a centrally acting dopamine agonist that enhances nerve signals sent by the brain during sexual stimulation. Dopamine agonists mimic the body’s natural neurotransmitter, dopamine, to affect an erection where other currently marketed pharmaceuticals for the treatment of erectile dysfunction treat the disorder peripherally by dilating the vasculature and increasing blood flow to produce an erection. The subcutaneous injection of apomorphine has been shown to induce erections in men with erectile dysfunction. Marketing authorization for sublingual apomorphine HCl for erectile dysfunction was granted in Europe in May 2001. We believe that we have developed an intranasal formulation of apomorphine HCl, which allows for easier use than subcutaneous administration and may allow lower doses and reduced side effects compared to the commercialized sublingual formulation.

In February 2002, we granted Pharmacia exclusive, worldwide rights to develop and market intranasal apomorphine for the treatment of male and female sexual dysfunction, and Pharmacia agreed to manage and fund all future development in these indications. In January 2003, the FTC mandated as part of the Pfizer/ Pharmacia merger that Pharmacia divest its apomorphine HCl product. As a result of the FTC mandate, we entered into a divestiture agreement with Pharmacia under which we reacquired assets related to the intranasal apomorphine product that we had originally granted to Pharmacia in February 2002.

Clinical Trial Data. In November 2001, we completed a Phase II clinical trial in 184 men with erectile dysfunction. In March 2004, we announced the successful completion of a maximum tolerated dose study for this program. The multi-center, double blind, placebo-controlled study enrolled 102 men age 50 to 82 years, approximately half of whom had erectile dysfunction. The study involved a single daily active- or placebo-dose administration for seven consecutive days. Doses began at 0.5 mg and escalated in increments of 0.25 mg. Vital signs were measured both supine and standing to observe orthostatic effects and echocardiogram measurements were taken during the five hours after each dose.

Based on the results of this study, we believe that doses up to 1.75 mg are safe and well tolerated and doses up to 2.0 mg are acceptable for further in-clinic safety studies. All safety findings will need to be confirmed as part of the ongoing clinical development of apomorphine HCl.

Current Clinical Initiatives. We are currently seeking a collaboration partner for further development of the apomorphine HCl program.

In addition to their usual pain, cancer patients frequently experience breakthrough pain, a transitory exacerbation that occurs over a background of otherwise stable pain. Breakthrough cancer pain can occur several times daily, is rapid in onset and unpredictable in frequency. Oral opioids do not have optimal clinical characteristics for use in the treatment of breakthrough cancer pain due to their slow onset of action, approximately 45 to 120 minutes. Breakthrough cancer pain is one of the most commonly experienced symptoms of advanced cancer, affecting over three million people in the U.S. annually. According to Datamonitor, the world-wide market for breakthrough pain in cancer patients represents approximately $1 billion. Currently, only Cephalon, Inc.’s (“Cephalon”) Actiq, a transmucosal oral fentanyl product, is approved for treating breakthrough cancer pain for opioid-tolerant cancer patients. Actiq recorded sales revenue of approximately $103 million in the third quarter of 2004.

Clinical Trial Data. In December 2003, Dr. Fitzgibbon and his colleagues published the results from a Phase II clinical trial in patients with breakthrough cancer pain, indicating that intranasal morphine gluconate was rapidly absorbed, with onset of pain relief at an average of 2.2 minutes post dosing and meaningful pain relief at an average of 9.1 minutes (Pain, December 2003, volume 106, pages 309-315). There was a statistically significant difference between baseline pain intensity versus post dose pain intensity (p <0.05). None of the patients needed to take another breakthrough pain medication within 30 minutes after dosing, and 64% of the patients did not need rescue medication within the first hour. There were no serious adverse events reported.

Current Clinical Initiatives. We are currently seeking a collaboration partner for further development of this product.

Multiple sclerosis is a chronic autoimmune disease characterized by demyelination of nerve fibers, leading to nerve damage and associated symptoms of fatigue, cognitive and visual impairments. Currently, five drugs have been approved for the treatment of multiple sclerosis. According to Datamonitor, the world-wide market for multiple sclerosis is estimated to be $2.8 billion. Beta interferon is the most

Clinical Trial Data. At the annual meeting of the American Academy of Neurology in April 2004, we reported positive results from the Phase I clinical trial in healthy male subjects. When compared to injection, the intranasal formulation shows relative potency of approximately 20%. All three subjects who received the injection administration reported fever, one reported chills and one reported headache. Following intranasal administration, four of 11 subjects reported intranasal symptoms, three of 11 reported unusual taste, one of 11 reported headache and one of 11 reported shortness of breath. There were no neutralizing antibodies to beta interferon identified at six months after dosing. With additional formulation optimization, we believe that the intranasal formulation should be appropriate for dosing every other day or three times a week.

Current Clinical Initiatives. We are currently seeking a collaboration partner for further development of this product.

Our abuse-resistant opioid is a chemically-modified prodrug of oxycodone. We believe that this prodrug formulation has decreased abuse potential. When taken orally, our abuse-resistant opioid is metabolized by enzymes and other agents in the small intestine and results in the slow release of opioid over time. Our abuse-resistant opioid is currently in pre-clinical development, including pharmacokinetic studies to support further pre-clinical and possible clinical development. We are actively seeking to partner this potential advancement in oral narcotic pain management.

We are participating in two feasibility studies with two different research partners to evaluate the development of proprietary formulations for the intranasal delivery of an injected compound for the treatment of type 2 diabetes and an oral compound for the treatment of Alzheimer’s disease. We will utilize our proprietary tight junction technology to develop intranasal formulations of both compounds. Pre-clinical studies will assess the pharmacokinetics and safety of the intranasally delivered formulations compared to current injectable or oral dosage forms.

We focus on molecular-biology based drug delivery, which involves the use of gene cloning, high throughput tissue culture screening, phage display selection, RNA interference (RNAi) gene function knockdown, and peptide synthesis to create novel formulation components or excipients that can transiently manipulate or open “tight junctions” 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 surface, and the blood brain barrier. They function to provide barrier integrity and to regulate the transport and passage of therapeutic drugs across these natural boundaries. As part of the body’s normal activity, tight junctions selectively open and close in response to

Tight junctions are found in all tissues, but the tight junction containing tissues that are of particular relevance to drug delivery are found in intranasal tissue, intestinal tissue, blood vessels, and the blood-brain barrier. The blood-brain barrier is a specialized layer of endothelial cells that line the inner surface of blood vessels in the brain, which excludes many drugs from passing into the brain. Drugs, particularly those utilizing large molecules, need to pass through these tissue barriers in order to get to their sites of action.

Tight junctions consist of proteins, such as claudins, occludin and junctional adhesion molecules that are anchored in the membranes of two adjacent cells and interact with each other to hold the cells together and prevent other molecules from passing between them.

The goal of our tight junction biology program is to understand the structure and function of these tissue barriers and to identify active compounds that can transiently open the tight junction, thus permitting drugs to pass through. We have genetically engineered and produced many of the key tight junction proteins and are using them as targets to identify peptides and small molecules that can significantly improve drug delivery by temporarily opening tight junctions. We call such peptides and small molecules tight junction modulators.

By improving our understanding of the structure and function of tight junctions in the intranasal epithelial barrier, we expect to continue to make significant improvements in the delivery of both small and large molecules for an increasing number of therapeutic applications. We believe our intranasal drug delivery technology will offer 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 elimination of injection pain and avoidance of injection site irritation. In addition, we believe our intranasal drug delivery technology will offer advantages over oral administration by providing for faster absorption into the bloodstream, reduced side effects like nausea and vomiting and improved effectiveness by avoiding problems relating to gastrointestinal and liver metabolism.

Through our tight junction technology, we have identified compounds that directly and specifically affect the tight junctions between cells in the intranasal tissues in a manner mimicking natural processes (for example, the effects are reversible) and result in increasing drug permeability through the tight junction barrier. Based on these approaches, we have developed formulations for improving the delivery of promising new classes of drugs such as PYY for the treatment of obesity, PTH_1-34 for the treatment of osteoporosis and beta interferon for the treatment of multiple sclerosis. We were the first to demonstrate delivery of PYY by a non-injected route.

We believe that our tight junction technology has significant potential applications outside of intranasal drug delivery, particularly for improving oral drug delivery (through the gastrointestinal tract), pulmonary drug delivery (through the lungs by inhalation), intravenous drug delivery (through blood vessel walls into tissues), and drug delivery through the blood brain barrier (through the blood to the brain) for the treatment of diseases. All of these tissue barriers have tight junctions which, although distinct, have properties in common that can be manipulated by the technology we are developing.

RNAi is an important tool we are using to analyze tight junction function and to determine the importance of individual tight junction proteins in affecting drug delivery. RNAi is double-stranded RNA molecules 20-22 nucleotides in length that are able to silence a specific gene and reduce the amount of the protein the gene produces. We have developed RNAi against a number of the tight junction proteins and determined the resulting effects on the tight junction. For example, we can determine whether RNAi inhibition of specific tight junction proteins increases tight junction permeability. These types of studies help to identify which tight junction components are the most appropriate targets to affect in order to improve the passage of drugs through tissue barriers.

In addition to the use of RNAi as a research tool, considerable attention is being focused on using RNAi as a therapeutic strategy to decrease levels of disease-causing proteins. The application of RNAi in this manner requires the ability to deliver the RNAi inside the cells where the target proteins are produced. We have established a research and development program to enhance systematic delivery of this potential new class of therapeutics.

Other expertise that we utilize in identifying and developing product candidates include:


	•	manufacturing know-how;

	•	experience stabilizing liquid formulations;

	•	knowledge of physical properties of intranasal sprays;

	•	experience with prodrug selection to improve biological properties;

	•	experience with counterion selection to increase drug solubility; and

	•	correlations between in vitro and in vivo intranasal delivery models.

We seek to establish and maintain strategic collaborations to commercialize many of our product candidates, including by providing the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business. The decision to seek a collaboration partner for a product candidate is affected by a number of variables, including our specific expertise with the product candidate, the expected cost of development, our existing product candidates, and our available human and capital resources. Our current collaborative arrangements are as follows:

Under the terms of a supply agreement with Questcor, subject to certain limitations, we are obligated to manufacture and supply all of Questcor’s requirements and Questcor is obligated to purchase from us all of its requirements for the Nascobal® nasal gel and the Nascobal® nasal spray upon FDA’s final approval. We have filed the NDA and will continue to prosecute the pending U.S. patents for the Nascobal® nasal spray product on behalf of Questcor. Questcor has agreed to make milestone payment of $2.0 million contingent upon final FDA approval of the NDA for the Nascobal® nasal spray and an additional $2.0 million contingent upon issuance of a U.S. patent for the Nascobal® nasal spray.

In July 2003, we entered into an agreement with Cytyc Corporation (“Cytyc”) pursuant to which Cytyc acquired patent rights to our MASCT device. Under the terms of the agreement, we received payment upon commercialization from Cytyc in 2003, will receive an initial annual payments for patent maintenance and further patent prosecution and have potential to receive additional milestone payments and royalties.

Our goal is to become the leader in the development and commercialization of innovative, intranasal drug delivery products and technologies. Key elements of our strategy include:


	•	*Applying Our Tight Junction Technology to Product Candidates and Other Drug Delivery Methods.* We will focus our research and development efforts on product candidates where our proprietary intranasal drug delivery technology utilizing tight junctions will offer significant clinical advantages such as improved safety and clinical efficacy and increased patient compliance due to elimination of injection pain and avoidance of injection site irritation. We will also continue to search for applications of our tight junction technology to improve other forms of drug delivery, including oral, pulmonary and intravenous delivery.

	•	*Pursuing Collaborations with Leading Pharmaceutical and Biotechnology Companies.* We will continue to establish strategic collaborations with leading pharmaceutical and biotechnology companies. Typically, we collaborate with partners to commercialize our product candidates by utilizing their research and development, regulatory compliance, marketing and distribution capabilities. We may also assist our collaboration partners in developing more effective drug delivery methods for their product candidates that have already completed early stage clinical trials. We intend to structure our collaborative arrangements to receive research and development funding and milestone payments during the development phase, revenue from manufacturing upon commercialization and royalties on future sales of products.

	•	*Opportunistically Developing and Commercializing Product Candidates on Our Own.* In select cases where we deem it to be economically advantageous to us, we plan to internally develop, manufacture and distribute our products.

	•	*Utilizing Our Manufacturing Expertise and Capabilities.* We have invested substantial time and intellectual capital in developing our manufacturing facilities and know-how which we believe would be difficult for our competitors to replicate in the near term. These capabilities give us important competitive advantages including the ability to prepare the chemistry, manufacturing and controls section of the NDA filing with the FDA and maintain a high-level of quality control in manufacturing product candidates for clinical studies and FDA-approved products for commerciali-


		zation. We are currently expanding our manufacturing capabilities in our Bothell, Washington facility which we believe will meet our projected capacity needs for the foreseeable future.

We plan to formulate, manufacture and package all of our products in two facilities. We have a 10,000 square foot commercial manufacturing facility in Hauppauge, New York with manufacturing capacity of approximately six million product units per year, and we expect to complete customization of our 16,488 square foot commercial manufacturing space contained within our corporate headquarters in Bothell, Washington. Upon completion of FDA review, our manufacturing capability of the combined facilities will be approximately 60 million product units per year.

The process for manufacturing our pharmaceutical products is technically complex, requires special skills and must be performed in a qualified facility in accordance with cMGP of the FDA. Our Hauppauge facility is capable of manufacturing products in quantities we believe are sufficient for clinical trials of product candidates as well as commercial supply sufficient to meet forecasted demand for the next two years.

We are expanding our commercial manufacturing facilities to meet anticipated manufacturing commitments for PYY intranasal spray contained in our supply agreement with Merck. There is sufficient room for further development of additional capacity at the Bothell facility that would increase our manufacturing capacity to accommodate additional products under development or meet additional requirements under various supply agreements. We anticipate that full development of this site, including possible new construction on the surrounding property, can accommodate our space requirements for the foreseeable future. However, no assurance can be given that we will have the financial resources necessary to adequately expand our manufacturing capacity if and when the need arises.

Raw materials essential to our business are generally readily available from multiple sources. However, certain raw materials and components used to manufacture our products, including essential pharmaceutical ingredients and other critical components are available from limited sources. For example, our ANDA for generic calcitonin-salmon intranasal spray includes an active pharmaceutical compound supplied by one supplier. In addition, controlled substances including morphine gluconate are highly regulated by the DEA and may be purchased only when a research and manufacturing license has been issued by the DEA to obtain these substances.

We plan to market our FDA approved products on our own or through co-marketing, co-promotion, licensing or distribution arrangements with our collaboration partners. We believe that our current approach allows us maximum flexibility in selecting the sales and marketing method that will both increase market penetration and commercial acceptance of our products and enable us to limit committing considerable funds to develop a substantial sales and marketing organization. We currently have four sales and marketing personnel and plan to hire additional staff as needed to support our growth.

We intend to seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States and certain foreign countries. We have 15 issued or allowed United States patents and 59 pending United States patent applications, including provisional patent applications. When appropriate, we also seek foreign patent protection and to date have 23 issued or allowed foreign patents, and 92 pending foreign patent applications.


	•	obtain patent and other proprietary protection for our inventions;

	•	enforce and defend patents once obtained;


	•	operate without infringing the patents and proprietary rights of third parties; and

	•	preserve our trade secrets.

Our patents and patent applications are directed to composition of matter, methods of use and methods of manufacturing, as appropriate.

We apply for patents covering our discoveries and technologies as we deem appropriate. However, we may fail to apply for patents on important discoveries or technologies in a timely fashion or at all. Also, our pending patent applications may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to commercialize. In addition, because patent applications in the United States are maintained in secrecy for approximately 18 months after filing, other parties may have filed patent applications relating to inventions before our applications covering the same or similar inventions. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.

Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value. Also, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope.

Government authorities in the United States and other countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution, and marketing, among other things, of drugs and biologic products. All of our product candidates are either drugs or biologic products, except for MASCT device, which is a medical device and is also extensively regulated.

In the United States, the FDA regulates drug and biologic products under the Federal Food, Drug, and Cosmetic Act (the “FDCA”) and implementing regulations thereunder, and other laws, including, in the case of biologics, the Public Health Service Act. Failure to comply with applicable U.S. requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecutions.

Before our drugs and biologic products may be marketed in the United States, each must be approved by the FDA. None of our product candidates, except for Nascobol nasal gel, has received such approval. The steps required before a novel drug or a biologic product may be approved by FDA include pre-clinical laboratory and animal tests and formulation studies; submission to the FDA of an Investigational New Drug Exemption (an “IND”), for human clinical testing, which must become effective before human clinical trials may begin; adequate and well-controlled clinical trials to establish the safety and effectiveness of the product for each indication for which approval is sought; submission to the FDA of an NDA, in the case of a drug product, and a Biologics License Application (“BLA”), in the case of a biologic product; satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug or biologic product is produced to assess compliance with cGMP; and FDA review and approval of an NDA or BLA.

Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. The results of the pre-clinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified physician-investigators and healthcare personnel. Clinical trials are conducted under protocols detailing, for example, the parameters to be used in monitoring patient safety and the safety and effectiveness criteria, or end points, to be evaluated. Clinical trials are typically conducted in three defined phases, but the phases may overlap or be combined. Each trial must be reviewed and approved by an independent Institutional Review Board before it can begin. Phase I usually involves the initial introduction of the investigational drug or biologic product into people to evaluate its safety, dosage tolerance, pharmacodynamics and, if possible, to gain an early indication of its effectiveness. Phase II usually involves trials in a limited patient population to evaluate dosage tolerance and appropriate dosage; identify possible adverse side effects and safety risks; and preliminarily evaluate the effectiveness of the drug or biologic for specific indications. Phase III trials usually further evaluate effectiveness and test further for safety by administering the drug or biologic candidate in its final form in an expanded patient population. We cannot be sure that Phase I, Phase II or Phase III clinical trials will be completed successfully within any specified period of time, if at all. Further, we, our product development partners, or the FDA may suspend clinical trials at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk.

Assuming successful completion of the required clinical testing, the results of the preclinical studies and the clinical studies, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA or BLA requesting approval to market the product for one or more indications. Before approving an application, the FDA usually will inspect the facility or the facilities at which the product is manufactured, and will not approve the product unless cGMP compliance is satisfactory. If the FDA determines the NDA or BLA is not acceptable, the FDA may outline the deficiencies in the NDA or BLA and often will request additional information. Notwithstanding the submission of any requested additional testing or information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. After approval, certain changes to the approved product, such as adding new indications, manufacturing changes, or additional labeling claims are subject to further FDA review and approval. The testing and approval process requires substantial time, effort and financial resources, and we cannot be sure that any approval will be granted on a timely basis, if at all.

Some of our product candidates may be eligible for submission of applications for approval that require less information than the NDAs described above. The FDA may approve an ANDA if the product is the same in important respects as a listed drug, such as a drug with an effective FDA approval, or the FDA has declared it suitable for an ANDA submission. ANDAs for such generic drugs must contain the same manufacturing and composition information as NDAs, but applicants need not submit preclinical and clinical safety and effectiveness data. Instead they must submit studies showing that the product is bioequivalent to the listed drug. Drugs are bioequivalent if the rate and extent of absorption of the drug does not show a significant difference from the rate and extent of absorption of the listed drug. Conducting bioequivalence studies is generally less time-consuming and costly than conducting pre-clinical and clinical studies necessary to support an NDA. We have submitted an ANDA for calcitonin that is currently pending before the FDA, and we may be able to submit ANDAs for other product candidates in the future.

The FDCA provides that ANDA reviews and/or approvals will be delayed in various circumstances. For example, the holder of the NDA for the listed drug may be entitled to a period of market exclusivity, during which FDA will not approve, and may not even review, the ANDA. If the listed drug is claimed by an unexpired patent that the NDA holder has listed with the FDA, the ANDA applicant must certify in a so-called paragraph IV certification that the patent is invalid, unenforceable, or not infringed by the product that is the subject of the ANDA. If the holder of the NDA sues the ANDA applicant within

45 days of being notified of the paragraph IV certification, the FDA will not approve the ANDA until the earlier of a court decision favorable to the ANDA applicant or the expiration of 30 months. Also, in circumstances in which the listed drug is claimed in an unexpired listed patent and the patent’s validity, enforceability or applicability to the generic drug has been challenged by more than one generic applicant, ANDA approvals of later generic drugs may be delayed until the first applicant has received a 180-day period of market exclusivity. The regulations governing marketing exclusivity and patent protection are complex, and it is often unclear how they will be applied in particular circumstances until FDA acts on one or more ANDA applications. We do not believe that there is market exclusivity associated with calcitonin and we have not been sued by the patent holder in connection with our ANDA for calcitonin, but our ANDA approval could be delayed by exclusivity awarded to a previous ANDA applicant.

Some of our drug products may be eligible for approval under the Section 505(b)(2) approval process. Section 505(b)(2) applications may be submitted for drug products that represent a modification of a listed drug (e.g., a new indication or new dosage form) and for which investigations other than bioavailability or bioequivalence studies are essential to the drug’s approval. Section 505(b)(2) applications may rely on safety and effectiveness information submitted for the listed drug as well as information obtained by the 505(b)(2) applicant needed to support the modification of the listed drug. Preparing Section 505(b)(2) applications is also generally less costly and time-consuming than preparing an NDA. Like ANDAs, approval of Section 505(b)(2) applications may be delayed because of market exclusivity awarded to the listed drug or because patent rights are being adjudicated.

In addition, regardless of the type of approval, we and our partners are required to comply with a number of FDA requirements both before and after approval. For example, we are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements concerning advertising and promotion for our products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money and effort in all areas of regulatory compliance, including production and quality control to comply with cGMP. In addition, discovery of problems such as safety problems may result in changes in labeling or restrictions on a product manufacturer or NDA/BLA holder, including removal of the product from the market.

Our MASCT device that we have licensed to Cytyc is a medical device that requires FDA authorization before it may be marketed. Medical devices may be marketed pursuant to an approved Pre-Market Approval Application (“PMA”), or pursuant to a clearance under section 510(k) of the FDCA. Obtaining a PMA involves generally the same steps as obtaining an NDA or BLA. Obtaining a 510(k) generally, but not always, requires the submission of less, but still substantial, performance, manufacturing, and other information. The MASCT device has been cleared for marketing under section 510(k). In addition, medical devices are subject to pre- and post-approval and clearance requirements similar to those that apply to drugs and biologics.

In addition, we, our collaboration partners, and some of our product candidates, including our morphine gluconate and abuse-resistant opioid, are subject to the requirements of the Controlled Substances Act and implementing regulations thereunder, which are administered by the DEA. Establishments may not handle controlled drug substances until they have been inspected and registered by the DEA. The DEA also imposes recordkeeping and reporting requirements, procurement and manufacturing quotas, sales restrictions, and other obligations. Facilities must be equipped to meet DEA security requirements. We currently hold a DEA registration to conduct research at our Hauppauge facility relating to drug formulations containing DEA Schedule II controlled substances. However, there can be no assurance that we will be able to maintain our DEA registration or that we will be able to obtain additional registrations required to continue to research or commercially distribute our product candidates.

Competition in the drug industry is intense. Although we are not aware of any other companies that have the scope of proprietary technologies and processes that we have developed in our ability to deliver both small and large molecule drugs by intranasal administration, there are a number of competitors who possess capabilities relevant to the drug delivery field. In particular, we face substantial competition from companies pursuing the commercialization of products using intranasal drug delivery technology such as West Pharmaceuticals, Intranasal Technology, and IDDS. Established pharmaceutical companies such as AstraZeneca and GlaxoSmithKline also have in-house intranasal drug delivery research and development programs that have successfully developed and are marketing products using intranasal drug delivery technology. We also face indirect competition from other companies with expertise in alternate drug delivery technologies such as oral, injectable, patch-based and pulmonary administration. These competitors include Alkermes, Nektar, Skye Pharma, and Penwest Pharmaceuticals. Many of our competitors have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, and established collaborating relationships with pharmaceutical companies. Our competitors, either alone or with their collaboration partners, may succeed in developing drug delivery technologies that are similar or preferable in effectiveness, safety, cost and ease of commercialization, and our competitors may obtain intellectual property protection or commercialize such products sooner than we do.

Even if we are able to develop products that then obtain the necessary regulatory approvals, our success depends to a significant degree on the commercial success of products manufactured by us pursuant to supply agreements or distributed by our collaboration partners. If our product candidates obtain the necessary regulatory approvals and become commercialized, they would compete with the following products already in the market or currently in development stage:

There are currently three products approved by the FDA for the treatment of obesity, which are Xenical (orlistat) by F. Hoffman-La Roche Ltd., Meridia (sibutramine) by Abbott Laboratories and the generic phentermine. In addition, there are other products currently in development for the treatment of obesity, including Acomplia (rimonabant) by Sanofi-SA and injectable PYY by Amylin Pharmaceuticals, Inc. and oral PYY by Emisphere Technologies, Inc. (“Emisphere Technologies”).

Pharmaceutical treatments for osteoporosis include bisphosphonates such as Merck’s Fosamax (alendronate) and Procter & Gamble/ Aventis’ Actonel (risedronate) and selective estrogen receptor modulators such as Eli Lilly’s Evista (raloxifene). If commercialized, our intranasal PTH_1-34 will also compete with Eli Lilly’s Forteo (teriparatide), an FDA approved injectable parathyroid hormone. Additional competition could come from development candidates such as injectable full length parathyroid hormone by NPS Pharmaceuticals, Inc. Our generic calcitonin-salmon intranasal spray to be manufactured by us and distributed by Par Pharmaceutical will compete with Novartis’ Miacalcin (intranasal calcitonin-salmon). Novartis may also introduce a generic version through Sandoz US, its wholly-owned subsidiary. Additional competition could come from development candidates such as oral calcitonin by Emisphere Technologies.

There are three PDE-5 inhibitors approved by the FDA which are Viagra (sildenafil) by Pfizer, Cialis (tadalafil) by Eli Lilly/ ICOS and Levitra (vardenafil) by Bayer/ GlaxoSmithKline, as well as Uprima by TAP Pharmaceutical Products, Inc. marketed in Europe. In addition, products such as Palatin’s PT-141 intranasal spray are also in development for treatment of erectile dysfunction.

Currently, the only approved pharmaceutical treatment for breakthrough cancer pain is Actiq (oral transmucosal fentanyl citrate) by Cephalon. In addition, OraVescent by Cephalon is also in development.

Pharmaceutical treatments for multiple sclerosis include Rebif by Serono/ Pfizer, Avonex by Biogen Idec Inc. Betaseron by Berlex/ Chiron, and Copaxone by Teva Pharmaceutical Industries Ltd. Additional competition could come from development candidates such as Antegren (natalizumab) by Biogen Idec.

Testing, manufacturing and marketing products involve an inherent risk of product liability attributable to unwanted and potentially serious health effects. To the extent we elect to test, manufacture or market products independently, we will bear the risk of product liability directly. We currently have product liability insurance coverage in the amount of $10 million per occurrence and a $20 million aggregate limitation, subject to deductibles of $10,000 per occurrence and $50,000 in the aggregate.

We had 91 full-time employees at September 30, 2004, 61 of whom are engaged in research and development, and the others are engaged in administration and support functions. None of our employees is covered by a collective bargaining agreement.

We currently lease approximately 37,000 square feet of space at our corporate headquarters in Bothell, Washington. We amended our lease on February 17, 2004 for an additional 14,000 square feet effective January 1, 2005, for a total of approximately 51,000 square feet consisting of 15,355 square feet of research and development facilities, 16,488 square feet of manufacturing space and 6,240 square feet of general and administrative space. The lease for our headquarters in Bothell expires on January 16, 2016.

We also have an additional 10,000 square feet of manufacturing space that we lease in Hauppauge, New York. This lease is scheduled to expire on June 30, 2005, and we are currently negotiating to extend the Hauppauge lease for several years.

We believe that these facilities are adequate for our current needs, although we may in the future expand our facilities for additional research and development and manufacturing capability.

The following table sets forth information regarding our executive officers and directors:

Dr. Steven C. Quay. Dr. Quay has been employed by Nastech since August 2000 as Chairman of the Board, President and Chief Executive Officer. In 1999, Dr. Quay founded and was Chairman, President and Chief Executive Officer of Atossa, which focused on the development of a proprietary platform of diagnostics and treatments related to breast cancer risk assessment and therapeutics and other healthcare products for women. We acquired Atossa in August 2000. In 1991, Dr. Quay founded Sonus Pharmaceuticals, Inc. (“Sonus”), a company engaged in the research and development of drug delivery systems and oxygen delivery products based on emulsion and surfactant technology, where he served as Chief Executive Officer, President and a director until June 1999. In 1984, Dr. Quay founded Salutar, Inc. (“Salutar”) to develop contrast agents for magnetic resonance imaging. Two pharmaceuticals, OmniScan® and TeslaScan®, were invented by Dr. Quay at Salutar and are now FDA-approved for sale in the United States and other countries. Dr. Quay has authored more than 100 papers in diagnostic imaging, oncology and biochemistry and holds 48 U.S. patents. Dr. Quay graduated from the University of Michigan Medical School, where he received an M.A. and a Ph.D. in biological chemistry in 1974 and 1975, respectively, and an M.D. in 1977. Dr. Quay completed his post-graduate work in the chemistry department of Massachusetts Institute of Technology and received his residency training at Massachusetts General Hospital, Harvard Medical School in Boston. From 1980 to 1986, he was a faculty member of Stanford University School of Medicine.

Dr. Gordon C. Brandt. Dr. Brandt joined Nastech in November 2002. In his position of Executive Vice President Clinical Research and Medical Affairs, he oversees the drug development process from preclinical through clinical testing. From 1997 to 2002, Dr. Brandt worked at Sonus where he held the positions of Vice President, Clinical and Regulatory Affairs, and Director of Medical Affairs. At Sonus, Dr. Brandt was involved in managing all aspects of design and implementation of early and late stage clinical trial programs and submissions to regulatory authorities. Dr. Brandt graduated from Yale University with a B.S. degree in engineering science, received an M.D. from the University of California, San Francisco, and completed his residency training in internal medicine at Kaiser Hospital in San Francisco. Dr. Brandt holds one U.S. patent.

Dr. Paul H. Johnson. Dr. Johnson has been employed by Nastech since September 2003 as Senior Vice President, Research and Development and Chief Scientific Officer. From 2001 to 2003, Dr. Johnson was Vice President, Research and Development and Chief Scientific Officer at EpiGenX Pharmaceuticals, Inc., a privately-held company focused on the development of epigenetic-based strategies to treat cancer and infectious diseases. From 1994 to 2001, Dr. Johnson served as the Head of the Cell and Molecular Biology Department and Principal Scientist in the Cancer Research Department at Berlex Biosciences (“Berlex”) in Richmond, California, the U.S. research and development center for Schering AG in Germany. He also held an adjunct faculty position in the Graduate Division of Molecular Biology and Biochemistry at the University of California at Davis. From 1975 to 1994, Dr. Johnson was the Director of the Cell and Molecular Biology Laboratory at SRI International (formerly the Stanford Research Institute) and Professor of Biochemistry at Wayne State University Medical School. Dr. Johnson received a B.S. in biological sciences from the State University of New York (“SUNY”), Buffalo, a Ph.D. in biochemistry from the Roswell Park Cancer Institute (SUNY), and completed his post-doctoral training at the California Institute of Technology under an American Cancer Society fellowship.

Gregory L. Weaver. Mr. Weaver has been employed by Nastech since May 2002 as its Chief Financial Officer. He was also appointed Corporate Secretary in 2003. Prior to joining Nastech, Mr. Weaver held the positions of Vice President, Strategic Development, and Vice President and Chief Financial Officer of Ilex Oncology, Inc. (“Ilex”), an oncology-focused biopharmaceutical company. During his tenure at Ilex, Mr. Weaver was involved in a series of strategic financings and acquisitions. Prior to Ilex, Mr. Weaver held several senior financial management positions, including Vice President and Chief Financial Officer of Prism Technologies, a medical device company, and Chief Financial Officer of a division of Fidelity Capital Publishing. Mr. Weaver received B.A. in accounting from Trinity University in San Antonio, Texas, and an M.B.A. in finance from Boston College. He also served in the United States Air Force. Mr. Weaver is a Certified Public Accountant.

David E. Wormuth. Mr. Wormuth has been employed by Nastech since March 2001 as its Senior Vice President, Operations. From 1997 to 2001, Mr. Wormuth was President of David E. Wormuth & Associates, a consulting firm providing expert consulting services to the pharmaceutical industry related to manufacturing and quality control. From 1992 until 1997, Mr. Wormuth served as Vice President of Operations for Sonus. Prior to joining Sonus, Mr. Wormuth spent five years in various operational and manufacturing positions with Kabivitrum, Inc., a Swedish firm, specializing in emulsion technology and the development of amino acids for LVP applications. Prior to Kabivitrum, Mr. Wormuth spent 13 years with Abbott Laboratories in various manufacturing roles until 1987. Mr. Wormuth graduated from Newberry College in Newberry, South Carolina, where he received a B.A. in history and political science, and also served in the United States Marine Corps.

Timothy M. Duffy. Mr. Duffy has been employed by Nastech since June 2004 as Vice President, Marketing and Business Development. Prior to joining Nastech, Mr. Duffy held the position of Vice President, Business Development at Prometheus Laboratories Inc. (“Prometheus”), a privately held specialty pharmaceutical company. During his career at Prometheus, Mr. Duffy managed acquisition of seven pharmaceutical products, licensing of nine diagnostic technologies, and negotiation of other transactions. Prior to Prometheus, Mr. Duffy served for 13 years in functional and management positions in the pharmaceutical division at The Procter & Gamble Company. Mr. Duffy received a B.A. in biology from Loras College in Dubuque, Iowa.


(1)	Dr. Quay commenced employment with us in August 2000.

(2)	Dr. Brandt commenced employment with us in November 2002.

(3)	Dr. Johnson commenced employment with us in September 2003.

(4)	Mr. Weaver commenced employment with us in May 2002.

(5)	Mr. Wormuth commenced employment with us in March 2001.

(6)	The amounts shown in this column represent temporary living expense, except that the amounts relating to Dr. Johnson and Mr. Weaver represent relocation expenses.

The following table sets forth, as of October 31, 2004, the beneficial ownership of our common stock as to (i) persons known to us who may be deemed to be beneficial owners of more than five percent of the outstanding shares of our common stock, (ii) each of our directors, executive officers and affiliates, and (iii) all of our directors and officers as a group. Unless otherwise indicated, the address of each of the persons named below is c/o Nastech Pharmaceutical Company Inc., 3450 Monte Villa Parkway, Bothell, Washington 98021.


	(1)	Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable are deemed outstanding, but are not deemed outstanding for purposes of computing the beneficial ownership of any other person. Unless otherwise indicated in the footnotes below, we believe, based on information provided by such persons, that the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable.

	(2)	Includes 1,006,719 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004. Also includes 593,940 shares held by K-Quay Enterprises LLC, of which Dr. Quay is a beneficial owner.

	(3)	Includes 55,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 3,000 unvested restricted shares as of November 17, 2004.

	(4)	Includes 10,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 3,000 unvested restricted shares as of November 17, 2004.

	(5)	Includes 15,000 unvested restricted shares as of November 17, 2004.

	(6)	Includes 16,500 unvested restricted shares as of November 17, 2004.

	(7)	Includes 85,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 3,000 unvested restricted shares as of November 17, 2004.


	(8)	Includes 10,256 shares issuable pursuant to outstanding warrants currently exercisable as of November 17, 2004 and 15,000 restricted shares as of November 17, 2004. Also includes 57,500 shares held by Mr. Stanewick’s spouse.

	(9)	Includes 128,500 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 3,000 unvested restricted shares as of November 17, 2004.


(10)	Includes 45,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 3,000 unvested restricted shares as of November 17, 2004. Also includes 166 shares held by Mr. Wenig’s spouse.

(11)	Includes 30,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004.

(12)	Includes 30,000 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004.

(13)	Includes 91,668 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004 and 7,500 restricted shares as of November 17, 2004.

(14)	Includes 82,501 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004.

(15)	Includes 15,000 unvested restricted shares as of November 17, 2004.

(16)	Includes 1,564,388 shares issuable pursuant to outstanding stock options currently exercisable as of November 17, 2004, 10,256 shares issuable pursuant to outstanding warrants currently exercisable as of November 17, 2004 and 84,000 unvested restricted shares outstanding as of November 17, 2004.

This section summarizes certain material U.S. federal income and estate tax considerations relating to the ownership and disposition of our common stock. This summary does not provide a complete analysis of all potential tax considerations. The information provided below is based on existing authorities. These authorities may change, or the Internal Revenue Service (“IRS”) might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of our common stock could differ from those described below. For purposes of this summary, a “non-U.S. holder” is any holder other than a citizen or resident of the United States, a corporation organized under the laws of the United States or any state, a trust that is (i) subject to the primary supervision of a U.S. court and the control of one of more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person or an estate whose income is subject to U.S. income tax regardless of source. If a partnership or other flow-through entity is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. This summary generally does not address tax considerations that may be relevant to particular investors because of their specific circumstances, or because they are subject to special rules. Finally, this summary does not describe the effects of any applicable foreign, state, or local laws.

INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE, OR LOCAL LAWS, AND TAX TREATIES.

Any dividends paid to a non-U.S. holder on our common stock will generally be subject to U.S. withholding tax at a 30 percent rate. The withholding tax might not apply, however, or might apply at a reduced rate, under the terms of an applicable income tax treaty between the United States and the non-U.S. holder’s country of residence. A non-U.S. holder must demonstrate its entitlement to treaty benefits by certifying its nonresident status. A non-U.S. holder can meet this certification requirement by providing a Form W-8BEN or appropriate substitute form to us or our paying agent. If the holder holds the stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to the agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. For payments made to a foreign partnership or other flow-through entity, the certification requirements generally apply to the partners or other owners rather than to the partnership or other entity, and the partnership or other entity must provide the partners’ or other owners’ documentation to the appropriate withholding agent. Special rules, described below, apply if such dividends are effectively connected with a U.S. trade or business conducted by the non-U.S. holder.

Non-U.S. holders will generally not be subject to U.S. federal income tax on any gains realized on the sale, exchange, or other disposition of our common stock. This general rule, however, is subject to several exceptions. For example, the gain would be subject to U.S. federal income tax if:


	•	the gain is effectively connected with the conduct by the non-U.S. holder of a U.S. trade or business (in which case the special rules described below apply);

	•	the non-U.S. holder was a citizen or resident of the United States and thus is subject to special rules that apply to expatriates; or


	•	the rules of the Foreign Investment in Real Property Tax Act (“FIRPTA”) (described below) treat the gain as effectively connected with a U.S. trade or business.

The FIRPTA rules may apply to a sale, exchange or other disposition of our common stock if we are, or were within five years before the transaction, a “U.S. real property holding corporation” (“USRPHC”). In general, we would be a USRPHC if interests in U.S. real estate comprised most of our assets. We do not believe that we are a USRPHC or that we will become one in the future.

If any dividends on our common stock, or gain from the sale, exchange or other disposition of our common stock is effectively connected with a U.S. trade or business conducted by the non-U.S. holder, then the dividends or gain will be subject to U.S. federal net income tax at the regular graduated rates. If the non-U.S. holder is eligible for the benefits of a tax treaty between the United States and the holder’s country of residence, any “effectively connected” dividends or gain would ordinarily be subject to U.S. federal income tax only if it is also attributable to a permanent establishment or fixed base maintained by the holder in the United States. Payments of dividends that are effectively connected with a U.S. trade or business, and therefore included in the gross income of a non-U.S. holder, will not be subject to the 30 percent withholding tax. To claim exemption from withholding, the holder must certify its qualification, which can be done by filing a Form W-8ECI. If the non-U.S. holder is a corporation, that portion of its earnings and profits that is effectively connected with its U.S. trade or business would generally be subject to a “branch profits tax.” The branch profits tax rate is generally 30 percent, although an applicable income tax treaty might provide for a lower rate.

The estates of nonresident alien individuals are generally subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent. The U.S. federal estate tax liability of the estate of a nonresident alien may be affected by a tax treaty between the United States and the decedent’s country of residence.

The U.S. Internal Revenue Code and the applicable Treasury regulations promulgated thereunder require those who make specified payments to report the payments to the IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by “backup withholding” rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or repeatedly failing to report interest or dividends on his or her returns. The withholding tax rate is currently 28 percent. The backup withholding rules do not apply to payments to corporations, whether domestic or foreign.

Payments to non-U.S. holders of dividends on our common stock will generally not be subject to backup withholding, and payments of proceeds made to non-U.S. holders by a broker upon a sale of our common stock will not be subject to information reporting or backup withholding, in each case so long as the non-U.S. holder certifies its nonresident status. Some of the common means of certifying nonresident status are described under “Dividends.” We must report annually to the IRS any dividends paid to each non-U.S. holder and the tax withheld, if any, with respect to such dividends. Copies of these reports may be made available to tax authorities in the country where the non-U.S. holder resides.

Any amounts withheld from a payment to a holder of our common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder.

THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

Citigroup Global Markets Inc. is acting as sole bookrunning manager of the offering, and, together with Needham & Company, Inc., WR Hambrecht + Co, LLC and Delafield Hambrecht, Inc., are acting as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus supplement, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter’s name.

The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.

The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus supplement and some of the shares to dealers at the public offering price less a concession not to exceed $ per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $ per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms.

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to 637,500 additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter’s initial purchase commitment.

We and our officers and directors have agreed that, for a period of 90 days from the date of this prospectus supplement, we and they will not, without the prior written consent of Citigroup, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. The exceptions permit our officers and directors to transfer shares of common stock as bona fide gifts and as approved by Citigroup, and to sell shares of common stock, where applicable, under preplanned trading programs that satisfy the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 and that are in effect on the date of the lock-up agreements. Citigroup in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.


	•	it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares included in this offering to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;


	•	it has only communicated and caused to be communicated and will only communicate or cause to be communicated any invitations or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any shares included in this offering in circumstances in which section 21(1) of the FSMA does not apply to us;

	•	it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares included in this offering in, from or otherwise involving the United Kingdom; and

	•	the offer in The Netherlands of the shares included in this offering is exclusively limited to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, pension funds, other institutional investors and finance companies and treasury departments of large enterprises).

The common stock is quoted on the Nasdaq National Market under the symbol “NSTK.”

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

In connection with the offering, Citigroup on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. “Covered” short sales are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Citigroup repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq National Market or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

In addition, in connection with this offering, some of the underwriters (and selling group members) may engage in passive market making transactions in the common stock on the Nasdaq National Market, prior to the pricing and completion of the offering. Passive market making consists of displaying bids on the Nasdaq National Market no higher than the bid prices of independent market makers and making purchases at prices no higher than those independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker’s average daily trading volume in the common stock during a specified period and must be discontinued when that limit is reached. Passive market making may cause the price of the common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions. If the underwriters commence passive market making transactions, they may discontinue them at any time.

The underwriters have performed investment banking and advisory services for us from time to time for which they have received customary fees and expenses. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business.

This prospectus supplement and the accompanying prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

The validity of the common stock offered by this prospectus supplement is being passed upon for us by Pryor Cashman Sherman & Flynn LLP, New York, New York and Cleary, Gottlieb, Steen & Hamilton, New York, New York will pass upon legal matters for the underwriters.

The consolidated financial statements of Nastech Pharmaceutical Company Inc. as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any documents filed by us at the Securities and Exchange Commission’s public reference room located at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the public reference room of the Securities and Exchange Commission by calling the Securities and Exchange Commission at 1-800-SEC-0330. You can also request copies of such documents, upon payment of a duplicating fee, by writing to the public reference room of the Securities and Exchange Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that we file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s web site is: http://www.sec.gov. In addition, our common stock is listed on the Nasdaq National Market under the symbol “NSTK,” and similar information concerning us can be inspected and copied at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. In addition, copies of our annual, quarterly, and current reports may be obtained from our website at http://www.nastech.com. The information available on or through our website is not a part of this prospectus supplement and the accompanying prospectus.

We have filed with the Securities and Exchange Commission a registration statement on Form S-3 under the Securities Act (File no. 333-119429), with respect to the securities offered by this prospectus supplement. This prospectus supplement does not contain all of the information set forth in the registration statement, certain portions of which have been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. Statements contained in this prospectus supplement as to the contents of any contract or other document are not necessarily complete, and in each instance please see the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding us and the securities offered by this prospectus supplement, please refer to the registration statement and such exhibits and schedules which may be obtained from the Securities and Exchange Commission at its principal office in Washington, D.C. upon payment of the fees prescribed by the Securities and Exchange Commission, or from its web site.

In this document, we “incorporate by reference” the information we file with the Securities and Exchange Commission, which means that we can disclose important information to you by referring to that information. The information incorporated by reference is considered to be a part of this prospectus supplement, and later information filed with the Securities and Exchange Commission will update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the offering is completed.


	(1) Our annual report on Form 10-K for the fiscal year ended December 31, 2003;

	(2) Our quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004;

	(3) Our current reports on Form 8-K dated March 10, 2004, April 21, 2004, May 24, 2004, June 25, 2004, June 29, 2004, September 24, 2004, October 22, 2004, November 8, 2004 and November 23, 2004;

	(4) Our definitive notice and proxy statement filed on Schedule 14A on April 29, 2004; and

	(5) The description of our common stock contained in our registration statement on Form 8-A, filed with the Securities and Exchange Commission on August 12, 1985, and any further amendment or report filed thereafter for purposes of updating any such description, including the Amended and Restated By-laws dated August 11, 2004, filed as Exhibit 3.10 to the registration statement on Form S-3 (File no. 333-119429).

You may request a copy of any or all of the information that has been incorporated by reference in this prospectus supplement but that has not been delivered at no cost, by writing or calling us at the following address or telephone number:

          Nastech Pharmaceutical Company Inc.
          3450 Monte Villa Parkway
          Bothell, Washington 98021
          Attention: Chief Financial Officer
          (425) 908-3600

We may, from time to time, in one or more series, offer and sell the following securities:


•	common stock;

•	warrants to purchase common stock; or

•	debt securities.

The initial offering price for any of these securities will not exceed $80,000,000. We will describe the terms of any such offering in a supplement to this prospectus. Any prospectus supplement may also add, update, or change information contained in this prospectus. Such prospectus supplement will contain the following information about the offered securities:


•	title and amount;

•	offering price, underwriting discounts and commissions and our net proceeds;

•	any market listing and trading symbol;

•	names of lead or managing underwriters and description of underwriting arrangements; and

•	the specific terms of the offered securities.

Our shares of common stock trade on the Nasdaq National Market under the symbol “NSTK.” On September 29, 2004, the last sale price of the shares as reported on the Nasdaq National Market was $12.40 per share.

You should carefully read and consider the risk factors beginning on page 14 in our Annual Report on Form 10-K for the year ended December 31, 2003 for risks relating to investments in our securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Unless the context otherwise requires, all references in this prospectus to “Nastech,” “Company,” “registrant,” “we,” “us” or “our” include Nastech Pharmaceutical Company Inc., a Delaware corporation, and any subsidiaries or other entities controlled by us. All references in this prospectus to “common stock” refer to our common stock, par value $.006 per share.

This prospectus is part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission utilizing a shelf registration process. Under this shelf registration statement, we may, from time to time, sell any combination of common stock, warrants to purchase common stock or debt securities in one or more offerings for total gross proceeds of up to $80,000,000. This prospectus provides you with a general description of the securities we may offer.

If required, each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of the securities being offered. The prospectus supplement may add, update or change information contained in this prospectus and may include a discussion of any risk factors or other special considerations that apply to the offered securities. If there is any inconsistency between the information in this prospectus and a prospectus supplement, you should rely on the information in that prospectus supplement. Before making an investment decision, it is important for you to consider the information contained in this prospectus and any prospectus supplement together with additional information described under the heading “Where You Can Find More Information.”

We have not authorized any person to give any information or to make any representations other than those contained or incorporated by reference in this prospectus, and, if given or made, you must not rely upon such information or representations as having been authorized. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities described in this prospectus or an offer to sell or the solicitation to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made under this prospectus will, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that the information contained or incorporated by reference in this prospectus is correct as of any time subsequent to the date of such information.

We consider some of the statements in this prospectus and in documents incorporated by reference to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to future events or our financial performance, and involve certain known and unknown risks, uncertainties and other factors, including those identified below, which may cause our or our industry’s actual or future results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statements or from historical results. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of such act. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “believe,” “expect,” “plan,” “anticipate,” “intend,” “estimate,” “predict,” “potential” and other expressions which indicate future events and trends. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We have no duty to update or revise any forward-looking statements after the date of this prospectus or to conform them to actual results, new information, future events or otherwise.

The following factors, among others, could cause our or our industry’s future results to differ materially from historical results or those anticipated:


	•	our ability to obtain additional funding;

	•	our efforts to establish and maintain collaborative partnerships for the development of apomorphine nasal spray, calcitonin nasal spray, interferon beta, morphine gluconate nasal spray, parathyroid hormone (PTH 1-34), abuse-resistant opioid, peptide PYY (3-36) nasal spray or other programs;

	•	the success or failure of our research and development programs;

	•	the advantages and disadvantages of pharmaceuticals delivered nasally;

	•	the need for improved and alternative drug delivery methods;

	•	our efforts to collaborate with other pharmaceutical and biotechnology companies that have products under development;

	•	our ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization;

	•	our ability to obtain required governmental approvals, including product and patent approvals;

	•	our ability to successfully manufacture the products of our research and development programs and our marketed products to meet current Good Manufacturing Practices and to manufacture these products at a financially acceptable cost;

	•	our ability to attract and/or retain our key officers and employees and manufacturing, sales, distribution and marketing partners;

	•	costs associated with any product liability claims, patent prosecution, patent infringement lawsuits and other lawsuits;

	•	our ability to develop and commercialize our products before our competitors; and

	•	the projected size of the drug delivery market.

For further information on factors which could impact us and the statements contained herein, see the “Risk Factors” beginning on page 14 in our Annual Report on Form 10-K for the year ended December 31, 2003. We assume no obligation to update and supplement forward-looking statements that become untrue because of subsequent events.

These factors and the risk factors beginning on page 14 of our Annual Report on Form 10-K for the year ended December 31, 2003 are all of the important factors of which we are currently aware that could cause actual results, performance or achievements to differ materially from those expressed in any of our forward-looking statements. We operate in a continually changing business environment, and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that projected results or events will be achieved or will occur.

Nastech Pharmaceutical Company Inc. is an emerging pharmaceutical company developing products based on applying proprietary drug delivery technologies, with over 200 patents and applications filed. We are developing molecular biology-based technologies for delivering both small and large molecule drugs by nasal administration, along with an extended release oral delivery technology. Our intranasal drug delivery technology may lead to greater drug efficacy, speed of action, safety, and patient compliance. We are developing a diverse product portfolio across multiple therapeutic areas, including products targeted for the treatment of sexual dysfunction, obesity, pain management, osteoporosis, and multiple sclerosis.

We are building a pharmaceutical company leveraging our unique drug delivery capabilities and technologies as the means to develop commercial products — initially with partners, then on our own. The key elements of our business model are to:


	•	develop proprietary active delivery molecules from our tight junction and siRNA technologies;

	•	focus on molecules where our portfolio of technologies will offer significant clinical advantages;

	•	conduct preclinical, clinical and manufacturing steps to generate validated clinical leads and products;

	•	partner to complete or assist us to complete development and commercialization; and

	•	provide turn-key commercial manufacturing of nasal delivery products.

We are a leader in molecular-biology based drug delivery, which involves the pharmaceutical manipulation of “tight junctions.” Tight junctions are the cell-to-cell connections that comprise various tissues of the body and that regulate the transport and passage of therapeutic drugs across these natural barriers. We also have expertise in formulation science, a systematic approach to drug development using biophysics, physical chemistry and pharmacology to maximize therapeutic efficacy and safety, which sometimes involves a change in route of administration. Our drug delivery technology is essential in designing an optimized, customizable dosage form and in delivering proteins and large molecule drugs that can currently only be delivered by injection or other non-optimized routes.

Our core technical competency in molecular-biology based drug delivery involves the research, development and manufacture of nasally administered prescription pharmaceuticals. We investigate the commercial weaknesses of pharmaceutical products currently available in oral, injectable or other dosage forms, and we determine the advantages an alternative nasal drug delivery system, such as intranasal, would have for the same drug in the market place. For example, while the oral route delivery is the most popular and least expensive method of delivery, gastrointestinal and liver metabolism can reduce an oral drug’s effectiveness. Generally, a nasal delivery system will provide faster absorption into the blood stream than an oral product thereby resulting in faster onset of action. Other advantages of this therapy may include lower drug doses, fewer side effects, greater safety and efficacy, greater convenience to the patient, better patient compliance of prescribed drug therapy, and lower overall health care costs for the patient when compared to established methods of delivery. Pharmaceuticals that are currently injected can also be candidates for nasal delivery.

Our current business strategy seeks to broaden applications of our commitment to tight junction technology and formulation science, allowing drugs to be more safe and effective in patient treatment, with particular emphasis on the applications for nasal drug delivery in the prescription and over-the-counter markets.


	•	focus initial efforts on significant injectable approved drugs;

	•	leverage strategic alliances; and

	•	protect and expand intellectual property rights.

We intend to leverage our core technologies by collaborating with other pharmaceutical and biotechnology companies that have products under development that may benefit from nasal delivery.

As of September 28, 2004, Nastech employs 91 full-time employees, of whom 68 are engaged in research and development. The balance are engaged in administration and support functions.

We were incorporated in Delaware on September 23, 1983. Our principal executive offices are located at 3450 Monte Villa Parkway, Bothell, Washington 98021, and our telephone number there is (425) 908-3600. We have an internet web address at “http://www.nastech.com.” The information available on or through our website is not a part of this prospectus or any prospectus supplement.

Our certificate of incorporation, as amended, provides that the indemnification provisions of Section 145 of the Delaware General Corporation Law shall be utilized to the fullest extent possible. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent of the corporation. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

We also maintain a policy of directors and officers liability insurance covering certain liabilities incurred by our directors and officers in connection with the performance of their duties.

Our Certificate of Incorporation also contains provisions to limit the liability of our directors to us or our stockholders as permitted by Section 102(b)(7) of the Delaware General Corporation Law, as amended from time to time. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any transaction from which the director derived an improper personal benefit. Our Certificate of Incorporation, as amended, provides for such limitation of liability.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.

The ratio of earnings to fixed charges for each of the periods indicated is as follows:


		charges. Fixed charges consist of interest charges and that portion of rental payments under operating leases we believe to be representative of interest.

(b)		Earnings for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 and for the six months ended June 30, 2004, were insufficient to cover fixed charges by $8,350, $9,387, $9,232, $13,468, $2,141, and $15,135 (in thousands), respectively.

Unless otherwise specified in the applicable prospectus supplement, we intend to use the net proceeds from the sale of securities offered by this prospectus for general corporate purposes, including the funding of our clinical research and development programs, the clinical development of our pipeline, capital expenditures and working capital needs.


	•	through underwriting syndicates represented by one or more managing underwriters;

	•	to or through underwriters or dealers;

	•	through agents;

	•	directly to one or more purchasers; or

	•	through a combination of any of these methods of sale.

We may, from time to time, authorize underwriters acting as our agents to offer and sell the securities upon the terms and conditions as are set forth in the applicable prospectus supplement. We will describe the name or names of any underwriters and the purchase price of the securities in a prospectus supplement relating to the securities. Any underwritten offering may be on a best efforts or a firm commitment basis. The obligations, if any, of the underwriter to purchase any securities will be subject to certain conditions.

If a dealer is used in an offering of securities, we may sell the securities to the dealer as principal. We will describe the name or names of any dealers and the purchase price of the securities in a prospectus supplement relating to the securities. The dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time of sale. Any public offering price and any discounts or concessions allowed, reallowed, or paid to dealers may be changed from time to time.

We, or any underwriter, dealer or agent, may distribute the securities from time to time in one or more transactions at:


	•	a fixed price or prices, which may be changed;

	•	at market prices prevailing at the time of sale;

	•	at prices related to prevailing market prices; or

	•	at negotiated prices.

Any of these prices may represent a discount from the prevailing market prices. Underwriters and others participating in any offering of securities may engage in transactions that stabilize, maintain or otherwise affect the price of securities. We will describe any of these activities in the prospectus supplement.

We may authorize underwriters, dealers or agents to solicit offers by certain institutions to purchase our securities at the public offering price under delayed delivery contracts. If we use delayed delivery contracts, we will disclose that we are using them in the prospectus supplement and will tell you when we will demand payment and delivery of the securities under the delayed delivery contracts. These delayed

In connection with the sale of the securities and as further set forth in an applicable prospectus supplement, underwriters may receive compensation from us or from purchasers of the securities for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers, and these dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the securities may be deemed to be underwriters, and any discounts or commissions they receive from us, and any profit on the resale of the securities they realize, may be deemed to be underwriting discounts and commissions under the Securities Act. The prospectus supplement will identify any underwriter or agent and will describe any compensation they receive from us.

Unless otherwise specified in the prospectus supplement, each series of the securities will be a new issue with no established trading market, other than our common stock which currently is listed on the Nasdaq National Market. We may elect to list any series of debt securities or warrants on an exchange, but are not obligated to do so. It is possible that one or more underwriters may make a market in a series of our securities, but underwriters will not be obligated to do so and may discontinue any market making at any time without notice. Therefore, we can give no assurance about the liquidity of the trading market for any of our securities that may be sold pursuant to this prospectus.

Under agreements we may enter into, we may indemnify underwriters, dealers and agents who participate in the distribution of the securities against certain liabilities, including liabilities under the Securities Act.

Certain of the underwriters, dealers and agents and their affiliates may be customers of, engage in transactions with, and perform services for us and our subsidiaries from time to time in the ordinary course of business.

If indicated in the prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by institutions to purchase securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which we may make these contracts include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of the securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which the purchaser is subject. The underwriters and other agents will not have any responsibility with regard to the validity or performance of these contracts.

Set forth below is a description of our common stock. The following description of our common stock is a summary and is subject to and qualified by the applicable provisions of our certificate of incorporation, our bylaws and the relevant provisions of the laws of the State of Delaware. The particular terms of any offering of our common stock will be described in a prospectus supplement relating to such offering. The prospectus supplement may provide that our common stock will be issuable upon the conversion of debt securities or the exercise of warrants to purchase our common stock.

We are currently authorized to issue up to 25,000,000 shares of common stock. As of September 28, 2004, we had issued and outstanding 13,396,711 shares of our common stock.

All shares of common stock issued will be duly authorized, fully paid and non-assessable. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a

vote of the holders of our common stock. Under Delaware law, stockholders generally are not liable for our debts or obligations. Our certificate of incorporation does not authorize cumulative voting for the election of directors. Subject to the rights of the holders of any class of our capital stock having any preference or priority over our common stock, the holders of shares of our common stock are entitled to receive dividends that are declared by the board of directors out of legally available funds. In the event of our liquidation, dissolution or winding-up, the holders of common stock are entitled to share ratably in our net assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. Our common stock has no preemptive rights, conversion rights, redemption rights or sinking fund provisions, and there are no dividends in arrears or default. All shares of our common stock have equal distribution, liquidation and voting rights, and have no preferences or exchange rights.

Our common stock currently is trading on the Nasdaq National Market. We will apply to the Nasdaq National Market to list any additional shares of common stock that we offer and sell pursuant to a prospectus supplement.

On February 22, 2000, our board of directors adopted a stockholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock. Each right entitles the holder, once the right becomes exercisable, to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value $.01 per share. We issued these rights on March 17, 2000 to each stockholder of record on such date, and these rights attach to shares of common stock subsequently issued. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors and could, therefore, have the effect of delaying or preventing someone from taking control of us, even if a change of control were in the best interest of our stockholders.

Holders of our preferred share purchase rights are generally entitled to purchase from us one one-thousandth of a share of Series A preferred stock at a price of $50.00, subject to adjustment as provided in the Stockholder Rights Agreement. These preferred share purchase rights will generally be exercisable only if a person or group becomes the beneficial owner of 15 percent or more of our outstanding common stock or announces a tender offer for 15 percent or more of our outstanding common stock. Each holder of a preferred share purchase right, excluding an acquiring entity or any of its affiliates, will have the right to receive, upon exercise, shares of our common stock, or shares of stock of the acquiring entity, having a market value equal to two times the purchase price paid for one one-thousandth of a share of Series A preferred stock. The preferred share purchase rights expire on March 17, 2010, unless we extend the expiration date or in certain limited circumstances, we redeem or exchange such rights prior to such date.

American Stock & Transfer Company is the transfer agent and registrar for our common stock.

The following description of our warrants for the purchase of common stock in this prospectus contains the general terms and provisions of the warrants. The particular terms of any offering of warrants will be described in a prospectus supplement relating to such offering. The statements below describing the warrants are subject to and qualified by, the applicable provisions of our certificate of incorporation, bylaws and the relevant provisions of the laws of the State of Delaware.

We may issue warrants for the purchase of our common stock. We may issue warrants independently or together with any of our securities, and warrants also may be attached to our securities or independent of them. We may issue series of warrants under a separate warrant agreement between us and a specified

As of September 28, 2004, the only warrants issued and outstanding consist of warrants to purchase 1,586,751 shares of our common stock.

A prospectus supplement will describe the specific terms of any warrants that we issue or offer, including:


	•	the title of the warrants;

	•	the aggregate number of warrants;

	•	the price or prices at which the warrants will be issued;

	•	the currencies in which the price or prices of the warrants may be payable;

	•	the designation, amount and terms of our capital stock purchasable upon exercise of the warrants;

	•	the designation and terms of our other securities, if any, that may be issued in connection with the warrants, and the number of warrants issued with each corresponding security;

	•	if applicable, the date that the warrants and the securities purchasable upon exercise of the warrants will be separately transferable;

	•	the prices and currencies for which the securities purchasable upon exercise of the warrants may be purchased;

	•	the date that the warrants may first be exercised;

	•	the date that the warrants expire;

	•	the minimum or maximum amount of warrants that may be exercised at any one time;

	•	information with respect to book-entry procedures, if any;

	•	a discussion of certain federal income tax considerations; and

	•	any other material terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the warrants.

Unless otherwise specified in the applicable prospectus supplement, the debt securities will be issued under an indenture between us and Wilmington Trust Company, as trustee. The terms of the debt securities will include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”), as in effect on the date of the indenture. The following description summarizes only the material provisions of the indenture. Accordingly, you should read the form of indenture, a copy of which has been filed as an exhibit to the Registration Statement, because it, and not this description, defines your rights as holders of our debt securities. You should also read the applicable prospectus supplement for additional information and the specific terms of the debt securities.

For purposes of this section, “Description of Debt Securities,” only, references to “Nastech”, “Company”, “we”, “us” or “our” include only Nastech Pharmaceutical Company Inc. and not its subsidiaries.

We may, at our option, issue debt securities in one or more series from time to time. “Debt securities” may include senior debt, senior subordinated debt or subordinated debt. The particular terms of the debt securities offered by any prospectus supplement, and the extent, if any, to which such general provisions do not apply to the debt securities will be described in the prospectus supplement relating to such debt securities. The following summaries set forth certain general terms and provisions of the indenture and the debt securities. The prospectus supplement relating to a series of debt securities being offered will contain the following terms, if applicable:


	•	the title and ranking;

	•	the aggregate principal amount and any limit on such amount;

	•	the price at which such debt securities will be issued;

	•	the date on which the debt securities mature;

	•	the fixed or variable rate at which the debt securities will bear interest, or the method by which such rate shall be determined;

	•	the timing, place and manner of making principal, interest and any premium payments on the debt securities, and, if applicable, where such debt securities may be surrendered for registration of transfer or exchange;

	•	the date or dates, if any, after which the debt securities may be converted or exchanged into or for shares of our common stock or another company’s securities or properties or cash and the terms of any such conversion or exchange;

	•	any redemption or early repayment provisions;

	•	any sinking fund or similar provisions;

	•	the authorized denominations;

	•	any applicable subordination provisions;

	•	any guarantees of such securities by our subsidiaries or others;

	•	the currency in which we will pay the principal, interest and any premium payments on such debt securities;

	•	whether the amount of payments of principal of (and premium, if any) or interest, if any, on the debt securities may be determined with reference to an index, formula or other method and the manner in which such amounts shall be determined;

	•	the time period within which, the manner in which and the terms and conditions upon which the purchaser of the securities can select the payment currency;

	•	the provisions, if any, granting special rights to the holders of debt securities upon certain events;

	•	any additions to or changes in the events of default or covenants of Nastech with respect to the debt securities and any change in the right of the trustee or the holders to declare the principal, premium and interest with respect to such securities to be due and payable;

	•	whether and under what circumstances we will pay any additional amounts on such debt securities for any tax, assessment or governmental charge and, if so, whether we will have the option to redeem such debt securities instead of paying such amounts;

	•	the form (registered and/or bearer securities), any restrictions applicable to the offer, sale or delivery of bearer securities and the terms, if any, upon which bearer securities may be exchanged for registered securities and vice versa;


	•	the date of any bearer securities or any global security, if other than the date of original issuance of the first security of the series to be issued;

	•	the person to whom and manner in which any interest shall be payable;

	•	whether such securities will be issued in whole or in part in the form of one or more global securities;

	•	the identity of the depositary for global securities;

	•	whether a temporary security is to be issued with respect to such series and whether any interest payable prior to the issuance of definitive securities of the series will be credited to the account of the persons entitled thereto;

	•	the terms upon which beneficial interests in a temporary global security may be exchanged in whole or in part for beneficial interests in a definitive global security or for individual definitive securities and the terms upon which such exchanges may be made;

	•	the securities exchange(s), if any, on which the securities will be listed;

	•	whether any underwriter(s) will act as market maker(s) for the securities;

	•	the form (certificated or book-entry);

	•	the form and/or terms of certificates, documents or conditions which may be necessary, if any, for the debt securities to be issuable in final form; and

	•	additional terms not inconsistent with the provisions of the indenture.

One or more series of debt securities may be sold at a substantial discount below their stated principal amount bearing no interest or interest at a rate below the market rate at the time of issuance. One or more series of debt securities may be variable rate debt securities that may be exchanged for fixed rate debt securities. In such cases, all material United States federal income tax and other considerations applicable to any such series will be described in the applicable prospectus supplement.

We will comply with Section 14(e) under the Exchange Act, to the extent applicable, and any other tender offer rules under the Exchange Act, which may then be applicable, in connection with any obligation of Nastech to purchase debt securities at the option of the holders thereof. Any such obligation applicable to a series of debt securities will be described in the applicable prospectus supplement.

We expect payment of principal, premium, if any, and any interest on the debt securities to be payable, and the exchange and the transfer of debt securities will be registerable, at the office of the trustee or at any other office or agency we maintain for such purpose. We expect to issue debt securities in denominations of U.S. $1,000 or integral multiples thereof. No service charge will be made for any registration of transfer or exchange of the debt securities, but we may require a payment to cover any tax or other governmental charges payable in connection therewith.

Unless we indicate otherwise in the applicable prospectus supplement, the following provisions will apply to all debt securities.

The debt securities of a series may be issued in whole or in part in the form of one or more global securities that will be deposited with a depositary that we will identify in a prospectus supplement. Each global security will be deposited with the depositary and will bear a legend regarding any related restrictions or other matters as may be provided for pursuant to the applicable indenture.

Unless a prospectus supplement states otherwise, no global security may be transferred to, or registered or exchanged for debt securities registered in the name of, any person or entity other than the depositary, unless:


	•	the depositary has notified us that it is unwilling or unable or is no longer qualified to continue as depositary;

	•	we order the trustee that such global security shall be so transferable, registrable and exchangeable, and such transfers shall be registrable; or

	•	other circumstances, if any, as may be described in the applicable prospectus supplement.

All debt securities issued in exchange for a global security or any portion thereof will be registered in such names as the depositary may direct. The specific terms of the depositary arrangement with respect to any portion of a series of debt securities to be represented by a global security will be described in the applicable prospectus supplement.

Debt securities which are to be represented by a global security to be deposited with or on behalf of a depositary will be represented by a global security registered in the name of such depositary or its nominee. Upon the issuance of such global security, and the deposit of such global security with the depositary, the depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the debt securities represented by such global security to the accounts of institutions that have accounts with such depositary or its nominee (the “Participants”). The accounts to be credited will be designated by the underwriters or agents of such debt securities or by us, if such debt securities are offered and sold directly by us.

Ownership of beneficial interests in such global security will be limited to Participants or persons that may hold interests through Participants. Ownership of beneficial interests in such global security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by the depositary or its nominee for such global security or by Participants or persons that hold through Participants.

The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in certificated form. The foregoing limitations and such laws may impair the ability to transfer beneficial interests in such global securities.

So long as the depositary, or its nominee, is the registered owner of such global security, such depositary or such nominee, as the case may be, will be considered the sole owner or holder of the debt securities represented by such global security for all purposes under the indenture. Payment of principal of, and premium and interest, if any, on debt securities will be made to the depositary or its nominee as the registered owner or bearer as the case may be of the global security representing such debt securities. Each person owning a beneficial interest in such global security must rely on the procedures of the depositary and, if such person is not a Participant, on the procedures of the Participant through which such person owns its interest, to exercise any rights of a holder under the indenture. If we request any action of holders or if an owner of a beneficial interest in such global security desires to give any notice or take any action a holder is entitled to give or take under the indenture, the depositary will authorize the Participants to give such notice or take such action, and Participants would authorize beneficial owners owning through such Participants to give such notice or take such action or would otherwise act upon the instructions of beneficial owners owning through them.

The rights of any holder of a debt security to receive payment of principal and premium of, if any, and interest on such debt security, on or after the respective due dates expressed or provided for in such debt security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the holders.

Neither we, the trustee, any paying agent nor the security registrar for such debt securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of

We expect that the depositary or its nominee, upon receipt of any payment of principal, premium or interest, will credit immediately Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the global security for such debt securities as shown on the records of such depositary or its nominee. We also expect that payments by Participants to owners of beneficial interests in such global security held through such Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participants.

If the depositary for a global security representing debt securities of a particular series is at any time unwilling or unable to continue as depositary and we do not appoint a successor depositary within 90 days, we will issue debt securities of such series in definitive form in exchange for such global security. In addition, we may at any time and in our sole discretion determine not to have the debt securities of a particular series represented by one or more global securities and, in such event, will issue debt securities of such series in definitive form in exchange for all of the global securities representing debt securities of such series.

Except as permitted under “Consolidation, Merger and Sale of Assets,” the indenture will require us to do or cause to be done all things necessary to preserve and keep in full force and effect our existence, rights (declaration and statutory) and franchises; provided, however, that we shall not be required to preserve any right or franchise if we determine that the preservation thereof is no longer desirable in the conduct of our business and that the loss thereof is not disadvantageous in any material respect to the holders of the debt securities.

The indenture will require us to pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all taxes, assessments and governmental charges levied or imposed upon us except any tax, assessment, charge or claim whose amount or applicability is being contested in good faith.

Reference is made to the indenture and applicable prospectus supplement for information with respect to any additional covenants specific to a particular series of debt securities.

Except as set forth in the applicable prospectus supplement, the indenture will provide that we shall not consolidate with, or sell, assign, transfer, lease or convey all or substantially all of our assets, or merge into, to any person unless:


	•	we are the surviving entity or, in the event that we are not the surviving entity, the person formed by the transaction (in a consolidation) or the entity which received the transfer of assets:


	•	is a corporation organized under the laws of any state of the United States of America or the District of Columbia; and

	•	assumes all of our obligations under the debt securities and the indenture; and


	•	immediately after giving effect to the transaction, no event of default, as defined in the indenture, shall have occurred and be continuing.

Notwithstanding the foregoing, we may merge with another person or acquire by purchase or otherwise all or any part of the property or assets of any other corporation or person in a transaction in which we are the surviving entity.

Unless otherwise specified in the applicable prospectus supplement, the following are events of default with respect to any series of debt securities issued under the indenture:


	•	failure to pay principal of any debt security of that series when due and payable at maturity, upon acceleration, redemption or otherwise;

	•	failure to pay any interest on any debt security of that series when due, and the default continues for 30 days;

	•	failure to comply with any covenant or warranty contained in the indenture, other than covenants or warranties contained in the indenture solely for the benefit of other series of debt securities, and the default continues for 30 days after notice from the trustee or the holders of at least 25% in principal amount of the then outstanding debt securities of that series;

	•	certain events of bankruptcy, insolvency or reorganization; and

	•	any other event of default provided with respect to that particular series of debt securities.

If an event of default occurs and continues, then upon written notice to us the trustee or the holders of at least 25% in principal amount of the outstanding debt securities of that series may declare the unpaid principal amount of, and any accrued and unpaid interest on, all debt securities of that series to be due and payable immediately. However, at any time after a declaration of acceleration with respect to debt securities of any series has been made, the holders of a majority in principal amount of the outstanding debt securities of that series may rescind and annul such acceleration:


	•	if all events of default other than the nonpayment of principal of or interest on the debt securities of that series which have become due solely because of the acceleration have been waived or cured; and

	•	the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. For information as to waiver of defaults, see “Amendment, Supplement and Waiver” below.

The indenture will provide that, subject to the duty of the trustee during an event of default to act with the required standard of care, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders, unless such holders shall have offered to the trustee reasonable security or indemnity. Subject to certain provisions, including those requiring security or indemnification of the trustee, the holders of a majority in principal amount of the outstanding debt securities of any series will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee, with respect to the debt securities of that series.

We will be required to furnish to the trustee under the indenture annually a statement as to the performance by us of our obligations under that indenture and as to any default in such performance.

Except as otherwise set forth in the applicable prospectus supplement, we may terminate our obligations under the debt securities of any series, and the corresponding obligations under the indenture when:


	•	we have paid or deposited with the trustee funds or United States government obligations in an amount sufficient to pay at maturity all outstanding debt securities of such series, including interest other than destroyed, lost or stolen debt securities of such series which have not been replaced or paid;

	•	all outstanding debt securities of such series have been delivered (other than destroyed, lost or stolen debt securities of such series which have not been replaced or paid) to the trustee for cancellation; or


	•	all outstanding debt securities of any series have become due and payable; and

	•	we have paid all other sums payable under the indenture.

In addition, we may terminate substantially all our obligations under the debt securities of any series and the corresponding obligations under the indenture if:


	•	we have paid or deposited with the trustee, in trust an amount of cash or United States government obligations sufficient to pay all outstanding principal of and interest on the then outstanding debt securities of such series at maturity or upon their redemption, as the case may be;

	•	such deposit will not result in a breach of, or constitute a default under, the indenture;

	•	no default or event of default shall have occurred and continue on the date of deposit and no event of default as a result of a bankruptcy or event which with the giving of notice or the lapse of time would become a bankruptcy event of default shall have occurred and be continuing on the 91st day after such date;

	•	we deliver to the trustee a legal opinion that we have received from, or there has been published by, the United States Internal Revenue Service a ruling, or there has been a change in tax law, in either case to the effect that the holders of the debt securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of our exercise of such option and shall be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such option had not been exercised; and

	•	certain other conditions are met.

We shall be released from our obligations with respect to the covenants to deliver reports required to be filed with the Securities and Exchange Commission and an annual compliance certificate, and to make timely payments of taxes (including covenants described in a prospectus supplement) and any event of default occurring because of a default with respect to such covenants as they related to any series of debt securities if:


	•	we deposit or cause to be deposited with the trustee in trust an amount of cash or United States government obligations sufficient to pay and discharge when due the entire unpaid principal of and interest on all outstanding debt securities of any series;

	•	such deposit will not result in a breach of, or constitute a default under, the indenture;

	•	no default or event of default shall have occurred and be continuing on the date of deposit no event of default as a result of a bankruptcy or event which with the giving of notice or the lapse of time would become a bankruptcy event of default shall have occurred and be continuing on the 91st day after such date;

	•	we deliver to the trustee a legal opinion that the holders of the debt securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of our exercise of such option and shall be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such option had not been exercised; and

	•	certain other conditions are met.

Upon satisfaction of such conditions, our obligations under the indenture with respect to the debt securities of such series, other than with respect to the covenants and events of default referred to above, shall remain in full force and effect.

Notwithstanding the foregoing, no discharge or defeasance described above shall affect the following obligations to or rights of the holders of any series of debt securities:


	•	rights of registration of transfer and exchange of debt securities of such series;

	•	rights of substitution of mutilated, defaced, destroyed, lost or stolen debt securities of such series;

	•	rights of holders of debt securities of such series to receive payments of principal thereof and premium, if any, and interest thereon when due;

	•	rights, obligations, duties and immunities of the trustee;

	•	rights of holders of debt securities of such series as beneficiaries with respect to property deposited with the trustee and payable to all or any of them; and

	•	our obligations to maintain an office or agency in respect of the debt securities of such series.

A holder of debt securities may transfer or exchange such debt securities in accordance with the indenture. The registrar for the debt securities may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the indenture. The registrar is not required to transfer or exchange any debt security selected for redemption or any debt security for a period of 15 days before a selection of debt security to be redeemed.

The registered holder of a debt security may be treated as the owner of such security for all purposes.

Subject to certain exceptions, the terms of the indenture or the debt securities may be amended or supplemented by us and the trustee with the written consent of the holders of at least a majority in principal amount of the outstanding debt securities of each series affected by the amendment with each series voting as a separate class. Without the consent of any holder of the debt securities, we and the trustee may amend the terms of the indenture or the debt securities to:


	•	cure any ambiguity, defect or inconsistency;

	•	provide for the assumption of our obligations to holders of the debt securities by a successor corporation;

	•	provide for uncertificated debt securities in addition to certificated debt securities;

	•	make any change that does not adversely affect the rights of any holder of the debt securities in any material respect;

	•	add to, change or eliminate any other provisions of the indenture in respect of one or more series of debt securities if such change would not (i) apply to any security of any series created prior to the execution of a supplemental indenture and entitled to the benefit of such provision and (ii) modify the rights of the holder of any such security with respect to such provision or become effective only when there is no outstanding security of any series created prior to the execution of such supplemental indenture and entitled to such benefits;

	•	establish any additional series of debt securities; or

	•	comply with any requirement of the Securities and Exchange Commission in connection with the qualification of the indenture under the Trust Indenture Act.

However, holders of each series of debt securities affected by a modification must consent to modifications that have the following effect:


	•	reduce the principal amount of debt securities the holders of which must consent to an amendment, supplement or waiver of any provision of the indenture;

	•	reduce the rate or change the time for payment of interest on any debt security;

	•	reduce the principal of or change the fixed maturity of any debt securities;

	•	change the date on which any debt security may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor;

	•	make any debt security payable in currency other than that stated in the debt security;

	•	waive any existing default or event of default and the consequences with respect to that series;

	•	modify the right of any holder to receive payment of principal or interest on any debt security on or after the respective due dates expressed or provided for in the debt security;

	•	impair the right of any holder to institute suit for the enforcement of any payment in or with respect to any such debt security; or

	•	make any change in the foregoing amendment provisions which require each holder’s consent.

Any existing default may be waived with the consent of the holders of at least a majority in principal amount of the then outstanding debt securities of the series affected thereby.

The consent of the holders of debt securities is not necessary to approve the particular form of any proposed amendment to any indenture. It is sufficient if any consent approves the substance of the proposed amendment.

Any mutilated certificate representing a debt security or a certificate representing a debt security with a mutilated coupon will be replaced by us at the expense of the holder upon surrender of such certificate to the trustee. Certificates representing debt securities or coupons that become destroyed, stolen or lost will be replaced by us at the expense of the holder upon delivery to us and the trustee of evidence of any destruction, loss or theft satisfactory to us and the trustee, provided that neither we nor the trustee has been notified that such certificate or coupon has been acquired by a bona fide purchaser. In the case of any coupon which becomes destroyed, stolen or lost, such coupon will be replaced by issuance of a new certificate representing the debt security in exchange for the certificate representing the debt security to which such coupon appertains. In the case of a destroyed, lost or stolen certificate representing the debt security or coupon, an indemnity bond satisfactory to the trustee and us may be required at the expense of the holder of such debt security before a replacement certificate will be issued.

The indenture, the debt securities and any coupons are governed by, and will be construed in accordance with the internal laws of, the State of New York.

Unless we otherwise identify in the prospectus supplement relating to any series of debt securities, the trustee with respect to such series will be Wilmington Trust Company. The indenture and provisions of the Trust Indenture Act incorporated by reference therein contain certain limitations on the rights of the trustee, should it become a creditor of Nastech, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim, as security or otherwise. The trustee and its affiliates may engage in, and will be permitted to continue to engage in, other transactions with us and our

The holders of a majority in principal amount of the then outstanding debt securities of any series will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee. The Trust Indenture Act and the indenture provide that in case an event of default shall occur, and be continuing, the trustee will be required, in the exercise of its rights and powers, to use the degree of care and skill of a prudent man in the conduct of his own affairs. Subject to such provision, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any of the holders of the debt securities issued thereunder, unless they have offered to the trustee indemnity satisfactory to it.

The validity of the equity and debt securities offered by this prospectus is being passed upon for us by Pryor Cashman Sherman & Flynn LLP, New York, New York.

The consolidated financial statements of Nastech Pharmaceutical Company Inc. as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, appearing in Nastech’s Annual Report (Form 10-K) for the year ended December 31, 2003, have been incorporated by reference herein in reliance upon the report of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any documents filed by us at the Securities and Exchange Commission’s public reference room located at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the public reference room of the Securities and Exchange Commission by calling the Securities and Exchange Commission at 1-800-SEC-0330. You also can request copies of such documents, upon payment of a duplicating fee, by writing to the public reference room of the Securities and Exchange Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s web site is: http://www.sec.gov. In addition, our common stock is listed on the Nasdaq National Market under the symbol “NSTK”, and similar information concerning us can be inspected and copied at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. In addition, copies of our annual, quarterly, and current reports may be obtained from our website at http://www.nastech.com. The information available on or through our website is not a part of this prospectus or any prospectus supplement.

We have filed with the Securities and Exchange Commission a registration statement on Form S-3 (of which this prospectus is a part) under the Securities Act, with respect to the securities offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement, certain portions of which have been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance please see the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding us and the securities offered by this prospectus, please refer to the registration statement and such exhibits and schedules which may be obtained from the Securities and Exchange Commission at its principal office in

In this document, we “incorporate by reference” the information we file with the Securities and Exchange Commission, which means that we can disclose important information to you by referring to that information. The information incorporated by reference is considered to be a part of this prospectus, and later information filed with the Securities and Exchange Commission will update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus until the offering is completed.

(1) Our Annual Report on Form 10-K (File No. 000-13789) for the fiscal year ended December 31, 2003;

(2) Our Quarterly Reports on Form 10-Q (File No. 000-13789) for the fiscal quarters ended March 31, 2004 and June 30, 2004;

(3) Our Current Report on Form 8-K (File No. 000-13789) dated September 24, 2004 reporting certain events under Items 8.01 and 9.01 and our Current Report on Form 8-K (File No. 000-13789) dated September 24, 2004 reporting certain events under Items 1.01 and 9.01;

(4) Our Proxy Statement relating to the Annual Meeting of Stockholders held on June 9, 2004; and

(5) The description of our common stock and the description of certain provisions of Delaware Law contained in:


	(i) Our Registration Statement on Form 8-A dated August 12, 1985;

	(ii) Our Certificate of Incorporation dated September 20, 1983 and filed as Exhibit 3.1 to the registration statement on Form S-3 of which this prospectus is a part;

	(iii) A Certificate of Amendment to our Certificate of Incorporation dated November 30, 1989 and filed as Exhibit 3.2 to the registration statement on Form S-3 of which this prospectus is a part;

	(iv) A Certificate of Amendment to our Certificate of Incorporation dated November 8, 1993 and filed as Exhibit 3.3 to the registration statement on Form S-3 of which this prospectus is a part;

	(v) A Certificate of Amendment to our Certificate of Incorporation dated December 30, 1996 and filed as Exhibit 3.4 to the registration statement on Form S-3 of which this prospectus is a part;

	(vi) A Certificate of Amendment to our Certificate of Incorporation dated August 15, 1999 and filed as Exhibit 3.5 to the registration statement on Form S-3 of which this prospectus is a part;

	(vii) A Certificate of Designation of Rights, Terms and Preferences of Series A Junior Participating Preferred Stock dated March 2, 2000 and filed as Exhibit A to our Current Report on Form 8-K dated February 22, 2000;

	(viii) A Certificate of Correction to a Certificate of Amendment to our Certificate of Incorporation dated July 28, 2004 and filed as Exhibit 3.7 to the registration statement on Form S-3 of which this prospectus is a part;

	(ix) A Certificate of Correction to a Certificate of Amendment to our Certificate of Incorporation dated July 28, 2004 and filed as Exhibit 3.8 to the registration statement on Form S-3 of which this prospectus is a part;

	(x) A Certificate of Correction to a Certificate of Amendment to our Certificate of Incorporation dated July 28, 2004 and filed as Exhibit 3.9 to the registration statement on Form S-3 of which this prospectus is a part;


	(xi) Our Amended and Restated Bylaws dated August 11, 2004 and filed as Exhibit 3.10 to the registration statement on Form S-3 of which this prospectus is a part; and any amendments or reports filed for the purpose of updating such description.

We will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference in the prospectus but not delivered with the prospectus. You may request a copy of these filings (including exhibits to such filings that we have specifically incorporated by reference in such filings), at no cost, by writing or calling us at the following address or telephone number:


	Nastech Pharmaceutical Company Inc.
	3450 Monte Villa Parkway
	Bothell, Washington 98021
	Attention: Chief Financial Officer
	(425) 908-3600

You should rely only on the information contained in this prospectus or information specifically incorporated by reference in this prospectus. We have not authorized anyone to provide you with information that is different. Neither the delivery of this prospectus, nor any sale made hereunder, shall create any implication that the information in this prospectus is correct after the date hereof. This prospectus is not an offer to or solicitation of any person in any jurisdiction in which such offer or solicitation is illegal.


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to Nastech Pharmaceutical Company Inc. (before expenses)	$	$


	Page

About This Prospectus Supplement		ii
Summary		S-1
Risk Factors		S-9
Forward-Looking Statements		S-20
Common Stock Market Data		S-22
Dividend Policy		S-22
Use of Proceeds		S-22
Capitalization		S-23
Dilution		S-24
Selected Financial Data		S-25
Management’s Discussion and Analysis of Financial Condition and Results of Operations		S-27
Business		S-40
Management		S-56
Principal Stockholders		S-59
Material United States Federal Tax Considerations for Non-U.S. Holders of Common Stock		S-61
Underwriting		S-64
Legal Matters		S-67
Experts		S-67
Where You Can Find More Information		S-67
Incorporation of Certain Information by Reference		S-67


	Page

About This Prospectus		1
Forward Looking Information		1
Information About The Company		2
Ratio of Earnings to Fixed Charges		4
Use of Proceeds		5
Plan of Distribution		5
Description of Common Stock		6
Description of Warrants		7
Description of Debt Securities		8
Legal Matters		17
Experts		17
Where You Can Find More Information		17
Incorporation of Certain Information by Reference		18


Quarter		High		Low

2002:
	First Quarter	$	19.90	$	12.00
	Second Quarter		16.57		11.74
	Third Quarter		16.20		6.64
	Fourth Quarter		11.00		7.52
2003:
	First Quarter	$	9.95	$	6.76
	Second Quarter		11.95		7.06
	Third Quarter		11.19		7.57
	Fourth Quarter		10.70		8.30
2004:
	First Quarter	$	14.65	$	9.01
	Second Quarter		14.95		9.40
	Third Quarter		15.05		7.25
	Fourth Quarter (through November 23, 2004)		16.56		12.28



				As of September 30, 2004

				Actual			As Adjusted


				(unaudited, in thousands
				except share amounts)
Cash, cash equivalents and short-term investments				$	19,171		$	80,173

Long-term liabilities					6,103			6,103
Stockholders’ equity:
	Preferred stock, $0.01 par value; 100,000 authorized; no shares issued and outstanding				—			—
	Common stock, $0.006 par value; 25,000,000 shares authorized; 13,399,211 shares outstanding; as adjusted – 17,649,211 shares				80			106
	Additional paid-in capital				88,509			149,485
	Deferred compensation				(1,531	)		(1,531	)
	Accumulated deficit				(77,534	)		(77,534	)

		Total stockholders’ equity			9,524			70,526

			Total capitalization	$	15,627		$	76,629


	•	Applying our tight junction technology to product candidates and other drug delivery methods;

	•	Pursuing collaborations with leading pharmaceutical and biotechnology companies;

	•	Opportunistically developing and commercializing product candidates on our own; and

	•	Utilizing our manufacturing expertise and capabilities.


	•	3,393,342 shares of common stock authorized for issuance under our stock option plans, under which options to purchase 2,766,752 shares, with an average exercise price of $11.35 per share, were outstanding and 626,590 shares were available for grant as of such date; and

	•	1,551,973 shares of common stock reserved for issuance upon the exercise of warrants outstanding as of such date, with a weighted average exercise price of $10.52 per share.


(1)	In 2000, we acquired Atossa HealthCare, Inc. (“Atossa”) in a transaction that was accounted for under the purchase method. In connection with the acquisition, we recognized a charge of $2.3 million for acquired in-process research and development.

(2)	In 2001, we completed two private placements totaling 2,117,361 shares of common stock from which we received net proceeds of $9.5 million.

(3)	In 2002, we received net proceeds of $5.0 million from a private placement of 250,000 shares of common stock.

(4)	In 2003, we received net proceeds of $10.0 million from a private placement of 1,513,069 shares of common stock.

(5)	In the first nine months of 2004, we received net proceeds of $12.3 million from a private placement of 1,136,364 shares of common stock.


Assumed offering price per share				$	15.52
	Pro forma net tangible book value per share as of September 30, 2004	$	0.70
	Increase per share attributable to this offering		3.29
Pro forma as adjusted net tangible book value per share after this offering					3.99

Dilution per share to new investors				$	11.53



	Year Ended December 31,												Nine Months Ended September 30,


	2001				2002				2003				2003				2004

			% of				% of				% of				% of				% of
	Revenue		Total		Revenue		Total		Revenue		Total		Revenue		Total		Revenue		Total


	(in thousands)
Product revenue, net	$	996		38%	$	1,408		16%	$	1,805		9%	$	1,797		10%	$	300		76%
License and research fees		1,607		62		7,515		84		17,635		91		16,732		90		96		24

Total Revenue	$	2,603		100%	$	8,923		100%	$	19,440		100%	$	18,529		100%	$	396		100%



							Nine Months
	Year Ended						Ended
	December 31,						September 30,

	2001		2002		2003		2003		2004


	(in thousands)
Product revenue	$	996	$	1,408	$	1,805	$	1,797	$	300
Cost of product revenue		503		289		498		435		190
Cost of product revenue as a percentage of product revenue		51%		21%		28%		24%		63%



	Payments Due by Year

	Total		2004		2005		2006		2007		2008		Thereafter


	(in thousands)
Facility leases	$	21,661	$	1,288	$	1,661	$	1,655	$	1,696	$	1,738	$	13,623
Note payable		8,581		—		8,581		—		—		—		—
Capital lease obligation		4,364		1,330		1,577		1,183		274		—		—

Total	$	34,606	$	2,618	$	11,819	$	2,838	$	1,970	$	1,738	$	13,623


Name	Age		Position

Dr. Steven C. Quay		54	Chairman of the Board, President and Chief Executive Officer
Dr. Gordon C. Brandt		44	Executive Vice President Clinical Research and Medical Affairs
Dr. Paul H. Johnson		61	Senior Vice President, Research and Development and Chief Scientific Officer
Gregory L. Weaver		48	Chief Financial Officer and Secretary
David E. Wormuth		59	Senior Vice President, Operations
Timothy M. Duffy		44	Vice President, Marketing and Business Development
J. Carter Beese, Jr.		48	Director
Dr. Ian R. Ferrier		61	Director
Myron Z. Holubiak		57	Director
Leslie D. Michelson		53	Director
John V. Pollock		66	Director
Gerald T. Stanewick		57	Director
Bruce R. Thaw		51	Director
Devin N. Wenig		38	Director


										All Other
Name and Principal Position		Year		Salary		Bonus		Options		Compensation(6)

Dr. Steven C. Quay			2003	$	357,500	$	50,000		—		—
	President, Chairman and		2002		316,927		25,000		900,000		—
	Chief Executive Officer(1)		2001		300,000		41,231		—	$	113,417

Dr. Gordon C. Brandt			2003		200,000		80,250		25,000		—
	Executive Vice President		2002		20,498		56,667		90,000		—
	Clinical Research and Medical Affairs(2)

Dr. Paul H. Johnson			2003		51,539		22,000		90,000		42,211
	Senior Vice President, Research and Development, and Chief Scientific Officer(3)

Gregory L. Weaver			2003		242,796		97,149		25,000		—
	Chief Financial Officer(4)		2002		146,087		47,846		125,000		100,000

David E. Wormuth			2003		207,428		83,008		25,000		—
	Senior Vice President, Operations(5)		2002		192,476		79,056		10,000		29,608
			2001		141,356		36,600		80,000		45,045


			Percentage of
	Amount and Nature of		Outstanding
Name of Beneficial Owner	Beneficial Ownership(1)		Shares Owned

Dr. Steven C. Quay(2)		1,793,940		11.7	%
J. Carter Beese, Jr.(3)		58,000		*
Dr. Ian Ferrier(4)		13,000		*
Myron Z. Holubiak(5)		15,000		*
Leslie D. Michelson(6)		16,500		*
John V. Pollock(7)		101,333		*
Gerald T. Stanewick(8)		161,668		1.2
Bruce R. Thaw(9)		229,541		1.7
Devin N. Wenig(10)		419,987		3.0
Dr. Gordon C. Brandt(11)		30,000		*
Dr. Paul J. Johnson(12)		30,000		*
Gregory L. Weaver(13)		100,168		*
David E. Wormuth(14)		82,501		*
Timothy M. Duffy(15)		15,000		*
All Officers and Directors as a Group (14 persons)(16)		3,066,638		18.5


Sole Book-Runner	Co-Lead Manager


Citigroup	Needham & Company, Inc.


	*Revenue Recognition*


	*Stock-Based Compensation*


	*	Represents less than 1% of the outstanding shares of our common stock.


		Number of
Underwriter		Shares

Citigroup Global Markets Inc.
Needham & Company, Inc.
WR Hambrecht + Co, LLC.
Delafield Hambrecht, Inc.

	Total		4,250,000



	Paid by
	Nastech Pharmaceutical
	Company Inc.

	No Exercise	Full Exercise

Per share	$	$
Total	$	$


Programs Under Development	Therapeutic Category

Apomorphine Hydrochloride		Sexual Dysfunction
Calcitonin		Osteoporosis
Interferon Beta		Multiple Sclerosis
Morphine Gluconate		Pain
Peptide YY (3-36)		Obesity
Parathyroid Hormone (PTH 1-34)		Osteoporosis
Abuse-Resistant Opioid		Pain


(a)		For the purposes of computing the ratio of earnings to fixed charges, earnings consist of income (loss) before the provision for income taxes and the cumulative effect of changes in accounting, plus fixed